Polygon Network's MATIC token continues to rally in a sign of persistent demand for layer 2 scaling projects that help decentralized finance (DeFi) protocols bypass Ethereum's high transaction costs and thus attract more users.
MATIC reached a record high of $0.9459 early today, surpassing the previous high of $0.92 reached on Thursday, according to data provided by CryptoCompare. Messari puts the cryptocurrency's daily high at $1.05.
"The ongoing capital rotation into all things Polygon is showing no signs of abating," Denis Vinokourov, head of research at Synergia Capital, said. "The layer 2 scaling solution is attracting capital inflows at an astronomical rate, as evidenced by the recent sharp rise in the total value locked through $1.5 billion."
Scaling refers to increasing the throughput of the system, as measured by transactions per second.
Layer 2 scaling solutions facilitate faster and cheaper transactions by running sidechains or tangential networks alongside the main Ethereum blockchain. Demand for these projects has picked up in the wake of network congestion and high transaction costs on Ethereum's blockchain., with prominent DeFi protocols like Aave announcing integration with Polygon earlier this month.
Derivatives market data shows the focus has shifted to Ethereum-based scaling solutions in recent weeks from rival blockchains like Solana.
Open interest in MATIC futures listed on Binance, FTX and Huobi has skyrocketed along with the cryptocurrency's price. Open interest refers to the number of contracts traded but not squared off with an offsetting position.
Open interest in Solana's SOL token has turned south since mid-April, after it had risen solidly during the preceding months. Vinokourov expects continued growth in Polygon at the expense of Solana.
"Non-Ethereum based solutions, such as Solana, may suffer in the short-term due to Polygon's growth," Vinokourov said. "The dominance of Polygon will most likely strengthen going forward, and its positioning as an aggregator could boost interest in the sector as a whole and support a wide variety of Ethereum-scaling solutions."
Indeed, Ethereum's scalability could improve, bringing transaction fees down once the sharding upgrade is implemented. However, Polygon's Sandeep Nailwal doesn't foresee Ethereum's improved scalability affecting demand for sidechains.
"Ethereum 2.0 will become 64 times more scalable than Ethereum is now, but the demand is 1,000 times than where we are. You will need L2 scalability," Nailwal told CoinDesk.
Ethereum founder Vitalik Buterin plans to implement the sharding upgrade after the completion of the switch to proof-of-stake mechanism by early next year.
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