We are just a couple of weeks away from the highly anticipated upgrade that will move Ethereum (ETH -1.13%) from a proof-of-work consensus mechanism to proof of stake. Known as The Merge, this change is being brought about to lay the foundation for Ethereum to increase lagging transaction speeds, lower gas fees, and use less energy.
As one of the most popular blockchains in the world, Ethereum's network has become susceptible to congestion and high fees during peak times. To combat this, Layer 2 solutions like Polygon (MATIC -0.49%) have risen in popularity as users and developers look for cost-friendly and quicker blockchain alternatives.
Instead of trying to outdo Ethereum, Polygon offloads some of that traffic and serves as a de facto sidekick. Transactions on Polygon are processed separately and then added to the Ethereum blockchain at a later date. In doing so, Polygon users get access to increased speeds and minimized fees without sacrificing security since all transactions are eventually added to Ethereum's decentralized blockchain.
But if Ethereum's ultimate goal is to become faster and cheaper to use, would that eliminate any need for Polygon's blockchain as Ethereum enters the new proof-of-stake world? And more importantly, should it take up a portion of your portfolio?
The truth about The Merge
Before getting into the latter question, it's worthwhile to take a look at The Merge and exactly how it affects Polygon. Since The Merge was first announced years ago, there has been no shortage of hype and speculation surrounding what will actually happen to Ethereum once it has been fully upgraded. Some of the most common misconceptions revolve around those transaction speeds and lower fees.
Currently, transaction speeds range from around 12 to 20 transactions per second (TPS). Many hopeful users were optimistic that The Merge would help Ethereum scale to handle more transactions. Unfortunately, that is not the case. Ethereum's website states that users aren't likely to see any substantial differences in speeds post-Merge. It is true that blocks are created faster on proof-of-stake networks, something that validators will notice, but not the end users.
In addition, those gas fees probably won't be coming down much, either. Another major misconception was that with faster transaction speeds, fees would subsequently come down as well. Both are untrue. Fees can only decrease when the network's capacity increases, and the move to proof of stake won't substantially increase capacity. At least not yet.
A match made in heaven
Eventually, Ethereum's capacity will grow, which would thereby increase speeds and reduce gas fees. To do this, a technology known as sharding is planned to be introduced sometime in 2023. Sharding will split up Ethereum's primary blockchain into smaller, more manageable chains. Once this technology is live, Ethereum will become exponentially faster and cheaper to use.
At this point, you must be thinking that when sharding comes along, it will surely mean the end of Polygon. But that's not the case.
The Ethereum website is littered with information on the development of its vision, and surprisingly, developers are well aware of the role Layer 2 scaling solutions will have in helping Ethereum realize its potential.
Even when sharding is operational, the goal is for Ethereum to work "harmoniously" with Layer 2 solutions so that Ethereum can scale even more. We can only go off estimates now, but developers believe that once sharding is enabled, Ethereum will be able to handle around 1,280 TPS, a nice increase from the current 20 TPS, but 1,280 TPS isn't enough to handle all of the world's traffic.
For Ethereum to fulfill its goal of becoming "powerful enough to help all of humanity," it will need some assistance handling more transaction throughput -- something Polygon is more than capable of doing. It's believed that Polygon can handle around 7,000 TPS at the moment, and once sharding comes along, that number could increase exponentially.
Unlike what you might find in the depths of the internet, The Merge won't be the end of Layer 2 sidechains like Polygon. In fact, it will help Polygon just like it will help Ethereum. The development of Polygon's blockchain in conjunction with Ethereum should set it up to become the primary scaling solution of Ethereum for years to come.
At less than 75% of its all-time high, Polygon's long-term potential looks too good to be true at today's prices. Even in the midst of a "crypto winter," it's clear that Polygon has what it takes to make it through this bear market and should enjoy a vibrant future even as Ethereum continues to evolve.
