Blockchain technology represents a solution to centralization, ultimately allowing for a permissionless and trustless financial system. As power and responsibility have flowed away from centralized actors, smaller entities are required to take on this workload as part of distributed networks. A fundamental element of a blockchain – and one area where individual retail participants can often contribute – is in a blockchain’s consensus algorithm. The consensus algorithm is the agreed-upon rules for adding blocks to the ledger.
Polygon utilizes the Proof of Stake (PoS) consensus mechanism and this article focuses on how participants can involve themselves in helping to validate transactions, secure the network, and contribute to the operation of a decentralized financial system – all while earning staking rewards.
The PoS consensus mechanism requires validators who are responsible for validating blocks. In essence validators check all the transactions contained within the block are valid before adding them to the network. In return for this service the network pays validators.
PoS contrasts with the another common consensus mechanism, Proof of Work (PoW), which gets more difficult with more participants and with every validator competing for the same rewards. PoS was introduced in part to enable individuals to participate in securing the network. As the PoW mining difficulty increases naturally it leads to centralization with the increased cost of participation and larger players benefit from economies of scale. A decade ago BTC could be mined using a normal computer; now BTC mining is concentrated in organizations running fleets of ASICs in warehouses.
PoS allows greater participation and decentralization, and some would argue therefore security. It also allows a network to reduce the security cost of maintaining a network and reduces issuance. Validators deposit their stake to the network, and in return are eligible to be selected to validate blocks. When chosen, they earn their reward.
What is MATIC?
MATIC is the native token of the Polygon Network. The Polygon Network is a layer two scaling solution for the Ethereum network. It exists as a series of blockchains designed to improve the performance of Ethereum and reduce congestion. Broadly split into its flagship PoS Matic sidechain and ZK Rollup chains which perform off-chain transactions and return transaction summary data to the main Ethereum chain. Nansen provides a complete guide to MATIC here: What is Polygon (MATIC)? Everything You Need To Know.
Polygon delivers rapid and cheap transactions to Ethereum’s vast DeFi ecosystem. The dashboard above shows the number of active addresses and daily transactions. The Polygon Network since the start of March, with the network processing close to 3 million transactions per day.
The Polygon Network in the same time frame has seen roughly three times as many daily transactions as the Ethereum Network. But the gas fees remain worlds apart. Even as Ethereum’s gas fees have dropped to below $2, the average transaction on Polygon costs close to or less $0.01.
Polygon also sees higher contract deployment than Ethereum further displaying the appetite for faster and cheaper transactions. Investors who want to gain a deeper understanding of how Polygon matches up to Ethereum can view Nansen’s dashboard Polygon vs Ethereum. Nansen also provides a macro overview of Polygon: Polygon.All of the transactions for the network must be validated by a validator to be added to the blockchain.
Why Stake Matic?
Staking MATIC remains popular amongst investors for two primary reasons: financial incentives and philosophical reasoning. The central benefit of staking MATIC is that users earn more MATIC. Polygon is a popular project that is used by crypto investors globally and usage is the key factor in deciding the future fate of a blockchain project. Theoretically, a layer one blockchain could deliver exceptional throughput, low latency, and rapid finality, but if no one uses the network it amounts to nothing. Polygon has solid fundamentals and for this reason defines itself as a stable long-term investment within the crypto space.Investors who want to undertake staking must select coins that they believe in. Polygon provides plenty of grounds for long-term conviction and outlines itself as an ideal staking opportunity.
MATIC Staking Rewards
When investors stake MATIC it becomes a productive asset generating assets for the investor. According to Staking Rewards the current APR (Annual Percentage Rate) stands just shy of 7%. There will be variations depending on the pool that the investor delegates with, and rewards increase if the investor decides to become a validator. However, with the national average for savings accounts in the United States being 0.14%, Polygon’s 6.97% looks very attractive.
The MATIC Bridge
Investors who want to use the Polygon PoS sidechain must first bridge their assets from the parent chain Etheruem to the child chain Polygon. The PoS bridge is more popular for some users than the Plasma bridge because deposits are secured instantly and the process is more straightforward. Utilizing the bridge is a straightforward process for investors who possess a non-custodial wallet such as a MetaMask. Investors visit the Polygon Bridge, connect their wallets, select the assets and the quantity they want to transfer, then sign the transaction. Deposits will be instant, but withdrawals can take up to three hours. The PoS Bridge maps the connection between the tokens of both chains. An overly simplified explanation follows: when tokens are bridged from the parent chain they become locked on that network, fresh tokens are minted on the Polygon PoS chain, and when tokens are bridged back the minted tokens are burnt and the original tokens unlocked.
Where to Stake
All MATIC staking takes place on the Ethereum Network. Investors have two central options for staking: directly through Polygon Staking or for investors who want their staked tokens to remain liquid Lido.Investors who choose to stake through Polygon must be aware there is an unbonding process and tokens cannot be withdrawn immediately. Lido’s DeFi alternative allows instant withdrawal as users can swap their token receipt (stMATIC) on the open market. However, Lido typically takes a larger commission than other delegation pools. But this DeFi alternative is becoming increasingly popular. Attached is a broad guide to DeFi for investors curious to get started in the space: Everything You Need to Know About DeFi.
How to Stake
The following guide outlines the process for staking directly through Polygon and presupposes the investor already has a non-custodial wallet; this example uses MetaMask. It is broken down into three steps: Purchasing MATIC, Delegating, and Staking. Purchasing MATIC
Investors have a few options. The most popular is to purchase MATIC from a centralized exchange such as Binance or Coinbase. A centralized exchange can be viewed as the intermediary between fiat and digital. They allow investors to exchange fiat for cryptocurrency. Alternatively, investors can purchase MATIC with their credit or debit card through MetaMask which has added a fiat on-ramp.
Sending to a Staking Provider
To delegate MATIC investors will need to connect their wallet to the Polygon website. There are currently five options, investors need to decide which wallet they want to use, and connect it.
Now investors need to select a pool to delegate to. Different validators charge different commission rates for delegation and the Polygon page automatically filters by performance; better performance means more rewards.
Once investors have selected the validator. They need to select delegate and choose how much MATIC they want to stake. Then sign the transaction which will appear in their wallet. The investors MATIC has now been staked and they will begin to receive MATIC rewards. Investors can connect their wallet to the Polygon page to keep tabs on their staking rewards and restake or withdraw their rewards as they accumulate.
Staking MATIC represents a great source of passive income and allows investors to become a part of the network actively contributing to validating the millions of transactions it processes every single day. This article has provided an overview of how to stake MATIC, but for investors curious about staking and using DeFi to generate revenue Nansen’s dashboards remain essential. By combing on-chain data and millions of wallets Nansen provides market insights for investors to stay ahead.