Ethereum is the second largest blockchain in the world, holding a market cap of more than 200 Billion dollars. However, scalability is one big problem with Ethereum. Right now, Ethereum is only able to handle around 15 transactions per second, way worse than its traditional rivals. Visa processes around 1,700 transactions per second on average, and Mastercard claims to handle around 5,000 transactions per second.
Several scaling solutions are here to address this issue. There is a single-chain approach like Solana, Aptos, Sui, or Sei, which lets dApps interact with each other in a single chain. There is a horizontal approach, like Cosmos, Polkadot, or Avalanche, which builds an ecosystem with multiple L1 networks and cross-chain protocols. Most recently, we have the third approach, a vertical one, like Optimism, Arbitrum, or Starknet. We call it Layer 2, or roll-up, which performs computations off-chain and allows dApps to interact with high composability.
By far, the Layer 2 category receives the most interest in the industry. The war of Layer 2 is more intense than ever and will be even more fierce in the next bull run. Total Value Locked on Layer 2s has reached more than 10 Billion dollars. Arbitrum is leading the pack, holding ~55% of the market share, followed by Optimims with ~26% of the market share.
The battle of Arbitrum and Optimism is just the start. New rivals are coming every day, zkSync, Starknet, Base, Linea, Mantle, and many more. Each has its unique selling points and its unique solutions.
Polygon, an old name in the industry, one of the first scaling solutions for Ethereum, certainly can not just stand outside and watch. To re-join the battle, Polygon is evolving to Polygon 2.0 in their next major update, called itself the “Value Layer of the Internet”, and aims to provide unlimited scalability and unified liquidity.
Polygon 2.0 strives to reshape the current blockchain infrastructure with ZK-rollups. The idea is quite interesting, as they become a ZK-based Protocol, a network of Layer 2s, and serve as the base value layer of Web3.
What is Polygon 2.0, what are its impacts, and does it stand a chance in the Layer 2 war?
II. What is Polygon 2.0?
Polygon was founded in 2017, as Matic Network. In 2019, it became one of the first IEOs on Binance. It was created to act as a sidechain to help scale Ethereum and called itself Ethereum's Internet of Blockchains. Polygon itself is an Ethereum Layer 2, the largest layer 2 in terms of market cap.
However, it still receives lots of criticism. One of them is Polygon is not truly decentralized with only about 100 validators. The other one is the network itself experienced lots of congestion and delay.
In 2021, Polygon acquired Hermez Network for $250 million and later changed its name to Polygon zkEVM. This marks the shifting of Polygon, from Plasma Chains to ZK-rollups. Still, Polygon remains a fragmented system with multiple public chains, such as Polygon POS, Polygon zkEVM, or Polygon Supernet, and a system that faces many problems in liquidity and user experiences.
Polygon 2.0 is the solution, it is the union of all those public chains. Polygon 2.0 is a network of ZK-based L2 chains, unified via a novel cross-chain coordination protocol, making the entire network feel like using a single chain.
With this update, Polygon looks to solve the blockchain trilemma, achieving unmatched scalability, liquidity, and security. And also solve its existing problems in terms of centralization and congestion. It is also to mark a new growth cycle for Polygon, becoming the “Value Layer of the Internet”.
Different than most scaling solutions, Polygon 2.0 is a zkEVM Validium Layer 2. Hard to digest? Let’s break it down word by word.
- ZK in zkRollup: It is a solution that uses zero-knowledge proofs to achieve scalability and security. This technology enables Polygon to process a high volume of transactions with minimal overhead, significantly improving the network's overall efficiency.
- EVM in EVM compatibility: allowing developers to deploy Ethereum-based applications on the Polygon network. This compatibility enables a smooth transition for existing Ethereum projects, expanding their reach and providing users with diverse, decentralized applications.
- Validium: is the same technology as zkRollup but different in Data Availability, where only proof of transaction is sent to Layer 1, not all the transaction data. This helps improve transaction speed and also reduces transaction fees.
Polygon 2.0 is the combination of the existing Polygon public chains and the new ZK-powered Layer 2s (Polygon Chains) to come. Polygon 2.0 is not just a ZKrollup, it is the next level of ZKrollup.
As its upgrade seeks to make it easier to create new Polygon chains, it will also feature a shared bridge to improve interoperability between those chains and eliminate the need for wrapped tokens. The way that works is native Ethereum tokens will be deposited into a single contract on Ethereum, so when a user transacts across Polygon chains, the corresponding assets will be mapped to the tokens deposited on Ethereum.
They are aiming for unlimited scalability and unified liquidity. Imagine an ecosystem with unlimited Layer 2 and a single token that is used to validate all those Layer 2s. This is not just a milestone for Polygon, but also a significant milestone for the Ethereum Scaling solution. IMHO, this new concept will transform Ethereum into what it was always intended to be, “a network of computers all over the world, the foundation for communities, applications, organizations, and digital assets that anyone can build and use.”
The update will transform Polygon itself. Polygon 2.0 will consist of four protocol layers, each enabling an important process within the network:
- Staking Layer: This proof of stake (PoS) layer utilizes a decentralized validator pool and an updated restaking model to support validation across multiple Polygon chains.
- Interop Layer: Facilitates cross-chain messaging so that users experience the benefits of functioning on a single chain while utilizing several chains, such as the capacity to transfer native Ethereum assets across chains.
- Execution Layer: Allows supported chains to create sequenced transaction batches.
- Proving Layer: Uses the ZK proving protocol to produce external and internal proofs of transactions for all chains.
Polygon 2.0 will be done in stages, starting from the update of Polygon PoS to ZK Layer 2.
III. From $MATIC to $POL
Polygon was once rebranded from Matic Network but still kept its native token $MATIC. Now with Polygon 2.0, the token is re-constructed, and called POL.
Polygon 2.0 is set to bring about significant changes in the blockchain industry, with potential economic implications. Its scalability and interoperability features are designed to attract a broad range of developers and users, which could lead to increased activity on the platform and potentially influence the demand for the Polygon token.
The tokenomics of Polygon 2.0, which are yet to be fully disclosed, are expected to incentivize participation in the new network ecosystem.
In the new Polygon, POL will be used across all new Polygon chains (L2s) as a validation reward for securing the network. The reward mechanism is the same: Users stake POL to earn protocol rewards as validators.
The key difference is that there will be multiple L2 chains on Polygon 2.0. These chains can choose to provide other tasks and corresponding rewards to validators, allowing them to earn extra bonuses, in a competitive environment.
Compared to other L2s, the Polygon token will have more utility and more usage. Most other L2s rely on the security mechanism of L1, in the case of Ethereum, it is Proof of Stake. This left their native token not much usage, where only ETH is being used to validate. These native tokens, ARB, OP, etc. mostly being used to govern its system, and maybe to airdrop for new users. $POL has instinct value and comes from its own architecture. It is used to validate the transaction on their networks of Layer 2s.
Furthermore, the economic impact of Polygon 2.0 is expected to extend beyond its own platform. If they can manage to provide a scalable and interoperable solution for Ethereum, Polygon 2.0 could help alleviate the congestion and high fees currently associated with the Ethereum network. Which potentially leads to increased adoption of Ethereum-based applications and a positive economic impact on the broader DeFi industry.
All MATIC tokens will migrate to POL, so the MATIC supply will match the POL supply. Holders of MATIC tokens will have at least four years to upgrade their MATIC tokens to POL. This will be accomplished by sending the old tokens to the new smart contract.
Earlier this year, the Polygon zk Ethereum Virtual Machine (zkEVM) beta version which was released in March 2023 could not reach its peak of adoption and led to criticism on its launch.
According to L2beat, zkSync still dominates the ZK Rollup category, with $376M TVL, followed by dYdX, Starknet, and Loopring, each having $339M, $139M, $98M TVL accordingly. Meanwhile, Polygon zkEVM is at $44M TVL.
The native token of Polygon is not in good shape right now. The surge we saw in June this year is mostly due to the change in macroeconomics and the rally of Bitcoin. Polygon FDV fell from $8.5B in July to today’s $5.5B.
However, the change from Polygon to Polygon 2.0, from a ZKrollup to a network of Layer 2s, from $MATIC to $POL, might be a game changer for Polygon itself. More utility equals more demand which equals lots of potential gains.
When the proposal for the token upgrade was announced in July, MATIC's price increased by more than 18% within a day. And when the network is fully upgraded in 2024, we can expect it will go a lot higher.
Polygon zkEVM might be ranked 12 in the Layer 2 category, but Polygon 2.0 Validium is another different story.
IV. Closing thoughts
Polygon 2.0 is a significant upgrade to its network, addressing key challenges in scalability, security, and interoperability. Their approach to the scaling problems is quite unique and might lead to a much larger adoption.
By combining its tech stack, Polygon is taking a huge bet on zkRollup, and they are going full force with it.
The concept is excellent, and it might be the way to achieve “unlimited scalability” and “unified liquidity”. However, they might face a lot of challenges in the upgrade, and in future practices.
Polygon 2.0 is not just an upgrade, it is the evolution of the platform itself. Opens up exciting possibilities and new challenges.
The Layer 2 war right now is in the hands of Optimistic Rollup projects, mostly contributed by Arbitrum and Optimism, the 2 projects hold more than 80% of the market share. However, we are witnessing the rise of ZKrollup solutions, with zkSync leading the packs. Which in turn, leaves a huge potential opportunity for Polygon 2.0.
Can zkRollup dominate the Layer 2 category? Can Polygon beat Optimism, Arbitrum, zkSync, and claim the throne? It is hard to tell. We can only believe in innovation and Polygon 2.0 is one of the latest in this space.