Polygon upgrade ignites token burn to make MATIC more valuable

Polygon, the layer-2 scaling network, rolled out a major upgrade on Tuesday, incorporating Ethereum’s London hard fork. With EIP 1599 now on its mainnet, the Polygon upgrade will now limit the supply of MATIC and make the tokens potentially more valuable.

Polygon upgrade EIP 1559 happened at block 23,850,000 just before 11 a.m. Hong Kong time. The purpose of the upgrade is to replace the current gas fee calculation mechanism to make it easier for users to estimate transaction fees while burning MATIC tokens. First tested on the Mumbai testnet in December, the Polygon upgrade also now  offers “better fee visibility,” according to the Polygon team. 

Tuesday’s update went smoothly, according to all accounts, and some suggest that this may lead to a boom in the price of MATIC, independently on Ethereum. 

EIP-1559 replaces the first-price auction, in which the highest bidder wins, with a base fee for transactions. Users can also pay a priority fee to miners to speed up processing of their transactions. 

“The key difference here is that the ‘base fee’ is burned rather than paid to miners,” Marcus Sotiriou, analyst at digital asset broker GlobalBlock, told Forkast. “This means that over time there will be less supply in circulation, hence making the MATIC token more deflationary.” 

Polygon’s MATIC is the 14th largest crypto by market cap with its founders originating from India. Polygon has gained superstar status as the gateway to Ethereum when the latter was struggling with high network congestion and gas fees. 

MATIC has a fixed supply of 10 billion tokens, with 6.8 billion currently in circulation. According to Polygon’s estimates, a total of around 0.27% of the total MATIC supply will be burned annually. Limiting the supply of MATIC would, therefore, make it deflationary, meaning that it will likely become more valuable over time. 

While the upgrade does not lower transaction fees, which fluctuate with demand and supply, it allows users to estimate costs more accurately and hence reduces the number of users overpaying, Sotiriou said. 

As a layer-2 scaling solution for Ethereum, Polygon usually offers lower transaction fees than Ethereum. But it has also struggled to keep transaction fees in check as it skyrocketed due to increased demand earlier this month, according to data from Dune Analytics. 

Shivam Thakral, CEO of Indian crypto exchange BuyUcoin, told Forkast that the upgrade will “result in fewer spam transactions and less network congestion as currently the base fees increase automatically once the block is filled up.”

Following the trial of the upgrade in December, the price of MATIC had soared by nearly 30%, although it has now retraced those gains, mirroring the larger downtrend in crypto prices. “I expect MATIC to rise to new all-time highs soon and I would not be surprised if it rallied by over 30% in the coming weeks,” Sotiriou said. 

However, Tony Sycamore, City Index’s senior market analyst for APAC, believes that it could take nearly six months for the upgrade to affect MATIC prices. 

The current slump in MATIC prices “suggests greater macro forces are driving prices at this point of time, including interest rate hikes and reduced central bank liquidity,” Sycamore told Forkast. “Additionally, as the upgrade has been well-flagged, I think the price movement in the short term will be limited.”

But in the long term, the upgrade will help drive MATIC prices higher when the benefits from the change start to materialize, Sycamore said.

At publishing time, MATIC prices — down 25.5% since its all-time high of US$2.92 on Dec. 27 — were down another 8.6% in the last 24 hours, to US$2.18, according to CoinGecko data. 

For developers and the larger Polygon ecosystem, the upgrade is good news. For example, the upgrade will offer more incentive to developers to build on Polygon, as Polygon users already enjoy lower fees compared to Ethereum who might prefer Polygon over Ethereum. 

“Projects built on Ethereum may be more inclined to shift over to MATIC with this upgrade,” Sotiriou said.