How did the Indian crypto unicorn Polygon come to be?

The author of this article is Aaryaman Vir, co-founder of Prophetic Ventures, and it has been compiled by Wang Dashu.

In recent times, several mainstream Ethereum applications, including Aave, Curve, Aavegotchi, and OpenSea, have chosen Polygon (formerly Matic Network) to scale their performance. With the increase in Polygon's market capitalization and the assets it hosts, this $12 billion Indian unicorn has become a giant in the crypto world.

In early April this year, Aaryaman Vir, co-founder of Prophetic Ventures, shared the experiences behind the company's founders and the value support behind its rapid growth. In the current industry context, this provides valuable insights for readers to understand the project, and thus, Chain Catcher has translated this article with some edits that do not affect the original meaning.

I have experienced several cycles in the crypto market, and although I have explored new fields during that time, my interest in this industry has never been as high as it is now. Here, I would like to popularize some exciting new developments that have occurred over the past few years and share my learnings with readers.

Matic is the ideal project because its local origin story makes it a fascinating subject of study for most of our Indian readership. But beyond that, I must say that the story of Matic is one of the most inspiring entrepreneurial tales I have ever heard.

1. The Story of Matic's Founders

Matic originally had three co-founders: Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun. Later, Serbian programmer and entrepreneur Mihailo Bjelic also joined the team as a co-founder. That said, the main inventor of the Matic protocol is Jaynti, also known as JD.

JD was born and raised in Ahmedabad (note: the sixth largest city in India), where his father was a worker in one of the many diamond factories in the city. Growing up, the family environment was not easy for JD, as his two sisters did not attend high school due to financial difficulties.

Despite this, the family sent JD to an engineering college in the nearby town of Nadiad. JD eventually enrolled in the computer science program there, which was a coincidence—he did not achieve good enough grades to enter the more popular electrical engineering program—but I think it was a very fortunate coincidence.

After graduating from university in 2011, JD joined Persistent Systems, an IT services company located in Pune. Through a mentor, JD was introduced to Hacker News, Y Combinator, and the global startup culture for the first time. After discovering this exciting new world, JD immersed himself in learning about technology and entrepreneurship.

The natural result of being immersed in entrepreneurship was that JD soon yearned to start his own venture. However, his first venture—a Twitter analytics tool—failed to take off, and shortly thereafter, JD applied to Housing.com.

While working as a front-end developer at Housing, JD became friends with the company's head of data science, which allowed him to join the data science team. Around 2015, JD first heard about cryptocurrency. The story behind this is interesting. As a fan of "Game of Thrones," JD wanted to create a derivative project where people could bet on the plot developments of the show.

"Which character will die in Game of Thrones? Bet correctly and win!"—this was the premise of JD's application, but he encountered issues while building a payment feature that could serve a global user base. While trying to find solutions to these problems, JD discovered cryptocurrency and, like many of us, quickly fell down the "rabbit hole."

Since then, JD has been reading and absorbing information about the crypto world. After making some money during the bull market in 2017, JD finally left Housing.com in October 2017 to start his own venture again. In 2018, JD completed the first proof of concept for the system that would eventually become the Matic network.

Along the way, he met Anurag and Sandeep. Together with other members of the Matic team, the three of them went on to create one of the most valuable and significant cryptocurrency projects.

JD's career shows that it doesn't matter who you are, where you come from, or how much money you have; anyone can change the world through curiosity, determination, and a willingness to take risks.

JD has undoubtedly taken many risks in his life, and you could even say that going to college was a risk for his family. Nevertheless, all these risks paid off in the most unlikely and remarkable way.

2. The Background of Matic's Development

In any case, to begin understanding Matic, we first need to understand Ethereum, which allows users to write custom code into a decentralized ledger in the form of "smart contracts." Once this code is deployed to the distributed ledger, everyone else can see it and interact with it. Applications can be built without a central server, without a single database, and open-source from the start.

The coolest thing about Ethereum is that anyone can propose an idea and publish that idea as a set of smart contracts to the world computer. On the other hand, once deployed, anyone can read these contracts and interact with them. All these programs are transparent, open, and freely accessible.

This functionality has given rise to a massive industry known as "decentralized finance," or DeFi for short. Today, around 200,000 unique addresses trade on Ethereum-based DEXs each week, with 1,000 to 1,400 unique borrowers daily.

However, the problem is that Ethereum has some limitations: transaction throughput, transaction speed, and transaction costs. Any transaction made on Ethereum must be replicated on all nodes running the Ethereum program, which is the only way to keep various internal copies of the distributed ledger in sync. But this opens up the possibility of abuse, as someone might write a program that occupies a gigabyte of memory or creates an infinite loop, causing the computer running that program to crash.

To address this issue, Ethereum introduced the concept of gas. Transactions that require more storage and memory necessitate users to pay more gas fees to have that transaction reflected in the distributed ledger. Thus, building and using complex distributed applications can become very expensive.

In addition to the gas-related issues, Ethereum also faces transaction bottlenecks. The system is designed to handle only 12-20 transactions per second. For a highly popular system like Ethereum, this leads to a backlog of pending transactions. Additionally, transactions take about 13 seconds to process and write to the ledger, with different users bidding higher prices to ensure their transactions are next in line to be processed.

As a result, millions of DeFi, NFT, and regular Ethereum users must queue to have their transactions confirmed on the ledger. Users can skip the queue by paying higher gas fees, leading to an average gas fee of $20 on Ethereum.

This is the current predicament Ethereum faces; high costs, slow processing times, and low transaction throughput make it untenable in many application scenarios.

3. So, what is Matic?

The idea behind Matic arose from the need to improve Ethereum's cost and scalability issues. In 2018, the Matic team began modifying and innovating some existing concepts in the cryptocurrency world to create a Layer 2 solution on top of Ethereum.

Unlike Layer 1, the Layer 2 network provided by Matic helps improve transaction costs and throughput. To achieve this, the Matic system involves two main components:

1) A set of Matic smart contracts located on Ethereum

2) The Matic sidechain, which is a completely independent blockchain

Given our current understanding of smart contracts on Ethereum, the first part is relatively straightforward, while the second part, the Matic sidechain, is essentially a new chain built independently by the Matic team. Unlike Ethereum, this new chain is optimized for certain parameters, such as transaction speed and transaction throughput.

Transactions on the Matic chain are confirmed in 1-2 seconds, while Ethereum takes 15-20 seconds. In comparison, Matic can process many more transactions in parallel, alleviating the fee pressure on Ethereum. However, there are still transaction fees on Matic, but these fees are around $0.00004-$0.00012 and are paid in MATIC tokens, which are the native cryptocurrency of the Matic chain.

Like Ethereum and Bitcoin, the Matic chain achieves security and consistency among copies of the distributed ledger. This means that people are incentivized to continuously process Matic transactions and maintain a provably correct copy of the internal ledger.

In Matic, these individuals are called validators, and their motivation for running these computers is that as long as they prove they maintain the correct distributed ledger of all processed transactions, they can earn newly minted Matic tokens. Node validators need to stake Matic tokens to participate.

If the system detects that a validator is acting maliciously, it will penalize them by confiscating their staked Matic tokens, thereby reducing the likelihood of misbehavior among node validators and ensuring authenticity.

Currently, Matic has become the preferred scaling solution for many Ethereum-based projects, including Decentraland, OpenSea, PolyMarket, and Aavegotchi. The list of partners and use cases is continuously growing, and Matic will soon expand its support to other popular Layer 1 blockchains beyond Ethereum.

As of now, users have deposited approximately $400 million worth of tokens into the Matic deposit manager, and the price of MATIC tokens has increased nearly 20 times. (Note: This data is from early April; currently, the deposited funds exceed $7 billion, and the token has increased over 100 times.)

4. How does Matic enhance transaction throughput?

Matic shifts the computational burden of Ethereum transactions to the Matic sidechain. Here’s how it works:

1) First, assume a user wants to conduct a series of fast and low-cost transactions using ETH on Decentraland;

2) Due to high fees and slow processing times, the user cannot perform these transactions on the Ethereum main chain;

3) The user holds the amount they wish to spend, say 100 ETH, and sends it to a special smart contract on the Ethereum main chain called the Matic Deposit Manager;

4) The deposit manager essentially acts like a vault; once the user sends 100 ETH to the deposit manager, they can no longer access that ETH on the Ethereum main chain;

5) This transaction occurs on the Ethereum main chain and is subject to high fees and slow times like all other Ethereum transactions, but don’t worry, it gets better from here.

6) After the user transfers to the deposit manager, the Matic sidechain continuously scans the Ethereum ledger to track transactions involving the deposit manager contract, sees the transfer of 100 ETH, and records 100 ETH to a new account on the Matic sidechain.

7) The Matic chain is built as a mirror of Ethereum, allowing users to use the same wallet on Matic as they do on Ethereum. Therefore, once the deposit transaction occurs on the main chain, this mirrored account on the Matic chain will reflect 100 ETH.

8) Now the user has 100 ETH on the Matic chain, and they can conduct as many transactions as they wish. They can send funds to a Matic wallet on Decentraland and enjoy fast and cheap transactions.

9) Whenever the user wants to transfer their funds back to the Ethereum main chain, they can send these tokens to a special "burn address" on Matic. This essentially equates to publicly destroying these funds. In our example, suppose the user spent 20 ETH in Decentraland; they would then send the remaining 80 ETH to the burn address.

10) After burning tokens on the Matic chain, the user must send this burned mathematical proof back to the Deposit Manager contract on the main chain. The deposit manager can calculate whether the burn indeed occurred on the sidechain, and after successful verification, the user can receive the remaining 80 ETH from their ETH wallet.

This is a super simplified version of the events, omitting many details, but it captures the essence of the system. Matic essentially provides a parallel transaction processing layer with low fees and short confirmation times. Using the bridge created by the deposit manager, assets can move back and forth between the parallel layer and the Ethereum main chain.

5. What is the value of the MATIC token?

As we have seen earlier, Matic essentially runs its own proof-of-stake blockchain. Any blockchain needs to incentivize people to secure the network and ensure the honest and fair maintenance of the collective ledger.

In public networks like Matic or Bitcoin, anyone can be anonymous. No one is obligated to maintain a truthful copy of the distributed ledger, especially when doing so requires some time (e.g., server time or computational hardware).

This is why blockchains provide monetary rewards to miners (in proof-of-work systems) or validators (in proof-of-stake systems) who protect the network by verifying transactions and maintaining an orderly record of all these transactions in a mathematically provable internal record.

Since the correct state of the ledger can always be mathematically verified, no bad actor can escape the penalties for falsifying numbers. There will always be enough "honest" nodes that have their own copies of the distributed ledger, who will ignore fraudulent behavior and continue to build an honest distributed ledger vault, as long as all other rational and profit-seeking individuals converge on a common, provably truthful version.

On Matic, validators are rewarded with MATIC tokens created by the protocol to maintain control over the incentive structure. Over time, the supply of these newly minted MATIC tokens will continue to decrease until the protocol stops creating new tokens.

However, to earn these newly minted MATIC tokens, validators need to stake their MATIC tokens. The more MATIC you stake, the more MATIC rewards you earn. This sounds good, but if validators mess up the accounting records of the ledger, their stakes may be reduced.

Thus, this is one use case for the MATIC token: you need to stake tokens to have a chance to produce blocks on the blockchain and earn MATIC rewards. Another use case is gas fees; anyone wishing to transact on the Matic chain must use MATIC to pay fees, allowing validators to extract their transactions and include them in the ledger.

In reality, you need to buy and use MATIC tokens to use the Matic blockchain. In the future, the MATIC token will also serve as a governance mechanism, allowing MATIC holders to vote proportionally to their holdings on certain actions on the network, such as allocating community funds or deploying software updates.

6. Conclusion

I believe this story has some interesting lessons. The first lesson is to always stay curious and believe in yourself: as long as you follow the threads of thought in your mind, it will always keep you grounded. You will definitely learn something, possibly meet like-minded individuals, and even build something life-changing with them!

This is especially true in the cryptocurrency industry, which is a global field with no barriers to entry. Any kid from a small corner of the world can propose an idea, deploy it to this global computer system, and see it adopted rapidly.

Secondly, contributing to the community is always worthwhile. Life and entrepreneurship should not be a zero-sum game, where all growth comes at the expense of others. JD and the Matic engineers are known for building one of the most popular free developer tools in the Ethereum ecosystem.

Many key connections and ideas arise from the first actions taken for the public good. Whether you are creating content, designing assets, or software projects. By contributing to the community, you will be rewarded.

Finally, while the cryptocurrency industry does have its share of scammers, it also attracts some of the most talented individuals and generates some of the most groundbreaking ideas of our time. Moreover, this community consists of many who simply wish to improve the society we all rely on.

A prime example is Sandeep Nailwal, co-founder of Matic, who, feeling frustrated by the suffering around him, established the India COVID Crypto Relief Fund to try to combat the pandemic sweeping through India. As of the writing of this article, Sandeep has raised hundreds of millions for this cause.