Polygon aims to be a general-purpose Ethereum scaling solution. It is presently working on many Ethereum scaling solutions, including ZK Rollups, Optimistic Rollups, Sidechains, a Data Availability Layer, and a blockchain software development kit (SDK) similar to the Cosmos SDK or Substrate. The Polygon Proof-of-Stake (PoS) sidechain was the first and most commonly utilized scaling method. Polygon is also pursuing an aggressive commercial development approach, collaborating with both Web3 and legacy firms, maintaining a venture arm, and creating Polygon ID, a decentralized identification system.

Key Metrics

Polygon's Proof-of-Stake (PoS) chain now accounts for virtually all of the business operations. The PoS chain is a sidechain of Ethereum. Unless otherwise noted, everything in the performance analysis section applies to the PoS chain.

Overview of the financial situation

The precipitous fall of FTX in the fourth quarter surprised major industry leaders and gained international attention. Yet, the cryptocurrency sector will survive, and this tragedy just emphasizes the necessity of decentralized networks.

Notwithstanding the broader financial turmoil, Polygon network finances performed well in the fourth quarter. Polygon's circulating market capitalization increased by 20% quarter over quarter (QoQ), from $5.68 billion to $6.82 billion, making it the tenth biggest protocol by market value on average.

Polygon's income stayed nearly flat year on year, but treasury expenses grew significantly. The circulation quantity of the MATIC token hit 10 billion in October.

Overview of the network

Although Polygon's financial performance was stable, its network key performance metrics grew significantly in the fourth quarter.

In the Polygon network, daily active addresses and new addresses increased by 55% and 34%, respectively, with average daily active addresses reaching an all-time high. Transactions increased by 3% year on year. The NFT and gambling industries were substantially responsible for the increased activity.

The Polygon PoS chain has fast block times, with an average of roughly two seconds per block. Polygon Labs researchers unveiled the Parallel EVM improvement in November with the goal of tripling the performance of the Polygon PoS chain. There is no timetable for the mainnet's installation.

The current state of Polygon

The fourth quarter showed a range of results from the Polygon ecosystem's many sectors.

Total Value Locked (TVL) denominated in USD and MATIC fell in the DeFi sector. Despite this decline, TVL spread throughout the Polygon ecosystem remains strong. Blue-chip protocols like Aave, Uniswap, and Lido continue to dominate their respective markets. Despite the TVL reduction, the quarter witnessed numerous notable integrations, illustrating the Polygon DeFi ecosystem's continuous expansion and development.

The NFT sector accelerated further, achieving new highs in daily active wallets. The prior quarter's release of Reddit collectible avatars drove the sector's growth even further. Similar to the third quarter, the fourth quarter witnessed a slew of new announcements, including collaborations between Polygon Labs and traditional tech behemoths, as well as NFT markets and collections declaring their integration and transfer to the network.

The gaming industry grew rapidly, with daily active wallets and transactions climbing 38% and 36%, respectively, year on year. The steady expansion of Polygon's biggest games was a major contributor to the company's success. There were also other important announcements, such as alliances, funding initiatives, and game debuts.

DeFi

During the 2022 bear market, Polygon has observed a tendency of falling TVL. Despite this, the platform concluded the year with a TVL of around $1.1 billion (1.4 billion MATIC), placing it seventh among base layers. Polygon has a well-balanced TVL across its protocols, with Aave leading with 31% of the TVL ($340 million), QuickSwap (15%; $160 million), Balancer (10%; $112 million), and Uniswap V3 (9%; $96 million).

Source: Defi Llamas

DEXs

Uniswap was the dominant decentralized exchange (DEX) on Polygon in Q4, accounting for 76% of all trading volume. QuickSwap came in second place, accounting for 10% of the trading volume. Sushi and Balancer came in third and fourth place, respectively. QuickSwap was the main DEX on Polygon in 2021 before the introduction of Uniswap. Nevertheless, Uniswap debuted on the Polygon mainnet in early 2022, and the two systems competed for DEX volume for a few months. Finally, in 2022, Uniswap emerged as the main DEX.

Liquid Staking

Polygon has a limited proportion of MATIC tokens that are liquid-staked. By the end of the fourth quarter, there were around 100 million MATIC liquid staked out of a total of 3.64 billion MATIC staked, accounting for approximately 3% of the total. Lido is the market leader among liquid staking providers, with 58% of the market share, trailed by Stader with 38%. The two suppliers account for a huge 97% of liquid-staked MATIC.

Stablecoins

The primary stablecoins on Polygon are USDC and USDT, both of which are bridged. USDC leads the pack with a market share of 45%, followed by USDT with 43%. DAI completes the top three with 8% of the stablecoin market share.

Source: DeFi Llamas

Lens

Lens is a decentralized social network system based on the PoS chain Polygon. It is intended to allow creators to control the connections between themselves and their communities, resulting in a completely customizable, user-owned social network.

Lens's user base has steadily increased since its Mainnet debut in May. Lens had an average of 15,000 monthly active users in Q3, which increased dramatically to 33,000 in Q4. It should be noted that Lens is still a walled garden, and users must be whitelisted in order to participate.

Source: Dune analytics

Integrations

Many big integrations and releases occurred in the Polygon DeFi ecosystem during the fourth quarter:

BitPay has announced its support for Polygon and MATIC.
Worldpay Global has allowed USDC settlement for its customers on the PoS chain and announced its intention to become a Polygon validator.
Coinbase Wallet made its debut on the Polygon Mumbai Faucet, offering customers free testnet MATIC.
Polygon now supports the Binance stablecoin BUSD.
Quest, a play-to-earn gamification function, has been introduced to the Polygon Wallet Suite.
Polygon has released the Phantom Wallet.
Polygon functionality was introduced to the Graph Protocol.

NFTs

Throughout the 2022 bear market, polygon NFTs have proved to be a bright spot for the network. The debut of Reddit's NFT marketplace boosted the Polygon NFT market in the third quarter. The network's popularity was boosted even further by new agreements with large corporations like Disney, Robinhood, and Starbucks, which added to the general excitement and enthusiasm in the ecosystem.

Polygon NFTs continued their outstanding success in Q4, with a 5% year-on-year growth in daily active wallets to a record high of 425,000 and a 63% year-on-year increase in NFT transactions. Many noteworthy announcements were made, as in the previous quarter:

Polygon was chosen by Meta as Instagram's NFT platform. On Polygon, Instagram users will soon be able to mint, exhibit, and sell digital collections powered by NFTs, providing artists with a new opportunity to communicate with and monetize their fan groups. You can find the first group of Instagram creators selling NFTs here.
Magic Eden has said that it intends to connect with Polygon, beginning with a launchpad. Numerous games have committed to releasing on the platform, including BORA by Kakao Games, IntellaX, Nay, Block Games, Planet Mojo, and Taunt Battleworld. The Polygon Launchpad from Magic Eden will be accompanied by a MATIC-compatible NFT marketplace.
Y00ts, a popular NFT collection, has announced a move from Solana to Polygon.

>>> Find out: A complete guide on Polygon NFT marketplace

Gaming

Polygon Gaming had a strong fourth quarter, with a 38% year on year increase in daily active wallets. This achievement may be credited to Animoca Brands' sustained success with Benji Bananas, which was the top application by unique addresses in Q3, the continuous growth of Planet IX since mid-November, and other games such as Arc8 and Sunflower Land. In addition to its present roster, Polygon is developing a number of new games in a variety of genres.

There were also other major announcements in the game industry, including:

fA collaboration between the Web3 gaming platform ITSBLOC and Polygon Labs to usher in a new age of Play-to-Earn games. ITSBLOC plans to produce games in a variety of genres, including MMORPGs and first-person shooter games.
Captain Tsubasa, a renowned Japanese comic book title, will make its crypto debut as a game on Polygon.
Earn Alliance, a Web3 gaming community and infrastructure platform has partnered with Polygon Labs.
Polygon Labs is a partner in Game7's $100 million funding initiative for creating better, more sustainable, and open-source games. Game7 is a Web3 gaming DAO with a treasury administered by the community.

Developer activity

The fourth quarter saw Polygon maintain a very strong presence within the developer community. Polygon Laboratories hosted the first Polygon Connect: India event in addition to Polygon Connect Bogota as part of the Polygon Web3: Built in India Tour. This tour took place all throughout India and consisted of seven Polygon Guild events. Polygon Labs struck a collaboration agreement with Reskill to collaborate with 50 campuses throughout India to give Web3 education to aspiring engineers. Also, Polygon Labs signed a partnership agreement with Pesto Tech to assist Web2 developers in making a move to Web3. Polygon Labs additionally joined as a global sponsor of Techstars Startup Weekend Global 2022, teamed up with CV Labs to promote the growth of blockchain technology in Africa, supported the Moralis and Google Defining DeFi Hackathon, and took part in the Lisbon blockchain week 2022. In addition, Polygon Labs was a participant in the Lisbon blockchain week 2022.

The connection that Polygon Lab has with the developer community is enhanced through the products and projects that Polygon Lab has geared at developers, such as:

The Polygon Advocate Program is designed to provide members of the community the ability to instruct others on how to create on the Polygon network. In 2022, Polygon Advocates hosted worldwide seminars and training sessions, which were attended by over 7,000 software engineers and developers. In the year 2023, Polygon Labs intends to further develop the software.
Polygon Guilds is a platform that allows developers to schedule monthly meetings, cooperate with one another, and provide seminars, among other things. There are already over 70 Polygon Guilds throughout the world, and further expansion is planned for 2023.
Polygon University is an all-encompassing educational resource for anything related to Polygon (currently in beta).
Polygon Village is a full-stack developer ecosystem that provides developers with a job board, a reward board, grants, vouchers, and mentoring.
ZK The instructional series known as Whiteboard Sessions was produced in partnership with ZK Hack and taught students about zero knowledge.

Polygon was recognized as a leading developer ecosystem in the 2022 Developer Report published by Electric Capital, which indicates that the attention placed on the interaction of developers has been fruitful. Important milestones include Polygon's ascent from 200 to over 1,000 developers since 2018, a 40% YoY rise in overall developers with an average of 500+ monthly active developers in 2022, and the company's swift ascent to 150 full-time developers in less than four years. According to the research, Polygon is one of the top developer ecosystems that are not based on Ethereum. It shares this distinction with Solana, Cosmos, and Polkadot.

Staking and Decentralization

The Ethereum layer, the Bor layer, and the Heimdall layer make up the three layers that make up the Polygon PoS chain. The Ethereum layer is responsible for maintaining the staking contracts for enhanced safety. The Bor layer compiles individual transactions into blocks and does out other functions that are analogous to those of the Ethereum Beacon Chain. The Heimdall layer is responsible for transferring checkpoints periodically from Bor to the Ethereum Mainnet so that they may be finalized. The Heimdall validator and the Bor block producer nodes are both maintained by validators on the PoS chain. Validators also stake their MATIC in the MATIC staking contracts that are hosted on Ethereum.

At the moment, there is a cap of one hundred on the number of active validators. New validators are able to become active whenever an existing active validator releases its binding; however, the cost of joining the active validator pool has steadily increased over the course of the year. There was a rise of 386% year over year in the minimum necessary stake for an active validator from the previous year's level of 129,000 MATIC to the level of 625,000 MATIC ($475,000) by the end of 2022. Polygon Improvement Proposal 4 suggests raising the maximum validator set to 105 as part of its proposed improvements.

Since the active validators in Polygon have, for the most part, stayed consistent since the cryptocurrency's inception, the Nakamoto coefficient has seen very slight variations. The Nakamoto coefficient for Polygon in the first quarter of 2022 was three, and it increased to four in the last three quarters of the year. The overall Nakamoto coefficient of the company is a little bit below the standard for the industry.

By the end of the year 2022, Polygon had staked 3.64 billion MATIC, which was 36% of the total supply. In the past, the proportion of Polygon's supply that was staked has often remained rather low, averaging around about 30%. It will be fascinating to monitor how this ratio develops in the years to come now that the complete supply of MATIC has been vested.

Unique Characteristics

In April, Polygon Labs announced the Polygon Green Manifesto, which outlines the company's commitment to achieving carbon neutrality and fostering sustainable development. In conjunction with the announcement, Polygon Labs made a commitment of twenty million dollars to fund programs that are driven by technological advancements in the fight against climate change. Polygon Labs reaffirmed its dedication to the cause in September by announcing that the organization will use its core capabilities to solve issues with waste, pollution, equality, supply, nature, and education.

In the fourth quarter, Polygon made strides in achieving its environmental objectives by:

Creating a partnership with the Ocean Conservation, Exploration, and Education Foundation (OCEEF), which will enable the general public to financially support OCEEF's efforts by acquiring NFTs, and using Polygon's governance in order to more widely distribute access to OCEEF's research vessel.
Senken has revealed its intentions to launch the first blockchain-based marketplace for carbon credits in order to make climate action more public and verifiable.
Being a founding member of the Ethereum Climate Platform with the goal of encouraging and financing initiatives that have a beneficial effect on the environment and society while also reducing greenhouse gas emissions.
Participating in a group effort to provide a grant of one million dollars to innovative climate change solutions.

Polygon was also busy with its other obligations, including the following:

Along with Bayer Crops, Nori is working to enhance the level of carbon sequestration that farmers on the Polygon network achieve.
Meta University was launched on Polygon by the National University of Mongolia, and it offers NFTs to graduates.
A first prototype of a road safety platform was developed via a collaboration between the International Road Federation and SettleMint.
Polygon Labs and Tether have formed a partnership with the goal of assisting the city of Lugano in its transition to a blockchain-powered city.
Polygon Labs and Tether have formed a partnership with the goal of assisting the city of Lugano in its transition to a blockchain-powered city.

Solutions for Scaling Up

The team at Polygon Labs is putting in a lot of effort to improve the scalability of Ethereum by creating a variety of different solutions.

Edge and Supernets

Polygon Edge is a blockchain development framework that is both modular and decentralized. It was created to accommodate a range of scalability and infrastructure options for the purpose of constructing chains that are compatible with Ethereum. Edge is a development tool that, like Polkadot's Substrate or the Cosmos Developer Kit, makes it easier to create application-specific chains. Polygon Supernets, which are powered by Polygon Edge, provide customers the ability to swiftly put up a high-performance blockchain network that is unique to their needs. While developing a blockchain, numerous problems that developers confront may be solved by using supernets.

During the fourth quarter, a number of noteworthy advancements in the field of Supernets were revealed. Nubank, a major digital banking platform that counts industry titans Berkshire Hathaway and SoftBank as backers, has announced its intention to create its very own coin on Polygon Supernets. In addition, there was mention of cooperation with Axelar that intended to improve communication across various Supernets by fostering cross-chain interaction. Last but not least, Uppolice grabbed news when it launched India's first police complaint site on the Supernets platform. You may anticipate that further Supernets will be announced as the rollout of the Supernet fund continues.

zkEVM

In July of 2022, Polygon Labs debuted Polygon zkEVM, a Layer-2 scaling solution for Ethereum. Polygon zkEVM makes use of zero-knowledge (ZK) proofs, which allow for increased scalability while still maintaining Ethereum's compatibility. Polygon Labs made the announcement in October that Polygon zkEVM testnet was available. This marked a significant milestone in the cryptocurrency industry because it was the first time a zkEVM testnet was made publicly available with an open-source ZK proving system. This made it possible for anyone to review the code of the testnet. This statement received more support when it was revealed that Aave, Uniswap, Lens, and Midnight Society, a game company, would all be joining the testnet.

Polygon decided to take extra precautions to protect the integrity of the zkEVM by requesting that two separate companies do an exhaustive and ongoing audit. The introduction of the final testnet by Polygon Labs came not long after the announcement of the audit. The recursion approach, which packs many ZK validity proofs into a single ZK validity proof, was first used on the testnet. This led to considerable gains in throughput, latency, and prover efficiency. The zkEVM testnet as a whole has completed close to 300,000 transactions, has 80,000 wallets, and has an average block time of 48 seconds.

The Polygon zkEVM is categorized as a type-3 by Vitalik's zk-EVM architecture, which indicates that it is very near to becoming an EVM equivalent. The long-term goal is to become a type-2 (fully EVM equivalent). The difficulty is in finding a happy medium between compatibility and performance. Plonky2, a very effective zk proving system, is used by the Polygon zkEVM in order to address the performance concerns associated with the zkEVM. It is anticipated that the zkEVM mainnet will go live in the early part of 2023.

>>> Read more: Eclipse: The first customisable rolllup using Solana VM

Conclusion

In 2021, the cryptocurrency sector overcame a number of serious obstacles, but the ecosystem supporting Polygon was still able to make tremendous strides forward.

The number of daily active wallets reached an all-time high in the NFT sector during the fourth quarter. Its expansion was catalyzed by the launch of collectible avatars on Reddit in the third quarter of last year, as well as the announcement by Meta that Polygon will serve as the NFT platform for Instagram. The names Disney, Meta, Nike, Reddit, and Starbucks have just been added to the illustrious list of companies that Polygon has partnered with.

The gaming industry at Polygon also had a successful fourth quarter as a result of the ongoing popularity of well-known games such as Benji Bananas and the consistent expansion of other noteworthy games like Arc8, Planet IX, and Sunflower land. Since Polygon is working on a large number of new games, it is anticipated that the general expansion of the gaming industry will continue over the next several months.

The DeFi sector of Polygon, on the other hand, witnessed slower development in comparison to the NFTs and gaming sectors. The TVL in USD and MATIC for Polygon went down during the fourth quarter, and the overall trend for 2022 was negative. Despite this, the most major participants in Polygon's DeFi ecosystem continued to take the lead, and a number of new integrations and announcements were made that would pave the way for future growth.

Developer-friendly policies and support have always been a top priority for Polygon, and the fourth quarter was no different. Polygon was very engaged in the game development community, participating in many tours, forming various alliances, and securing multiple sponsorships. Polygon's achievements were recognized by the renowned Electric Capital Developer report, which recognized it as a top developer ecosystem that has expanded from 200 to over 1,000 developers since 2018. This growth occurred in the time period between 2018 and 2019.

Polygon is hard at work building a number of other scaling methods for Ethereum in addition to the PoS chain. During the fourth quarter of 2018, Polygon zkEVM and Polygon Supernets were two of the solutions that were the most active in terms of announcements and developments. The latter company made an announcement about the construction of many new supernets as well as cooperation with Axelar to improve communication across existing supernets. Around the same time, Polygon's zkEVM testnet went online, which garnered attention across the industry as the first open-source zkEVM testnet. The zkEVM testnet was able to successfully handle almost 300,000 transactions involving 80,000 wallets throughout the course of the fourth quarter. At this time, the mainnet launch of zkEVM is anticipated to take place on March 27, 2023.

Polygon never wavered in its dedication to furthering its business and expanding its operations, despite the challenges it encountered in the year 2022. Polygon is in a strong position to realize its potential in 2023 because of the improvements it achieved during the bad market. It is reasonable to anticipate that Polygon will acquire even more momentum and maintain its ascent toward the top as the rivalry in the base-layer space becomes even more intense.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.