Polygon (formerly Matic) is a Layer 2 scaling solution backed by Binance and Coinbase. It's a sidechain that runs in parallel with Ethereum's mainnet and has massively reduced transaction fees compared to Ethereum. With its almost free transaction fees, Polygon has gathered a lot of attention from DeFi users and has exploded in popularity in recent months. To visualize this increase in popularity, the activities of Polygon's bridges are found out and plotted.
Link Green = Deposit, Blue = Withdraw
From the graph, we can see that the ETH bridging activity on Polygon started to increase starting from April and peaked on May 21 following the crash of crypto prices. However, the overall activity is still high for another month or so before finally dropping lower and lower starting from the middle of June. So what are the driving factors in bridging ETH into Polygon.
For starters, gas prices had been plaguing ETH mainnet since crypto went into a bull market last year, where more and more transactions are being made and started to clog up the mainnet. Transactions weren't getting confirmed and the system was slowing to a crawl. In order to get a transaction confirmed in a timely manner, especially for DeFi transactions where time is money, a user had to pay exorbitant prices.
Below are the average daily gas prices paid by users to get their transactions through.
As you can see, the gas prices had been lingering at the range of about 50 to 200 Gwei per transaction. Initially, paying for the transaction fees in this range is feasible, although unwillingly, for most users, as the gas fee in USD is less than $5 per transaction. However, as the price of ETH increases exponentially in the coming months, the gas price in USD skyrocketed to a whopping $20 per transaction on average, up to a high of more than $60 per transaction in May.
Several Layer 2 solutions introduced before Polygon took off in popularity, such as Binance Smart Chain (BSC). With the introduction of BSC as a cheap alternative to ETH, users started migrating from ETH to BSC, which in turn exploded the price of BNB. This exponential increase in the price of BNB again made BSC expensive to use. Along with the allegations of BSC being centralized, users were desperately finding another solution to the sky-high gas fees.
With this in mind, users started to migrate to Polygon, where more and more DeFi protocols are getting launched. Comparing the ETH transaction fee graph with Polygon <> ETH bridge activity, we can see that the volume going across the bridge is proportional to gas fees, which supports the theory that users are escaping the high transaction fees on ETH to Polygon.
Other than that, with the implementation of popular DeFi protocols on Polygon, Polygon was attracting more users who hunger for that sweet DeFi experience that doesn't burn a hole in their pockets. For example, AAVE launched on April 1 and Sushiswap short after in May, which coincides with the heightened activities on the bridge.
So, what about stablecoins? Are they being bridged to Polygon as well? In this dashboard, we look at the activity on the USDC Bridge.
