Polygon: major projects to speed things up

"The multitude of products launched by Polygon is such that we can no longer name them all," joked a leading figure in the crypto sector a few days ago. It has to be said that for several months now, this ecosystem has been striving to remain the main gateway to Ethereum, targeting both crypto-native and traditional businesses, offering a wide range of solutions.

Quentin de Beauchesne*, founder of Ownest and one of the main validators of the Polygon network, reflects on its lightning development: "Polygon was successful not least because it provided one of the only scalability solutions at a time when transaction fees were exploding on Ethereum in 2021. Their marketing teams were also very strong in reaching out to traditional businesses."

As a result, Polygon has become a well-established brand, recognised for its excellence in B2B (Business to Business) relationships, attracting high-profile companies such as Starbucks, Nike and Meta to develop their Web3 projects in 2022.

"It was undeniably the fashionable ecosystem, with some traditional companies going there a bit by default because there was a knock-on effect and experimentation was cheap. But in the long term, that's not enough to build loyalty," points out Stanislas Barthelemi, lead Blockchain & Crypto at KPMG.

In fact, the economic slowdown has put a bit of a damper on this fine momentum, with symbolic projects such as Meta coming to a halt.

In recent months, Polygon has seen the arrival of a new wave of competitors designed on Ethereum's more efficient scalability technologies, the "Rollups" (Arbitrum, Optimism, Base, etc.).

The value tied up in Arbitrum ($2.1bn) now far outstrips Polygon's ($800m).

Faced with these challenges, Polygon has initiated major changes to accelerate its development.

👉 Migration from Polygon 2.0 scheduled for March 2024

Currently, Polygon operates as an Ethereum sidechain that offers a high number of transactions per second, but involves a lower level of security than a Layer 2 running on Rollups, because Rollups rely on Ethereum's security, which is one of the most robust in the industry.

Polygon is thus preparing for a major update to align its products and improve the security of its main chain. Its name? Polygon 2.0.

In contrast to traditional rollups, which publish transaction data on the Ethereum blockchain, this iteration will store its data off-chain with a validium, an Ethereum scalability solution. This means that only proofs of transaction validity will be submitted to the Ethereum blockchain; not the transaction data itself.

The advantage is that Polygon 2.0 will be able to process a large number of transactions more efficiently (there's talk of 9,000 per second compared with less than 200 today), but the question of this version's better security is still being disputed: as not all data is sent over Ethereum, some of the operations will still depend on the Polygon network.

So it's better than the historical version, but not yet up to the level of traditional ZK-Rollups. On the other hand, the latter are unable to offer this level of scalability.

Polygon 2.0 will therefore be suitable for projects with a high volume of transactions requiring low fees (games, social networks, small DeFi projects, etc.).

On the other hand, those sanctuarising a lot of value, such as the major DeFi protocols, will pass and prefer more secure solutions such as Ethereum or Rollups (see last part).

🗓️ The migration to Polygon 2.0, which began last June, is due to be completed in March 2024.

A crucial aspect of this transition will be the adjustment of the MATIC token parameters. "The team behind Polygon still manages a large part of the supply today. In order to pay the validators, they are in a way obliged to send the MATICs themselves, as the protocol does not create new tokens to reward validation work," says Quentin de Beauchesne.

By becoming a true Layer 2, the distribution of MATICs, soon to be renamed POL, will be done automatically by inflation via the protocol, offering more options to holders who will be able to "validate several chains and play several roles on each of them", as Polygon's documentation states.

👉 A roll-up-as-a-service offering for companies that want their own Layer 2

The other product Polygon is relying heavily on is its Chain Development Kit (CDK), which is supposed to enable all projects to build their own Layer 2.

"This allows custom blockchains to be created that are interoperable with Polygon's main chain and its ecosystem networks. This is a significant step forward in providing streamlined access to unified liquidity through a shared bridge based on Zero-Knowledge," writes in a research note Swiss asset manager 21Shares.

"The ambition is clear: Polygon wants to become a kind of hub for Layer 2," analyses Stanislas Barthelemi.

Some big players have been experimenting with it since its launch last summer. The exchange platform OKX, which launched its X1 second-layer solution at the beginning of November, is one of these big players. "We believe that Polygon has the right technical capabilities and ecosystem relationships to make X1 a next-generation Layer 2 network that drives widespread Web3 adoption," insists an OKX spokesperson.

Quentin de Beauchesne sees this trend as an opportunity for Polygon: "Polygon is capitalising on its good reputation with businesses to offer them the chance to launch Layers 2 that meet their own needs. It's an excellent idea for diversification."

👉 Polygon ZkEVM is still struggling to attract

For Polygon, the big challenge will be to dig its furrow in the ZkEVM segment, i.e. scalability solutions that rely 100% on Ethereum's security (to be distinguished from Polygon 2.0, therefore).

According to Ethereum co-creator Vitalik Buterin, this is the technology that will become the norm in the next few years. It is therefore crucial to assert oneself as a leader in this field.

To date, Polygon ZkEVM is still struggling to attract interest, as evidenced by its low value immobilised by the projects that use it ($20 million). This is much less than its main competitors ZkSync Era ($145 million) and Starknet ($30 million).

This gap can be explained in particular by its recent launch (March 2023), but above all by the absence of a future token to distribute.

However, Polygon intends to capitalise on its technology, which it presents as the best in the world in this field. To justify itself, Polygon points to the purchase of start-up Mir for $400 million at the end of 2021. "This acquisition is important because Mir is a champion in the field," stresses Arthur** , Product manager at French start-up Nuant.

It remains to be seen whether this costly takeover will bear fruit, as innovation is raging.

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*Quentin de Beauchesne is a shareholder at The Big Whale. **He wished to remain anonymous.