[Recap] Polygon – Institutional Adoption: Past, Present and Future – Recorded at The Bridge

On November 3rd, 2023, Marc Boiron, CEO of Polygon Labs, and Matthew Blumberg, VP Institutional Capital at Polygon Labs, shared insights at The Tie's inaugural crypto corporate access event, The Bridge. They discussed the growth of institutional interest in digital assets, developments in blockchain infrastructure, and the evolving landscape of regulatory challenges.

Polygon is a decentralized Ethereum scaling platform powered by the MATIC token (with technical upgrade to POL token currently underway). Polygon aims to create a suite of scaling solutions that will enable developers to build scalable applications without sacrificing security.

The Fireside Chat focused on the following key topics:

Watch the full replay below:

Crypto began as a retail-first asset class. In 2017, retail investors were mainly buying cryptocurrencies through ICOs. The landscape evolved, and by the summer of 2020, more sophisticated players, particularly crypto-native private funds, showed interest. The 2021 bull run marked a notable pivot when larger institutions like Tesla and Microstrategy started buying Bitcoin. Some institutions also started looking to potentially add Ethereum to their balance sheet, but broader exploration into other cryptocurrencies was hindered by regulatory concerns.

Despite significant improvements in the infrastructure around holding and managing crypto—such as better custody services, key management systems, and improved liquidity—regulatory compliance remains a primary concern. Now, institutions are not only interested in holding cryptocurrencies but are also actively looking to build the infrastructure. 

The evolution of DeFi has been mixed, with both positive and negative developments. However, the successful elements lay a strong foundation for future growth. Marc hailed Uniswap as 'one of the greatest inefficient innovations ever,' highlighting how its Automatic Market Maker (AMM) algorithm revolutionizes the trading of illiquid assets by ensuring constant market availability. For retail investors, the ability to borrow against equities introduces interesting financial primitives. For institutions, the integration of permissible regulation within DeFi, alongside tokenized assets, promises a future of reduced risk and enhanced opportunity. Looking ahead, Marc anticipates that within five years, various regulatory regimes will recognize and accept tokenized assets, paving the way for institutions to confidently participate in the DeFi ecosystem.

Regulatory bodies around the world would prefer to be more proactive than reactive, with a focus on how to prevent issues in the financial sector rather than address them after they've occurred with methods like compensation and insurance. Blockchain technology is well suited for this approach, offering ways to mitigate risks such as unauthorized transactions. Yet, full adoption of blockchain is often hampered by current regulatory practices, including forced intermediation. While traditional brokers play an important role, as many individuals trust third-party asset management, Marc argued that the choice to use such services should be voluntary. Blockchain and Layer 2 solutions, such as those offered by Polygon, provide secure alternatives without the need for regulatory imposition. 

Tokenization of securities in the U.S. has been feasible for some time. But in the regions like the EU, Singapore, the UK, the UAE, and Hong Kong, the regulatory frameworks are evolving beyond issuance to also enable the trading of these assets. This progression from experimentation to the establishment of operational market systems signifies a notable shift in the global regulatory environment, though there is still a journey ahead to fully realize this potential.

Marc suggested that future regulatory compliance might shift towards implementing controls at the asset level instead of the protocol layer. This approach would maintain the blockchain's open and decentralized nature, with a regulatory focus applied where transactions actually occur.

Discussing sanctions enforcement in the crypto industry, the panel noted the possibility of moving to a more discerning, risk-based method akin to traditional finance. An example is the company Uniswap, which felt the need to implement broad restrictions like geo-blocking and address banning, even though it has no control over the Uniswap smart contracts. Marc advocates for empowering users to make informed decisions on transactions based on individual risk assessments, moving away from the one-size-fits-all model of centralized restrictions.

The fireside chat also highlighted a preference for global blockchain systems over localized ones. Localized blockchains neutralize most of the reasons why blockchains are useful. Marc stated that, “regional blockchains would arguably be worse than the traditional infrastructure we have today.” He highlighted that, beyond cost savings, a globally accessible, 24/7 blockchain infrastructure could facilitate unrestricted trading on the base layer. The consensus was that we should aim for a solution where blockchains are open to a broad range of jurisdictions with different guardrails to ensure adherence to the local compliance requirements. 

Polygon’s hybrid model offers a balance between private network control and the transparency of a public blockchain, a crucial factor for institutions wary of regulatory scrutiny. Institutions can develop their own Layer 2 networks using tools like Polygon's CDK (Chain Development Kit) for greater control, indicating a move towards customized blockchain environments catering to different risk profiles.

Institutions are exploring tokenization on Polygon, focusing on a hybrid approach that balances private network control with public network security. Currently, tokenization experiments are taking a combination of on-chain and off-chain routes, reflecting a hesitancy by institutions to fully commit assets on-chain. This partly has to do with a lack of trust in the nascent technology. The ability to tie to the security of Ethereum would provide reassurance down the road, and mitigate the need to rely on off-chain data as a backup. This would enable the assets to transition away from paper-based systems and be used more broadly.  

Polygon fundamentally believes that a monolithic chain approach is unsustainable due to scalability limitations. Instead, they envision a modular blockchain system that can adapt to varying demands for blockspace. This vision includes developing interoperability across different chains to facilitate seamless transactions, ensuring that users can enjoy the speed and security of one chain with the liquidity of the entire network. The desired end-state is an expansive blockchain ecosystem with unlimited blockspace and shared liquidity across all the chains.

Watch the full replay below:

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.