As delegators venture into the blockchain ecosystem, one key metric that frequently guides their choices is the Annual Percentage Rate (APR). APR allows stakers to gauge the profitability of their investments, particularly when choosing a staking provider.
Polygon, with its increasingly influential position in the blockchain realm due to outstanding advancements, including Polygon 2.0, the launch of zkEVM mainnet beta, and collaborations with institutions such as the Italian Central Bank, is quite attractive to potential delegators, so the question of APR is likely to be of high interest to them.
This article takes a closer look at the mechanisms behind the APR formation in Polygon and explores the factors influencing it.
MATIC and its Role in Staking
At the heart of Polygon's ecosystem lies its native token, MATIC. As both a means of payment and a stake in the network, MATIC plays an instrumental role in ensuring security and consensus within the blockchain. Staking, which involves locking up a certain quantity of tokens to support operations like block validation and transaction processing, is paramount for the network's stability and security.
Factors Influencing APR in Polygon
There are three pivotal elements underpinning the APR in Polygon:
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Staked ratio
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Validator performance
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Validator fee
Let's examine all of those factors closer.
Staked Ratio and its Economic Implications
The staked ratio signifies the portion of MATIC tokens locked in staking contracts compared to the total supply. As the staked ratio increases, APR tends to diminish. The logic behind this trend lies in balancing the supply-demand dynamics. As staking becomes more popular, individual rewards decrease, distributing the fixed reward pool among more participants.
Because of this, higher rewards are offered initially to incentivize staking, but as more of the supply is staked, these rewards reduce. For example, in mid-2020, with a Staked Ratio of approximately 11.60%, the APR stood at 63.71%. In June 2023, this ratio rose to around 40.21%, correlating with a reduced APR of 5.41%.
Validator Performance
Another factor directly influencing APR offered by a particular validator is its performance, i.e., the efficiency of performing its role as prescribed by the network rules.
Validator roles in Polygon can be categorized into three segments:
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Ethereum layer: It involves contracts on the Ethereum mainnet.
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Heimdall layer: Named after the Norse god guarding the rainbow bridge leading to Asgard, it includes so-called Heimdall nodes overseeing staking contracts on Ethereum and relaying Polygon Network checkpoints back to the Ethereum mainnet.
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Bor Layer: It comprises block-producing Bor nodes, shuffled by Heimdall nodes.
Validators are responsible for a multitude of tasks, from running full nodes to ensuring the commitment of checkpoints to the Ethereum mainnet. The performance of those tasks is evaluated through three metrics: checkpoints, Heimdall blocks, and Bor blocks. The instance of missing any checkpoints, for example, directly affects the APR for delegators, irrespective of the validator's fee structure.
One can learn about the performance of any validator on Polygon from the Polygon Validator performance framework, a dashboard launched in 2022 gauging validator productivity. Validators are color-coded based on their performance: green signifies optimal performance, orange indicates declining performance necessitating closer scrutiny, while red denotes a prolonged period of subpar performance, raising unstaking risks.
Regarding the performance of top Polygon validators, Everstake's quarterly report on MATIC staking concludes:
"When analyzing the performance of validators with the most delegators, we focus on three crucial metrics: checkpoints signed, Heimdall blocks signed, and Bor blocks produced. Only two validators – Everstake and Abyss Finance – have accomplished 100% signed checkpoints over the past three months. Moreover, six validators have achieved a flawless 100% record in signed Heimdall blocks, while an additional seven validators have demonstrated an impressive Bor block production rate of over 99%. Notably, nine of the top ten validators have met the network performance threshold and hold the Healthy status. This indicates a thoughtful approach by delegators in choosing validators, prioritizing network performance and reliability."
The figure above shows a direct correlation between APR and validator performance on all three layers. In particular, the closer the validator's performance is to 100%, the higher the APR it offers.
Validator Fee
The final factor directly impacting APR in Polygon is the validator fee, a commission validators charge for their services. When a validator processes transactions or produces new blocks, they earn rewards, a portion of which is taken as a fee before the remaining rewards are distributed among stakers. This fee is pivotal in determining the final APR for delegators.
Unlike other factors, which depend on objective economic and technical conditions, this one solely depends on the particular validator's discretion, market behavior, and business strategies.
Therefore, stakers must weigh the validator's performance against their fees to make informed decisions.
Conclusion
Understanding the intricacies of APR in the blockchain ecosystem is of paramount importance for potential stakers. In the case of Polygon, the relationship between staked MATIC tokens, validator performance, and associated fees plays a significant role in determining APR. Before proceeding with staking, delegators must be well-informed, recognizing that their decisions directly influence their returns and the broader health of the blockchain network.
You can stake your MATIC with Everstake at a 0% fee and the highest APR here.
