Polygon: L2 or Not L2?
adlrocha.substack.com
adlrocha.substack.com
Polygon is two separate products, masquerading as union advertised as an Ethereum layer 2
The two products are
1) a completely independent and separate proof of stake blockchain with validators, and a cron job that stores the network state hash on the Ethereum blockchain for shits and giggles. This is the only product anybody uses.
2) The Plasma system. Which would sometimes maybe be an Ethereum layer 2. Its fairly pointless.
The first product competes with other EVMs (Ethereum virtual machines) such as Binance Smart Chain (BSC) and Ethereum testnet. Somehow people have been swayed to believing the identical BSC is centralized while Polygon is a decentralized layer 2 solution. Oh by the way, if you are new here, people want an Ethereum layer 2 solution.
Polygon isnt it.
It is not a layer 2 solution it is a separate blockchain.
Why is this important? Its kind of not. Congratulations on being USD billionares in India guys!
Source:
>>Where do staked tokens reside?
>>Staked tokens are locked in a smart contract deployed on the Ethereum blockchain. Validators do not hold the actual custody of the tokens delegated to them.
the distinction people care about is whether transaction finality depends on Ethereum or not. it doesn't.
validators merely activate their status as a node by doing a random assortment of things, which in this case happens to include moving assets on the Ethereum network. that's it.
the part about delegation is irrelevant.
It's hilarious how many people in the Ethereum community who would otherwise jump at the throat of any competitor keep falling for this trick ("hard spoon!", "sister network!").
Imagine that ethereum wins, and the global economy runs mostly on rollups on eth2 shards. How much is that worth on a PE basis? Let's assume $100M in daily fees. At PE of 20 that gives a nice valuation of $730B - or about $6300 per eth. Maybe 60x - premium for being the only big yield asset that doesn't rely on law to enforce property rights (ie. eth replaces offshore banking). This means eth is already priced for success.
The alternative is worse for everyone in crypto, because if the long-term future is multi-chain (ie. pushed out usecases don't go back to ethereum once it's scalable enough, and activity spreads everywhere looking for low fees) then the whole space has almost no ability to extract rent. That would mean the stable fee level is some small margin over actual running costs. Which means total crypto market cap <$10B.
Bitcoin, of course, has no fundamental value at all - all it does is make btc buyers poorer because of mining, as a group. Yet it's still the largest crypto. Why? Because it's all about narratives to make people buy the token, thinking they are going to sell it higher to other people that buy for the same reason.
Back to matic - what this means in practice is if the project successfully markets itself as a 'small helper' to ethereum, it's going to be valued like that.
Eventually, the narrative premium is likely to disappear, and I think at that point either ethereum is valued at 1T-2T in today's dollars, or crypto as a whole collapses >100x. The latter would completely destroy PoW security and make PoS questionable. Is a chain safe if coordinating validators can make 10x by stealing pegged funds even at the cost of destroying their stake? Simple game theory says no, but in practice it may work because stealing is illegal and most validators aren't anonymous - ie. de facto law-based consensus.
For eth, it's possible, because it's going to generate income, but it's what I meant by the "premium for being the only big yield asset that doesn't rely on law to enforce property rights" bit. In the short run it can go much higher, but I doubt the ability to sustain >100x PE ratios over decades.
The likely reply to this is "gold", so let me preempt it. Gold is sustained mostly by jewelry demand (cultural reasons mostly in Asia) and industrial demand. Speculation pumps it on top of that, but without the non-speculative demand gold would collapse during market crashes, killing future speculative demand too. Even with that it appears to be going out of fashion among speculators - gold isn't money for several decades now and the 'gold is money' meme is finally losing power. That's after literally thousands of years when gold was used as money, showing how weak even the strongest meme 'backing' is.
https://goldbroker.com/media/image/cms/media/images/global-g...
I don't think this is the case because on chain protocols can give a lot a discretion torward how fees are done (i.e on a decentralized options exchange that allows anyone to create/govern their own liquidity pools that sets their own pricing/pool parameters, people may be willing to pay a premium for pools that have better parameters than others, people may be willing to pay a premium lower levels of margin requirements than others, manage risk better than others, etc)
I don't see why. Security depends on the ratio between amounts traded and amounts spent on mining. A 100x price reduction equally affects both. Yes, it becomes 100x cheaper to rewrite history, but the proceeds of any such rewrite are also 100x less, so security is not impacted much. To wit, when Bitcoin was worth only $30, its PoW security was not the least bit destroyed.
BSC is showing that the permissionless deployment model has utility to the market, whether it is centralized or not. People want to deploy contracts and create liquidity, the same ones that work on ethereum work there. It’s no different than shopify launching an app marketplace, people don’t care that’s its centralized it wasn’t even a factor.
But even then, it's far less trusted for long term storage of digital assets than Ethereum mainnet.
But I do agree that BSC, and to a lesser extent HEC, show the market places a premium on permissionless-ness and composability, even in the absence of a decentralized consensus process.
It's simply more convenient to use MetaMask to interact with exchange-native assets than an exchange-specific username/password. But I think all of that just solidifies Ethereum mainnet's utility as the root settlement layer.
The problem with it is that it's too centralized, most of the projects deployed on it are trash versions of Eth dapps that get exploited constantly, and their shitty geth clone keeps breaking.
Users are not loyal to chains and will go wherever money is to be made, for a while that place was BSC but for now it's Polygon due to massive liquidity incentives to lure users over on AAVE and other well established dapps becoming multi-chain.
But still, all the most innovative projects are Ethereum-based and that's where all the best people in this space are building.
A factor, sure
> it was the first major EVM compatible network to spring up with low fees.
so we are just going to ignore Tron? but its kind of hilarious that Tron tried for years to be considered not an Eth clone "we're totally differen't, not a 100% compatible EVM" and now the market only wants Eth clones and barely anybody knows Tron is one
> shitty geth clone keeps breaking
yep. pretty much all the "high tps" EVMs have an issue with the node software, it is very strange. barely anybody is even bothering to work on this layer. I know some coders and arbitragers that modify the geth software themselves so that it is parsing less data and more efficiently, so they can snipe transactions for frontrunning, but they don't share it.
I know only one evm compatible l1 (avalanche c-chain) that's better from a consensus perspective (not nakamoto), decentralization (#of validator nodes that actually participate relative to stake) and time to finality.
wrt decentralization, lots people ignore all the choke points in the eth/polygon model (infura, nakamoto consensus, local vs cloud run nodes [people like to handwave this in the avalanche discord as well and focus purely on stake distribution…]) which must not be ignored, esp when considering PoS.
I think part of this tradeoff has been made because for a couple years with no real competitors to the evm (probably because from early on, most people seemed not to care for smart contracts, so the jury was very much out on it for some, compared to just forking btc) combined with peoples acceptance of pooling with PoW systems, most have become resigned and decided that the capabilities needed to run a node for a evm compatible chain will need to be delegated to the cloud providers (and even though newer consensus algos are out, people might still make this tradeoff to deal with the not quite answered state space issues being worked out/researched now).
I've been looking into running validators a bit and haven't quite wrapped my head around all the trade offs. The problem with ethereum is that it requires a huge amount of money to stake, which I can't really justify. It seems possible to run a to run a Cardano stake pool at home, but I'm not sure the incentives work, because stakers seem much more incentivized to choose professionally run pools. It seems somewhat reasonable to run a Polkadot validator, but only really in a data center, either in the cloud or with dedicated hardware. So in short I haven't really figured out a good way to get involved in validating as an amateur. And maybe that's ok, but the comment about "local" validating made me curious.
As well as geographically, more nodes spread throughout more existing national governmental distributions is better than less.
> huge amount of money to stake
> So in short I haven't really figured out a good way to get involved in validating as an amateur. And maybe that's ok, but the comment about "local" validating made me curious.
Yeah, same with avalanche as it will require 2000 avax (maybe it will be lowered in the future when the dao goes online and existing stakers ok that). But at least at this point, I know people who are validating for x/p/c-chain on an RPI with 8GB of ram and external HDD or SSDs, which is way more accessible than pretty much everyone else (and has about ~973 validating nodes now).
Its not called Binance Scam Chain for nothing
The same scams happen on all the other EVMs
I think their somewhat recent branding from Matic to Polygon was a distraction ploy to get users to think they'll be competitive in the true L2 space and grow beyond just having a seperate POS chain. They keep saying how they're not just one scaling solution, but a suite of scaling solutions, yet have released no evidence of any progress on implementing rollups.
From what I can see right now, it seems highly unlikely the team will have any kind of working rollup in the near future. Rollups are still bleeding edge tech, and most of the code from the teams battling in the space is closed source. As far as I'm aware Polygon outsources most of its dev work, while other L2 teams are stacked with industry veterans with deep knowledge in applied cryptography. Once enough of the rollup tech becomes open source, Polygon can copy it, but by that time it'll likely be far too late.
Polygon has repeatedly made confusing statements towards their tech. In their FAQ, Polygon clearly states that they're a "side chain". Their FAQ reads super weirdly and not like a neutral technical document.
https://docs.matic.network/docs/home/faq/#what-is-matic-netw...
You may also be interested in learning why smart contracts don't work on Plasma.
https://ethresear.ch/t/why-smart-contracts-are-not-feasible-...
I see a conflict for Polygon wrt this point. In case of the network's crash, how are funds that e.g. are locked in Polygon contracts, distributed? That won't be automatically resolved like e.g. on Optimism. It'd be a major drama.
I'm not putting my money there.
Once an architecture is put in place and people are hired, that's when a point of no return is reached.
Years ago, I've written about this effect in the context of deploying a dapp on a PoA chain: https://timdaub.github.io/2019/02/28/poa/