Introduction to Polygon

Polygon, formerly known as Matic Network, was established in 2017 to address Ethereum’s scalability limitations. The project’s mainnet was launched in mid-2020, and in early 2021, it was rebranded as Polygon to expand its scope and develop a multi-tier scalability solution. The revamped Polygon ecosystem supports Ethereum Layer 2 scaling technologies such as Plasma, Optimistic Rollups, and ZK Rollups, as well as sidechain scaling solutions like the Proof-of-Stake (PoS) chain. It aims to provide developers with a diverse range of scaling options, enabling the efficient and flexible construction of blockchain networks.

Polygon’s core strength lies in its highly scalable ecosystem design and modular architecture, which not only lowers the technical barriers to building Ethereum-compatible networks but also caters to the unique needs of various projects. Today, Polygon has evolved into one of the leading scaling solution platforms in the industry, offering a robust foundation for the widespread adoption of Web3 applications.

Polygon was formerly known as Matic Network (Image source: https://www.asiacryptotoday.com/polygon/）

Polygon Architecture Design

Polygon’s architecture comprises four abstract layers that divide the system’s functional modules into distinct logical parts. These modules can be combined or customized as needed to meet the diverse requirements of blockchain applications.

Ethereum Layer: The Ethereum layer is the foundational layer for Polygon chains, providing functionalities such as finality confirmation, checkpoint storage, staking management, and cross-chain messaging. This layer is optional, meaning Polygon-based chains are not required to utilize it.

Security Layer: The security layer primarily functions as “Validators as a Service,” offering validation support to chains that require enhanced security. Validators periodically verify the validity of any Polygon chain in exchange for fees. This layer typically leverages Ethereum miners as validators and is implemented as a meta-blockchain parallel to Ethereum.

Polygon Networks Layer: This is the first mandatory layer in the Polygon architecture and consists of sovereign blockchain networks. Each network within this layer handles key functions such as transaction processing, local consensus mechanisms, and block production.

Execution Layer: The execution layer is the core component of Polygon chains and consists of two sub-layers: the execution environment and execution logic. It is responsible for converting on-chain transactions from instructions into actual execution operations, such as updating account balances, invoking smart contracts, and generating new on-chain states.

Polygon Architecture Design (Image source: https://finematics.com/polygon-matic-explained/）

Review of Controversial Events

On December 13, 2024, Marc Zeller, the founder of the Aave Chan Initiative (ACI), proposed a community initiative suggesting adjustments to the risk parameters of Aave V2 and V3 on Polygon and a gradual shutdown of Aave’s lending protocol on Polygon to mitigate potential financial risks. This proposal quickly sparked a heated debate between the Polygon and Aave teams—Polygon co-founder Sandeep Nailwal accused Aave’s leadership of monopolistic and anti-competitive behavior, arguing that it goes against the collaborative spirit of Web3. In response, Aave founder Stani Kulechov claimed that Polygon was attempting to cover up its own issues by blaming others. This controversy primarily stems from a Pre-PIP improvement proposal previously released by the Polygon community.

ACI founder proposed measures to mitigate financial risks on Polygon (Source: https://governance.aave.com/）

On December 12, 2024, Allez Labs, in collaboration with DeFi protocols Morpho and Yearn, drafted a Pre-PIP improvement proposal titled “Polygon PoS Cross-Chain Liquidity Program.” This proposal aimed to maximize the yield of idle funds on the PoS chain. According to the proposal, there is around $1.3 billion in stablecoin reserves (including DAI, USDC, and USDT) on the Polygon PoS cross-chain bridge. The community suggested deploying these funds into liquidity pools compliant with the ERC-4626 standard to generate approximately $70 million in annual revenue, further expanding the DeFi ecosystem of Polygon PoS and AggLayer.

Key improvement measures include converting DAI into the official yield-bearing token of the Maker ecosystem, sUSDS; and Depositing USDC and USDT into Morpho Vaults to earn yield. Additionally, Allez Labs would act as the risk manager, while Yearn would oversee the ecosystem incentive program, establishing dedicated Yearn Vaults for approved assets within the Polygon ecosystem. The profits generated from Morpho markets and the sUSDS strategy would be used to reward depositors in the Vaults.

According to the latest data from DeFiLlama, Polygon’s total value locked (TVL) stands at $930 million, with Aave contributing around $430 million—accounting for a dominant 46.2%. In contrast, Yearn Finance ranks 28th in Polygon’s ecosystem, with a TVL of just $2.42 million. From Aave’s perspective, the proposal essentially leverages Aave’s platform funds to generate profits for other lending protocols, while Aave itself would bear the associated financial risks without directly benefiting.

Polygon community previously proposed a controversial plan (Source: https://forum.polygon）

As things currently stand, the proposal initiated by Allez Labs, Morpho, and Yearn is unlikely to pass. It remains uncertain whether Aave will officially exit the Polygon ecosystem. If Aave were to withdraw, Polygon’s TVL could drop below $600 million, making it difficult to meet the $1 billion fund reserve target mentioned in the Pre-PIP improvement proposal. The expected yield goals would also become unattainable, potentially impacting various aspects of the ecosystem, such as governance token market value and active user numbers. The resulting chain reaction could lead to losses far exceeding the projected $70 million, which would not be a wise move.

From an outcome perspective, the proposal’s rationale appears insufficient. However, the fundamental opposition between the two parties stems from their differing perspectives in safeguarding their respective users’ interests. The growing divide between previously cooperative ecosystem partners highlights deeper underlying conflicts, which may require a retrospective analysis of Polygon’s developmental trajectory in recent years to understand the root causes of this dispute fully.

Comparison of Aave and Yearn’s total value locked (TVL) on Polygon (Image source: Polygon - DefiLlama）

Ongoing Ecosystem Upgrades

A. Protocol Architecture Upgrade

In June 2023, Polygon announced the launch of Polygon 2.0, an upgrade plan to introduce a Layer 2 network powered by zero-knowledge (ZK) technology. This upgrade seeks to achieve a unified ecosystem through an innovative cross-chain coordination protocol. The new network design supports an almost unlimited number of chains, enabling secure and instant cross-chain interactions without requiring additional security or trust assumptions, paving the way for long-term decentralized governance.

As part of the Polygon 2.0 transition, the native token was upgraded from MATIC to POL. POL is designed as a third-generation native asset, known as a “hyperproductive token,” allowing holders to validate an unlimited number of chains without compromising security. It also enables validators to take on multiple roles across different chains, such as generating zero-knowledge proofs and participating in the Data Availability Committee (DAC), ensuring multiple incentives for validators.

B. Governance Mechanism Innovation

In July 2023, Polygon Labs introduced a forward-looking governance framework to achieve decentralized ownership and decision-making across all Polygon protocols and ecosystem components. This framework outlines three key pillars of governance: core protocol governance, system smart contract governance, and community treasury governance. Additionally, several innovative mechanisms were introduced, including an “Ecosystem Council,” which is responsible for the upgrade and maintenance of system smart contracts. Community treasury governance focuses on providing financial support for promising ecosystem projects.

C. Technology and Product Expansion

Polygon has consistently led in technological innovation and product expansion, focusing on advancing zero-knowledge technologies. For example, in July 2024, Polygon launched the ZK proof system toolkit Plonky3, designed to unify liquidity across sovereign blockchain networks. Later, in October 2024, Polygon introduced AggLayer, a critical component of its multi-chain network vision, aggregating liquidity across chains to attract more developers and projects to the ecosystem.

One of the most noteworthy developments has been the rise of Polymarket, a decentralized prediction market built on Polygon. During the 2024 U.S. presidential election, Polymarket stood out by accurately forecasting election outcomes. It attracted a total betting volume of over $3.7 billion, establishing itself as a benchmark for on-chain prediction markets. This success showcases Polygon’s combined strengths in technological innovation, product iteration, and ecosystem expansion.

Polymarket growth trend in 2024 (Image source: https://www.bitget.com)

Current Declining State

As previously mentioned, Polygon has focused heavily on technological innovation, particularly in zero-knowledge proofs, establishing its unique market position. Its approach of driving the project through underlying infrastructure development and technical upgrades is logically sound. However, in the current market environment, non-disruptive technological advancements are no longer sufficient to serve as a project’s core competitive advantage. This approach has proven to be somewhat lacking in adaptability for established blockchain networks like Polygon, which are dedicated to technical innovation or seeking to rebrand through integration.

Today, what attracts users the most are profit-sharing mechanisms, and Polygon has gradually recognized this, attempting to push relevant improvements. However, progress has been slow due to the limited resources within its ecosystem. On-chain data reveals that Polygon generates only a few tens of thousands of dollars in daily transaction fees, which fails to stimulate significant user interest. Consequently, the Polygon community has begun proposing some risky governance strategies in an effort to boost platform revenue. However, such initiatives, while aimed at driving ecosystem growth, have also sparked controversy—for example, the previously mentioned public criticism from Aave and the recent exits of ecosystem partners such as Lido.

Price trend of the POL token over the past year (Source: https://coinmarketcap.com/currencies/polygon/）

Polygon’s most prosperous period was in June 2021, when the total value locked (TVL) reached an all-time high of $9.24 billion, nearly ten times its current level. Over time, Polygon’s TVL has continued to decline. Since June 2022, the TVL has hovered around $1.3 billion; after 2023, it even fell below $600 million. Although the market showed signs of recovery after 2024, Polygon’s TVL has mostly remained below $1 billion. As of January 2025, the TVL stands at $930 million.

The performance of the POL token has also been underwhelming. From March to November 2024, the price of POL did not follow the upward trend of major assets like Bitcoin but instead continued to decline, registering an annual drop of approximately 77%. Although the price has shown some recovery since late 2024, reaching around $0.47 at the time of writing, it would still need to increase by approximately sixfold to return to its historical high of nearly $3.

Bottlenecks and Challenges

As the cryptocurrency industry enters a mature phase, the early approach of gaining competitiveness through a single technological advantage is becoming increasingly unsustainable. Polygon initially gained widespread attention with its clear positioning as an Ethereum scaling solution. However, with the rapid evolution of the industry—such as Ethereum’s own upgrades (The Merge and Danksharding sharding technology) and the diversification of Layer 2 solutions—Polygon’s non-disruptive narrative is gradually losing its appeal. The lack of a new market positioning has resulted in a weakening presence in users’ minds.

Additionally, Polygon’s revenue-sharing mechanisms have underperformed compared to other public blockchains, leading users to prefer platforms that offer higher incentives, accelerating the decline in user activity. Although Polygon previously leveraged MATIC token incentive programs to attract developers to deploy DApps and drive platform traffic, these initiatives were mostly concentrated in the early stages of the project and lacked sustainability and innovative design in the long run. As incentives gradually weakened, users found it increasingly difficult to achieve attractive returns within the Polygon ecosystem, diminishing their willingness to invest and actively participate. This challenge has made it difficult for Polygon to maintain user retention and drive long-term ecosystem growth.

Polygon PoS active addresses have significantly decreased since mid-2024 (Source: https://polygonscan.com/chart/active-address）

As an Ethereum scaling solution, Polygon has long attempted to balance its collaboration with Ethereum’s mainnet. However, with Ethereum’s ongoing technological advancements, Polygon’s positioning has become increasingly ambiguous—it must rely on deep integration with Ethereum to attract its user base while simultaneously striving to establish its own independent competitive edge through differentiation. Clearly, redefining its market positioning has become a pressing challenge for Polygon, and it also presents a crucial opportunity to reinvigorate the project and achieve breakthrough growth.

Path to Future Breakthroughs

A. Defining Market Positioning and Maintaining Competitive Advantage

Polygon’s initial vision was to become the leading Layer 2 solution aggregator for the Ethereum network, building a modular and universal scaling framework. Currently, Polygon has made significant strides in zero-knowledge (ZK) technology, with innovative products such as zkEVM, Polygon Miden, Polygon Zero, and Polygon Nightfall. Looking ahead, Polygon should further enhance its research and implementation of ZK technology while optimizing developer tools like Polygon Edge and Supernets to lower development barriers and attract more developers to build applications within its ecosystem. These efforts will help maintain its technological and ecosystem uniqueness while solidifying its core position within the Ethereum ecosystem.

B. Optimizing Revenue-Sharing Mechanisms to Enhance User Stickiness

In blockchain networks, incentives play a crucial role in attracting market participants. For developers, Polygon should provide long-term support, including regular grants, technical assistance, and marketing resources to encourage the deployment of high-quality DApps on its network.

Additionally, Polygon can learn from successful strategies other blockchains adopt and design more attractive revenue-sharing models. For instance, it could introduce a dynamic revenue-sharing model that allocates incentives based on user activity and contributions or implement phased incentive programs to encourage long-term participation through sustained earnings. Integrating governance models via Decentralized Autonomous Organizations (DAOs) can further empower users by granting them greater decision-making authority, such as allowing the community to collectively prioritize incentive allocations, thereby increasing user engagement and loyalty.

C. Strengthening Ecosystem Collaboration and Enhancing Network Effects

In the DeFi sector, Polygon should continue to deepen its collaboration with leading projects such as Uniswap and Aave. As core applications within the ecosystem, these partnerships will help solidify Polygon’s competitive advantage in the DeFi space and attract more new users and developers to join the ecosystem. At the same time, Polygon should actively promote diversified application scenarios and explore new high-growth areas. For example, last year’s breakout success of Polymarket demonstrated the immense potential of innovative applications in expanding the ecosystem. Looking ahead, Polygon can focus on blockchain gaming, the metaverse, and real-world assets (RWA), further expanding its ecosystem footprint. Initiatives such as developing a dedicated Web3 gaming platform could serve as a strategic move to tap into these emerging sectors.

Conclusion

Polygon’s development showcases both the potential and challenges of blockchain ecosystem expansion as the industry matures—particularly the challenge of maintaining competitive advantages through differentiation. Polygon must reevaluate its industry position as an established scaling solution while preserving its technological foundation. Success hinges on revolutionizing its revenue-sharing model to create a sustainable ecosystem where users and developers thrive, balancing attractive incentives with robust security. In today’s environment of diminishing returns, ecosystem revitalization depends on identifying unique differentiators and responding to market shifts with precise strategic execution. This challenge extends beyond Polygon to all maturing public blockchains as they enter their next phase of evolution.