Polygon Investor
EIP-1559 Upgrade Launches on Polygon, MATIC Down by Nearly 10%
Securities.io is committed to rigorous editorial standards. We may receive compensation when you click on links to products we review. Please view our affiliate disclosure. Trading involves risk which may result in the loss of capital.
The highly anticipated Ethereum Improvement Proposals-1559 has finally gone live on Polygon today, initiating the burning of MATIC tokens.
The Polygon development team previously announced the upgrade as a solution to address the ecosystem's gas issues. In a tweet shared earlier today, the India-based blockchain project noted that EIP 1559 (popularly termed as London hardfork) had successfully been integrated into the mainnet.
The upgrade is set to bring several changes, most notably how the fee is charged on the Polygon network. The hardfork entirely abandons first-price auction as the main criteria for fee calculation, instead adopting a discrete base fee.
More on this and the price action of MATIC below:
MATIC burn initiated as EIP-1559 upgrade launches on Polygon
MATIC burn has begun on Ethereum's layer-2 scaling solutions Polygon following the introduction of EIP-1559. The upgrade went live at block height 23,850,000 after successful integration on the Mumbai testnet.
New token burning mechanism
EIP 1559 brings a new burning mechanism that will burn MATIC tokens in a way that facilitate transactions on the network onwards.
The new approach features a base fee for the transaction of the next block and a priority fee. The former, which hinges on the network's congestion state, will be burnt henceforth rather than going to validators.
“Validators, who now receive the total amount of the fees, will be getting only the priority fee in the future.”
It is worth noting that the upgrade does not reduce gas prices. Gas fees usually hinge on the supply and demand forces in the market. EIP -1559 instead provides better cost estimations for users as they can identify the threshold fee required to include the next block. This, in turn, helps users not overpay.
MATIC is now be a deflationary token
Polygon's development team shared a detailed piece analyzing the potential impacts of the hardfork. Markedly, the supply of MATIC tokens will likely be deflationary as per an evaluation by the team.
Polygon estimates that 0.27% of the total supply will be lost every year. The Polygon ecosystem has a capped supply of 10 billion MATIC tokens, out of which 73% are already in circulation as per CoinMarketCap data.
Reduction of spam and network congestion
The new burning mechanism will help improve fee visibility which was a challenge in the previously adopted first-price mechanism for fee calculation. It will additionally manage spam transactions.
“Because the base fee increases automatically if the block is full, the changes will result in fewer spam transactions and lead to less network congestion.”
Community can monitor burning activity
Polygon further detailed in the announcement post that users can easily track the burning process on the network. The development team shared an image showing a section of the dashboard that will give users real-time data on the burning process. This page will be made available to the public once the update is done.
Polygon DeFi outlook
Polygon currently boasts of the third-highest number of protocols with 178, behind the dominant network Ethereum and Binance's Smart Chain. DeFi Llama data shows that the chain has a total value locked figure of $5.32 billion, having shed almost 5.6% since yesterday. On the upside, weekly and monthly figures are positive, suggesting that Polygon is still on the right track as a DeFi Hub.
Source: DeFi Llama
A detailed analysis of Polygon (focusing on Uniswap) by a Polygon analyst on Twitter has recently underlined the efficiency of Polygon over Ethereum. Simran Gogia, the user behind the piece, tracked several metrics, including the number of transactions and users for four weeks (the last two weeks of 2021 and the first two weeks of 2022), to arrive at the proposition.
A similar analytical thread presented last Thursday by analyst RaphaelSignal dissected the Polygon network from ‘engagement, monetization, and retention' standpoints. The analysis also assessed the impact of the Sunflower game.
MATIC market performance
Polygon's MATIC had a decent start this week, peaking slightly above $2.44 during yesterday's trading session. The token price has, however, since dumped. MATIC is currently 8.43% down, trading at $2.12 against the dollar.
MATIC/USD trading chart
The newly introduced burning mechanism hasn't had an immediate positive push on the token price. However, this is not entirely unexpected since the deflationary effect is far from being felt.
In a note to Forkast, market analyst Tony Sycamore set forth that the short-term impact on MATIC price is ‘limited.'
“[The price movement] suggests greater macro forces are driving prices at this point of time, including interest rate hikes and reduced central bank liquidity. I think the price movement in the short term will be limited.”
He added that it could take half a dozen months for the impact of the upgrade to be felt in the market. Sycamore contends that the hardfork will eventually sway MATIC prices when the upgrade's merits become significant, which is not possible in the short term.
To learn more about this token visit our Investing in Polygon guide.
