[Recap] Polygon Q1 2024 State of the Ecosystem

On January 23rd, 2024, The Tie hosted a webinar featuring Heidi Pickett, Chief of Staff & SVP of Strategic Initiatives at The Tie, alongside Colin Butler, Head of Institutional Capital at Polygon Labs, and Matthew Blumberg, VP of Institutional Capital at Polygon Labs. They discussed the current state of the Polygon ecosystem, significant advancements made in 2023, and expectations for 2024.

Watch the full Webinar here:

Reflecting on 2023, Colin highlighted an "inflection point" for mass adoption of blockchain in global finance, emphasizing the emergence of a parallel financial system built on blockchain, with Polygon at its core. Meanwhile, Matt highlighted the technical strides made, including the launch of zkEVM and Polygon CDK, crucial in laying the groundwork and architecture for Polygon 2.0 and the future of scaling Ethereum.

The ultimate goal for all Layer 2 solutions, zkEVM included, is to inherit Ethereum’s security features while offering unlimited block space. Applications using zkEVM require fewer trust assumptions compared to those using optimistic rollups or sidechains, making them more suitable for security-sensitive use cases like DeFi. Polygon's PoS also benefits from Ethereum's base layer security, though to a lesser extent than zkEVMs but more so than classic sidechains. Matt envisions zkEVM to be the DeFi hub for Polygon's 2.0 ecosystem. For use cases such as gaming, which don't necessarily require the full security of Ethereum's Layer 1, Polygon's PoS or custom appchains offer suitable alternatives. 

Polygon 2.0 is the answer to challenges posed by Ethereum's scaling roadmap. Firstly, it aims to make it economically viable for chains to scale with demand without paying the expensive fee associated with Ethereum L1. Through recursive zero knowledge, Polygon 2.0 makes on-chain proof submission economically viable. Matt explained how Polygon’s aggregation layer acts as a catalyst for a network effect, making on-chain proof submissions more cost-effective with each additional chain that joins the ecosystem.

Furthermore, it aims to solve the problem around liquidity fragmentation. Historically, for blockchains, secure blockspace has been the scarce commodity, which is why users pay a premium for using Ethereum L1. With zkEVM, which inherits the full security of the base layer, liquidity becomes the new scarce resource. With Polygon 2.0, teams developing L2 solutions can tap into seamless liquidity across the ecosystem's various L2s, without sacrificing sequencer revenue.

POL represents an upgrade to Matic. Matic was slated to launch on Binance launchpad with an idea that every time a new chain gets released, it is going to increase the FDV by approximately 8% to assist in bootstrapping cryptoeconomic security. Due to the need for a mint button — which Binance had valid reservations about — a compromise led to use of Matic just for the PoS chain. With the advent of Polygon 2.0, the need for a larger supply to incentivize activity and bootstrap liquidity emerged, prompting the introduction of POL. Users will be able to swap their MATIC for POL on a one-to-one basis. The timeline for when to enable the swap will be determined by the community. Matt believes that the most optimal time to enable it would be when POL becomes the de facto staking token for the Polygon PoS chain. 

Polygon CDK is the easiest way to deploy an L2 and get the full security of Ethereum's base layer in the process. It serves as Polygon's counterpart to Cosmos SDK or Optimism's OP stack. Yet, there are two key differentiators.

Firstly, the builder gets ZK security out of the box, they understand that the need to not make trust assumptions is critical in getting any meaningful traction.  ZK aligns much more closely with foundational crypto values than do optimistic rollups or sidechains.

The second differentiator, often overlooked, is that CDK gets users access to the aggregation layer. This, in turn, enables shared interoperability and cost-effective submission of on-chain proofs. The aggregator layer is the crux of Polygon 2.0 architecture. Unlike different parts of Polygon CDK codebase, the network effect driven liquidity provided by the aggregator layer cannot be forked – which makes it the primary reason why teams building L2s would want to use it.
Matt highlighted that Polygon CDK has gained considerable traction, with as many as 15 chains developing on it. Teams like Astar Network from Polkadot and Kanto from Cosmos, that struggled with user traction or are not satisfied with the level of security on their respective chains, are migrating to Polygon CDK. Access to Ethereum mindshare, security, and liquidity presents a compelling case for building on Polygon CDK.

Zero knowledge is a powerful technology that enables user privacy and data ownership. It empowers users by providing them with an ability for selective data disclosure. Matt gave a real-world example of someone who wants to buy a few drinks in a bar; they would need to show their address and name to the bouncer using an ID, when all the bouncer needs is proof that the person has an attribute of being over the legal drinking age.

With Polygon IDs, users can own their data and choose who gets access to it. Additionally, the interoperability of credentials is an important promise of decentralized identity, which is enabled by Polygon IDs. The need to repeatedly enter sensitive personal data into different centralized databases with opaque security measures is a friction point for user onboarding. Polygon IDs offer portability, allowing users to complete the KYC process just once and use their credentials universally. This approach significantly enhances user privacy and streamlines the onboarding experience.

Libre, a new alternative investments infrastructure designed for asset managers and distributors, is launching a dedicated chain built with Polygon CDK to enable access to global alternative investment funds. It is a major B2B breakthrough, whereby the access to private equity and alternative assets will reach the hands of a much greater and more diverse range of investors. Bain Capital has identified this as a $400 billion opportunity for alternative investment managers, made accessible through blockchain technology.  Colin highlighted that the world's assets, which total approximately $150 trillion, are divided equally between individuals and entities. However, he noted that individuals with a net worth of less than $30 million have virtually no exposure to private equity and alternative assets, which have outperformed public assets over the past few decades.

Colin predicts that within a 5-10 year timeframe, the magnitude of this opportunity will lead to the emergence of vast markets for private assets. These markets will develop in parallel to, and eventually integrate with, the current public infrastructure. The advantages of tokenized real-world assets include 24/7 trading, enhanced transparency, quicker settlement times, diversification, and increased liquidity, making them an attractive option for individual investors. Currently, the Total Value Locked (TVL) in RWAs is miniscule compared to the broader global financial market. Colin forecasts a 50-100x growth in the current TVL figures as blockchain technology becomes more embedded in the global financial system. RWAs are one of the key areas where Polygon's zero-knowledge technology is ideally suited, as it is hard to imagine a world where billions of dollars gets traded without the highest level of security.

Envisioning Polygon as akin to Linux for its free and open-source nature, Colin highlighted three collaborations in terms of areas of focus. First, Fox News is utilizing Polygon as a platform to combat fake news proliferation by using blockchain technology to verify the origins of media content. The current challenges around disinformation are getting exacerbated by the internet. Colin hopes that Polygon and blockchain technology can provide a solution to the problem so that we can align on a vision of shared reality as opposed to the one that's disparate and divides people. 

Further, global loyalty programs are another area of focus. Blockchains enable interoperable trading of loyalty points. Colin predicts that with major brands building on Polygon, loyalty points will become a very active market in the coming years. 

Finally, Colin reflected on 2023 as a pivotal year for reengineering the global financial system. He anticipates that many of these innovative ideas will gain traction and scale in 2024. Both Colin and Matt were optimistic about the upcoming year, confident that Polygon’s zero-knowledge technology will address the challenge of siloed liquidity effectively. They also predicted that Polygon CDK will dispel any doubts regarding Ethereum's scalability.

Watch the full Webinar here:

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.