Polygon, an India-based scaling solution for Ethereum, powered by MATIC, is releasing an update to deploy a fee-burning mechanism line like Ether (ETH) and Binance Coin (BNB). Polygon will implement Ethereum's EIP-1599 update and introduce the burning of native token MATIC to provide better transaction fee visibility and other smaller features. The upgrade is being released in the network as a testnet and will be called the Mumbai Testnet. A testnet is an alternative blockchain used for testing and experimentation.

The EIP-1599 update on Ethereum's blockchain addressed two vital aspects in transaction fees: the burning of transaction fees depending on the network load and reduced gas price volatility.

Coin burning is a process in which miners remove a specific portion of coins from circulation. It means the miners send those tokens to an address with no private key. Without any private key, access to the coins is restricted and results in effective removal or burning.

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Before its update, Ethereum priced transaction fees using an auction mechanism. It involved users sending a transaction with bids, also known as gas prices, and then miners choosing the transactions that had the highest bid. The transactions the miners select pay the bid they had specified.

However, experts suggested there were many inefficiencies with the auction mechanism for fee calculation. Some of the issues were:

A mismatch between the volatility of transaction fee levels and the social cost of transactions.

Needless delay for users due to the natural volatility in transaction volume.

Complex fee estimation algorithms, that were necessary due to the auction mechanism, would often end up not working, leading to frequent fee overpayment.

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EIP-1599 completely eliminates the first-price auction mechanism to calculate the fee for a transaction. In the EIP-1599 update, there is a base fee for transactions to be included in the next block and a priority fee that speeds up the processing of transactions. The base fee fluctuates according to the network congestion and is then burned.

These changes in the transaction fee system allow users to estimate cost better since the base fee is the minimum price for being included in the next block. Overall, this will result in fewer users overpaying for transactions.

What does this mean for MATIC?

MATIC has a fixed supply of 10 billion coins in network. Burning the coin would have a deflationary effect. But experts believe the deflationary pressure will benefit both validators and delegators, as rewards for processing transactions would be denominated in MATIC.

Polygon's core development team used Ethereum's experience with the upgrade as a baseline to simulate the impact on MATIC's total supply. The team's analysis shows the annualised burn would only represent 0.27 percent of the total MATIC supply in the network.

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(Edited by : Yashi Gupta)

First Published:Dec 16, 2021 1:36 PM IST