The Big Whale's opinion 🐳 Losing momentum since 2022, Polygon has been hit by fierce competition from Ethereum's layer 2s.
Polygon nevertheless remains a heavyweight and is starting to roll out a full ecosystem that is supposed to address the fragmentation of liquidity.
His sales teams are among the best in the crypto ecosystem.
Unlike its competitors, its vesting period is already over, which limits selling pressure on its token.
Overview 🧬 Initially imagined as the "Matic Network" from 2017, Polygon (renamed in 2021) is an Ethereum sidechain launched in May 2020.
A sidechain is an independent blockchain that has its own network of validators to ensure its security. As such, Polygon cannot be said to be an Ethereum layer 2 as this type of solution is supposed to rely on Ethereum's security.
Polygon is content to periodically publish some data on the second largest blockchain in the sector. Both blockchains are based on the Ethereum Virtual Machine (EVM), which has made it easy to port applications to both infrastructures.
Their transaction fees are among the cheapest on the market.
This complementarity combined with low costs has attracted a number of large companies to develop their first blockchain experiments on it. These include Nike, Coca-Cola, Starbucks and Meta.
One of Polygon's strengths is undoubtedly the quality of its sales teams . Many of its members come from the ranks of large traditional companies, which makes negotiations easier.
The project is currently transitioning to its "Polygon 2.0" plan, presented in June 2023, which is intended to turn it into a much broader ecosystem.
Financing 💰 Polygon has raised $455 million in several deals, including some from very prestigious investment funds.
An initial seed round of $450,000 was raised in April 2019 from Coinbase Ventures.
In parallel, Polygon raised $5 million through an Initial Exchange Offering (IEO) from users of the Binance exchange platform.
Polygon raised $450 million in February 2022 in a round led by the Indian arm of Sequoia Capital (one of the world's best-known venture capital funds), as well as Web3 funds such as Galaxy Ventures, Animoca Brands, DragonFly Capital.
Note that Celsius and Alameda, both in bankruptcy, also participated in this investment.
The vesting period for private investors is over. This is a big plus point as there is no fear of future massive sales of the token by its historic investors.
Polygon signalled itself with two significant buyouts in 2021 with the acquisition of the Mir and Hermez projects, for $400 million and $250 million respectively. These two transactions, motivated to integrate their work on zero-knowledge proofs, were carried out with the MATIC token.
Team and community 👾 Indian Sandeep Nailwal is Polygon's lead architect, but a dozen people carry the title of co-founder of the protocol and the company responsible for its development, Polygon Labs.
Sandeep Nailwal notably launched a crypto relief fund to combat the Covid-19 epidemic in India. This initiative has received more than a billion dollars from Vitalik Buturin, one of the co-founders of Ethereum.
Since July 2023, American Marc Boiron has been at the helm of the structure. He previously held the position of General Counsel, having left the dYdX project. He has worked in the blockchain sector since 2015.
Polygon Labs is based in New York.
In February 2024, it announced the redundancy of 60 employees, or around 20% of the workforce. Executives said this was the result of too much hiring during the previous bull market.
We contacted Polygon Labs as part of this analysis. The team agreed to talk 'off the record' about its developments but did not communicate officially. Many of the elements provided in our document come from these discussions.
Polygon has around 2 million followers on X and 245,000 members on Discord.
Governance 🗳️ 36% of the network's tokens are currently staked with an annual return of 4.7% currently.
Luganodes, Binance Nodes and Twinstake validators each hold around 10% of voting power.
The top 11 validators hold 67% of voting power.
Source: Smart Stake
Social analysis 👥 According to analytics firm Kaito, Polygon is the 14th most discussed crypto project on social networks over the past 30 days.
Source: Kaito
The transformation of the MATIC token into POL 🪙 One of the highlights of 2024 will be the transformation of the MATIC token into POL.
This decision is part of a drive to change tokenomics, as until now the total number of MATICs was set at 10 billion. Staking rewards were distributed from a reserve holding 12% of tokens.
This system was difficult to sustain over the long term insofar as the reserve gradually dried up.
The POL, meanwhile, will have annual inflation set at 2%, which will therefore lead to a potentially infinite quantity of tokens. One half will be used to finance the stakers and the other half will feed a treasury, also governed by the stakers. The latter will be used to finance the ecosystem.
In addition to participating in the security of the Polygon blockchain, the stakers of the future POL will also be able to secure blockchains connected to AggLayer (see below) to benefit from additional rewards from these blockchains.
This vision is inspired by the retasking popularised by EigenLayer (read our analysis).
Polygon's 3 major proposals 🧐 It is sometimes difficult to find your way around the Polygon ecosystem, as several scalability projects are being developed in parallel.
On the one hand, there is the historic blockchain, Polygon, which has a capital value of one billion dollars. It is secured by its own proof-of-stake system and will gradually be transformed into a true layer 2 of Ethereum to inherit the latter's security. The stakers will remain in the equation and Polygon will probably be the first layer 2 decentralised by this means.
This blockchain will post its proofs of validity on Ethereum, but no data. This type of system is called a "validium". The data will be held by the existing network of validators. This compromise should increase transaction throughput and reduce costs. Its new name: Polygon zkPOS.
The second project, Polygon zkEVM, is a complete zk-rollup and benefits from the highest level of security. Absolutely everything is posted on Ethereum (proof of transactions and data). This makes this proposal more expensive than the previous one. Nevertheless, this solution is struggling to attract users (only 14 million in capitalized value).
Finally, Polygon Miden is another zk-rollup currently under development. Unlike the other two projects, which use the same virtual machine as Ethereum (EVM), Miden has its own device (Miden) and has an operation optimised for the use of zero-knowledge proofs to enable very high transaction throughput. This strategy is also found at Starknet, which relies on the Cairo language.
"The different chains developed by Polygon Labs each have their own specific features adapted to different types of applications," says a member of the team.
A development kit to easily create Ethereum Layers 2 ⚒ Polygon is banking heavily on the Polygon Chain Development Kit (CDK), a tool to help developers create their own Ethereum Layers 2 secured by zero-disclosure proofs.
Several major players have already announced that they will opt for this solution. These include Immutable (a blockchain specialising in gaming), OKX (a centralised exchange platform) and Gnosis (a blockchain specialising in payment).
Another major innovation, Polygon Labs announced at the beginning of February the forthcoming arrival of a type 1 "prover" that will offer full compatibility with Ethereum.
In fact, layer 2s operating with zero disclosure proofs are more or less difficult to connect with Ethereum. For the first time, Polygon will be able to offer a "pure" solution that is very easy to use.
Currently, no other project has this level of compatibility with Ethereum (Scroll and Linea are classified as "type 2", zkSync as "type 4").
This will make it very easy for any blockchain designed with Ethereum's programming language to become a layer 2 protected by zero disclosure proofs.
Thanks to this, Polygon hopes to attract many chains to strengthen its ecosystem.
AggLayer, Polygon's restaking platform? ♻ This project, also designed by Polygon Labs, is presented as a response to the fragmentation of liquidity caused by the multiplication of Ethereum's layers 2.
AggLayer offers to aggregate into a single one all the proofs of validity that different projects wish to register on Ethereum.
At the end of the day, this would offer financial and time savings, but also better connections between projects and their cash.
Stakers of the future POL token will get rewards from projects that use AggLayer.
"AggLayer aims to provide almost instant communication between connected channels that will give the impression of being one," comments a source close to Polygon Labs.
Roadmap 📝 There are no specific dates regarding the rollout of the Polygon 2.0 plan.
The transition from the MATIC token to POL should take place in the first half of 2024.
The AggLayer, deployed at the end of February, will gradually evolve and gain in performance.
We also have no launch date for the first layers 2 designed with CDK.
Competition ⚔ The competition is fierce among projects specialising in Ethereum scalability.
Arbitrum is the layer 2 recording the highest capitalized value (TVL): $3.3 billion.
Polygon's legacy blockchain and Optimism are in second place with around $1 billion in TVL each. Base, Coinbase's layer 2, comes next with $538 million in TVL.
Focusing solely on zk-rollups, zkSync is at $178 million in TVL and Starknet at $170 million, while Polygon zkEVM has just $14 million.
This is so far an abject failure. This lack of attraction is explained by the fact that no token airdrop is planned and that Polygon zkEVM is among the most expensive zk-rollups to use.
Future updates could nevertheless reduce its costs and its connection to AggLayer could help to develop its business.
This graph shows us that Polygon has lost its leading position over the past two years.
Source: Defillama Regulation ⚖ The MATIC token has been presented as illegal on several occasions by the US securities regulator. These statements came in June 2023 as part of the SEC complaints accusing the Coinbase and Binance platforms of listing unregistered securities, including MATIC.
Polygon Labs defended itself in June 2023, explaining that it was not targeting the US market.
"We are proud of Polygon's history, deployed outside the US and built to this day on a global community (.... We have ensured that MATIC is available to a broad group of people, but only in actions that were not targeted at any time at the US.(...) The market outside the US is the largest in the world."
The fate of MATIC in the US is likely to become clearer in the coming months, when the US courts issue their ruling in the Coinbase and Binance cases. If it loses, it could no longer be offered to US investors by exchange platforms.
Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈 MATIC's performance has disappointed over the past year. The darling of crypto investors during the last bull market in 2021, its price is down 2% since the start of the month, and has gained "only" 15% since the start of the year. A considerable underperformance compared to Bitcoin and Ethereum, and other layer 2 leaders such as Optimism and Arbitrum.
This drop in performance could be explained by the fact that crypto investors are in constant pursuit of new nuggets, to the detriment of "old" projects that date back to previous cycles. Indeed, since 2021 we have seen the rise of scaling technologies of the "Optimistic Rollup" or "ZK-Rollup" type, which have been wildly successful. It is in fact with this in mind that Polygon has tried to pivot by creating Polygon zkEVM and offering its CDK development kit.
The price of MATIC has nevertheless risen by 43% over the month of February, perhaps reflecting renewed interest on the part of investors and the fruit of all the work done by the ecosystem over the past two years.
Where can you buy the MATIC token? 🛒 Given its age and weight in the ecosystem, the MATIC token is available on most exchange platforms.
Conclusion 🧭 The Polygon 2.0 plan brings some coherence but the project is becoming increasingly complex.
In trying to do everything, it exposes itself to the risk of being average everywhere.
It surfs on several themes that are gaining momentum, such as zero-knowledge disclosure proofs, blockchain interoperability and restaking.
If AggLayer delivers on its promises, it could create a very dynamic ecosystem.
In the short term, the project seems to be lagging behind the other layer 2s that have been hogging the cash.
However, many of its competitors will gradually experience the end of their vesting and this could put selling pressure on their tokens.
Our other analyses 🔍 ⭐ The Dymension Analysis (DYM)
⭐ The Starknet Analysis (STRK)
⭐ EigenLayer's analysis
⭐ The analysis of Celestia (TIA)
⭐ The analysis of Lido (LDO)
