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The Polygon EIP-1559 Implementation Might Not Be Sufficient To Warrant A Higher MATIC Price

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·4 min read
In this article:
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Through this upgrade, partial transaction fees are permanently burned, reducing the circulating ETH supply. A similar upgrade will affect the Polygon network, potentially making MATIC a deflationary token.

EIP-1559 Is A Big Deal

The upgrade of Ethereum to EIP-1559 has some exciting consequences. A partial network fee burning mechanism is a great way to reduce the circulating supply of tokens on the network. Unlike Bitcoin, Ethereum has no “hard cap,” even though it has block reward reductions for miners. Moreover, once the transition to proof-of-stake occurs, that reward reduction schedule will remain in effect.

Ethereum enabled this upgrade through the London hard fork in the summer of 2021. As a result, network enthusiasts now benefit from better gas price predictability — although transactions can still be rather expensive — and network fee burning. More specifically, the network upgrade has burned over 1.58 million Ether, or over $4.5 billion. Although this has caused the ETH supply to flatten a bit, it has not triggered a deflationary effect yet.

Before the deflationary effect can become a reality, the network rewards will need to drop further. Another option is having the network process even more transactions – and subsequently, burning more fees — although Ethereum has been running at near-full capacity for some time. Better scaling will be required, which will occur through sharding in the next upgrade. There is no date for that upgrade today, though, resulting in an ongoing status quo for the network.

Polygon Implements EIP-1559

Users annoyed by Ethereum’s high fees and lack of scaling have begun exploring Layer 2 scaling solutions, including Polygon. Although this layer runs on the Ethereum blockchain, it provides a better transaction throughput at much lower fees. As a result, the Layer 2 solution has become popular among DeFi and NFT enthusiasts, allowing the developers to experiment with new ideas, including integrating EIP-1559.

Per a recent announcement, Polygon confirmed the launch of EIP-1559 on the mainnet on January 18. Its main purpose is to bring fee-burning to Polygon and remove the first-price auction method to calculate network fees. However, it will not reduce gas prices, as that functionality is seemingly not part of the future of Polygon and its native token MATIC.

However, MATIC’s supply will become deflationary  over time through the fee-burning mechanism. The switch will be gradual, as up to 0.27% of the supply will be burned every year. MATIC has a fixed supply of 10 billion — unlike Ethereum’s uncapped supply, and not all of it is in circulation yet — indicating the burning will have a more visible effect on Polygon’s native asset.

The future deflationary nature of MATIC will be beneficial to network validators and delegators. This is because both entities have their rewards denominated in MATIC. Additionally, EIP-1559 on Polygon will reduce spam and network congestion. It is a welcome change following Polygon’s recent gas issues skyrocketing and validators unable to submit blocks. That issue has been resolved, but more solutions to reduce such issues is always beneficial.

Future MATIC Price Impact

When deflation occurs, an asset or currency becomes more scarce. For MATIC, a currency with a fixed supply cap, deflation can prove beneficial in the price department. More specifically, it makes every MATIC slightly more scarce, and the currency will still be required to perform network activities all the same.

However, a 0.27% annual reduction is not necessarily a big change for a currency with a maximum supply of 10 billion. The reduction represents 27 million MATIC per year taken out of circulation. It seems unlikely that it will trigger a big price change in the first few years unless there is a sudden increase in demand for MATIC. That growth may occur through a growing DeFi and NFT ecosystem or Metaverse-related developments on this Layer 2 solution.

That said, MATIC has a one-year price performance of +5,473% — per CoinGecko — indicating demand for exposure to the asset is rising. The big question is whether that is purely for price speculation or utility, as the potential longevity of that uptrend will hinge on how people approach the asset. It has utility, but it is also speculative in nature. Moreover, the asset is ranked #15 by market cap today, behind Shiba Inu but ahead of TerraUSD and Cosmos.

Looking to the future

It is interesting to see Polygon embrace the EIP-1559 improvement, even though it will not address network gas fees. Instead, it is a significant update to reduce spam and network congestion while creating a deflationary curve — although not a spectacular one — for the MATIC asset. It is impossible to tell if that will impact the MATIC price at all, as the yearly supply reduction is not necessarily spectacular.

That said, it is good to see more networks embrace the concept of deflation these days. In traditional finance, inflation is the keyword today, with all of the negative consequences along with it. But on the other hand, deflation creates more scarcity, which can fuel the overall demand for MATIC. There is no guarantee that will happen, however.

This article was originally posted on FX Empire

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