The web3 and cryptocurrency space is a fast-paced, ever-evolving scene with solutions rising daily to make ecosystem components more compatible, efficient, scalable, or even easier to use.
Polygon Labs, known for the ethereum (ETH) scaling solutions it develops for Polygon protocols, has unveiled a significant upgrade to the ecosystem and introduced a new token named POL.
The Polygon ecosystem has been running with a native cryptocurrency token, MATIC, that, aside from being used for governance, is also paid for transaction fees on the blockchain and is used for staking to earn more MATIC as rewards.
However, in recent developments, Polygon Labs has launched POL, which will replace MATIC and serve as the new native token for the Polygon ecosystem.
According to Sandeep Nailwal, founder of Polygon Labs, POL is meant to deliver the benefits of multi-chain staking without the added risks of re-staking.
“With the Polygon 2.0 proposal, the Polygon Ecosystem will expand from a single chain to an ecosystem of L2s that can easily interoperate and share liquidity with each other.”
In this article, we will look at multi-chain staking and how current solutions work to facilitate it. This will also include the benefits and challenges of multi-chain staking. We will also look at the newly launched POL token and how it is structured to solve these challenges and make it more seamless.
What is Multi-Chain Staking?
Many cryptocurrency networks, including ethereum, use Proof-of-Stake (PoS) as a consensus mechanism. As such, investors and users of the crypto token stake, which means locking up some of their crypto as collateral to earn passive income by validating transactions and adding new blocks to the blockchain.
Usually, the staking process happens on a single blockchain network, and users who work as validators in the ecosystem only stake and reap the rewards off this single network.
However, thanks to the advancements in the crypto industry over time, tokens can now exist and be used on several chains, making them multi-chain assets. And given that each blockchain network has its own set of pros and cons as well as its own rewarding formula, users could benefit from staking on various networks and reaping the benefits of each.
Multi-chain staking is, therefore, the practice of participating in the staking activities of multiple blockchain networks simultaneously. By participating in this form of staking, the goal usually is to diversify staking activities across various networks.
This diversification has several benefits, starting with maximizing rewards from various blockchains. Different blockchains reward their validators differently. Therefore, staking on different networks enables holders to earn rewards in different tokens, maximize their assets’ returns, and increase their overall earnings.
Multi-chain staking also helps holders spread the risks involved with locking digital assets on several networks.
Staked assets are subject to issues such as security breaches or price volatility that could lead to one’s asset losing value while held at stake. Users can spread their assets over multiple chains by utilizing several blockchains, reducing the loss involved if they were staked on a single chain.
Similar to risks, every blockchain also has its own advantages, such as lower gas fees or higher rewards that users can benefit from. Users can leverage the advantages of multiple networks by taking part in multi-chain staking, increasing their profit and gains.
Aside from their gain, multi-chain staking also allows validators to take part in securing multiple blockchains simultaneously. Staking increases the overall staking power of the multiple blockchains and interconnects the chains, making it difficult to successfully launch an attack on one chain without going through another.
On the other hand, multi-chain staking has its share of challenges, one being the complexity of taking part in this form of staking. When staking on multiple blockchains, one needs to understand each network’s mechanism and reward rate and keep track of the different staking periods.
Secondly, it could lead to a compromise on the security of one’s assets, given that they are spread across different blockchains. If one stakes their tokens on a less secure blockchain, attacks could result in losses that would not have been incurred if all the assets were held on a more secure blockchain.
Introducing Polygon’s POL
The new POL token is part of the massive upgrade that the entire Polygon Network is undergoing as part of the Polygon 2.0 proposal. The upgrade is meant to address some of the issues the network has been suffering, including security and scalability issues.
Polygon is undergoing a redesign to increase scalability, turning it into a network of zero-knowledge-powered Layer 2 chains unified via a novel cross-chain coordination protocol. This will make creating an infinite number of Polygon chains easier without sacrificing security or user experience, Polygon says.
By doing so, Polygon is working to create what it calls the Value Layer of the Internet. According to Polygon, this layer will work similarly to the internet, which allows anyone to create and exchange information. The Value Layer is meant to be a fundamental protocol that allows anyone to create, exchange, and program value.
However, to coordinate, secure, and grow this powerful network, Polygon wants to create an advanced, well-designed protocol economy, and mechanism design is necessary, hence POL.
POL is meant to be the native token of the upgraded Polygon Network. Since MATIC already exists for the same role, POL will be swapped out for MATIC so every holder receives the upgraded version of the native token.
Polygon Labs has dubbed POL the “3rd Generation Token”, with bitcoin (BTC) being the first since it was the first successful native token and Ethereum being the second generation token. However, Polygon argues that bitcoin is an unproductive asset since it does not give its holders any role in the protocol nor offers the incentives to perform such a role.
Ethereum, on the other hand, is said to have improved on this and established the second generation of native protocol assets named productive tokens. This category of tokens enables their holders to become validators in their respective protocols, perform valuable work, and get rewarded.
Polygon believes POL is an upgrade on ethereum, and its class of tokens introduces a new class of tokens known as hyperproductive tokens. Similarly to productive tokens, it enables its holders to become validators and receive rewards.
In addition to that, POL will provide validators with the ability to validate multiple chains, i.e., as many chains as they want, hence multi-chain staking. Every chain will also be able to offer multiple roles and corresponding rewards to validators.
Multi-Chain Staking with POL
For the upgraded Polygon network, staking plays a fundamental role in ensuring the platform is secure. Through staking, validators help to prevent Sybil attacks and enable slashing, which is the punishment of malicious validators by imposing a financial penalty.
Based on how the staking is structured, it is also meant to align validators with the ecosystem’s success by incentivizing them to keep doing their job as validators.
Unlike other multi-chain structures where validators stake their assets and validate transactions on those blockchains for rewards, validators on the Polygon network will play multiple roles on the various chains they choose to stake on and validate.
Some of these roles will include validation in the narrow sense where they accept user transactions, determine their validity, and generate blocks, which entails producing zero-knowledge proofs of transaction validity.
They will also ensure data availability by providing guarantees that transaction data is published and publicly available.
For the various roles they play, validators can earn rewards in three ways. Firstly, through transaction fees, which users pay for their transactions to be processed on the blockchain. Since the processing entails the validation work that validators do, they receive a portion of the transaction fees.
They can also earn through protocol rewards, which are predefined amounts of POL that the staking protocol continuously emits and distributes to all active validators as the base protocol reward. These rewards would replace MATIC protocol rewards that Polygon validators currently receive.
Lastly, validators can be rewarded through an additional scheme that a given Polygon chain puts in place independently to attract more validators. These rewards can be given in any token, including but not limited to POL, stablecoins, or native tokens of those Polygon chains.
According to Nailwal, in Polygon 2.0, POL will be staked in the staking hub. Once staked, the same POL can be restaked to validate any number of chains on the network, an approach the Labs call “enshrined restaking.”
Restaking is the technique of using the same token, in this case, POL, as a stake on both the Polygon blockchain and any other chains within the ecosystem. This will enable a validator to contribute to securing all of these networks simultaneously while gaining an additional yield on the same staked capital.
POL can natively be used to stake any number of chains and participate in any number of roles. In addition to the common working of restaking, Polygon has added functionality. First, enshrined restaking is said to entirely avoid reliance on trusted third parties, creating fewer vectors of centralization and maintaining decentralization.
Also, POL can be used for more than just securing chains. It can also secure aggregate layers and other platforms on the blockchain. This grows the role of multi-chain staking in the crypto industry and enables more developers to launch their own chains without having to rally for their own set of validators.
It also enables validators to secure many chains and earn more rewards using the same staked capital, creating a win-win situation for both parties.
Is This the Future of Multi-Chain Staking?
Despite having released a white paper on the technical upgrade, Polygon Labs has stated that there is more to the project that will be released with time. Additionally, the upgrade is still awaiting the community’s approval for implementation.
Regardless, Polygon has ascertained that the upgrade is meant to solve prevailing issues in the current network and revolutionize how blockchains and developers view and carry out staking.
Through this technical upgrade to Polygon 2.0, Polygon provides multi-chain, multi-role staking with the chance of restaking without the risks involved. This unlocks growing returns for validators and more accessible security strategies for developers.
It also creates a more secure ecosystem due to validators’ ability to stake any chains within the ecosystem, which can host an infinite number of chains. This creates a large web of blockchains that solve the scalability issue that ethereum faces despite being the most significant blockchain.
However, given that the proposal is not final, challenges are bound to arise with implementing this upgrade due to the scale in which it is expected to operate. For instance, restaking is not a risk-free technique and could lead to the compromise of security on the blockchain.
Additionally, complications could arise due to the complexity of the proposed model architecture. This causes the possibility of vulnerabilities that could later be exploited to attack the blockchain and the entire ecosystem.