Why Polygon Will Win the L2 Scaling Wars

I’m sure you’ve heard a lot about Polygon already, the ‘layer-2’ protocol that recently raised $450M from a consortium of investors. With this post, I hope to break down the hype, walk you through its product evolution and why I believe it will win.

Vedant Agrawal

Published in

Coinmonks

11 min readFeb 23, 2022

Context:

One of the biggest issues with the blockchain, especially Ethereum, are the slow speeds (Ethereum supports 15 tx/sec while Visa supports 1700 tx/sec) and high transaction costs (can cost tens of dollars to execute a transaction on the Ethereum blockchain when congestion is high). The race is on to create a solution that builds on top of the traditional blockchain (called the Layer 1 or L1) and helps scale the chain while keeping the L1 secure and decentralized. Such solutions are called Layer 2 (or L2) solutions. L2 solutions are incredibly important in driving the next wave of blockchain adoption, and can be implemented in various ways, including sidechains, plasma chains, payment channels and rollups (see Appendix 1 for differences in these implementations).

Enter Polygon (https://polygon.technology/), an emerging L2 solution built from India, for the world. Polygon’s sidechain (Polygon PoS), one of its L2 solutions, has grown rapidly over the last 6–8 months, with 7000 decentralized apps or dapps building their products on their platform (including OpenSea, Curve, Uniswap) that have led to the creation of 140M cumulative unique wallet addresses and 3M transactions/day. While these metrics are impressive by any standards, Polygon has managed to do this by keeping the platform blazing fast (upto 65,000 transactions / second with block times of 2 seconds compared to 13 seconds for Ethereum) and keeping transaction fee minimal (almost $0).

This, however, is only the tip of the iceberg for the frugal and agile team at Polygon. In the latter half of 2021, Polygon acquired two companies, Hermez and Mir to develop ‘zero-knowledge rollups’ or ‘zkrollups’, another way to implement an L2 solution. Zkrollups solve issues of speed and security that come with other L2 implementations like sidechains, and is widely touted to be the way the industry will evolve. Hermez and Mir have developed cutting-edge tech, ahead of other well-funded competitors in the space and would enable Polygon to offer a zk-rollup solution with far higher speed and security.

One of the risks that Polygon faces is from competition, which is well capitalized. Both Starkware (Sequoia US and Paradigm backed) and zksync (a16z backed) have also created zk-rollups, but their EVM compatibility is further behind Hermez and Mir, which gives Polygon the edge. If Polygon executes against its product roadmap, it is well positioned to win, given its strong developer relationships (Polygon has the most dapps built on their platform as compared to any other player in the Ethereum space) and industry-leading tech.

In early 2022, Sequoia India, Tiger, Softbank and a consortium of investors (list here) bought $450M worth of $MATIC tokens at a 40% discount to the current price of $2 (vesting over 3 years). Polygon didn’t really need the money, with the founders controlling 20–25% of the $MATIC token in the Polygon treasury (worth $4–5b) that they could use to develop the ecosystem further. However, raising $ from institutional VCs would help the company aggressively hire web2 talent (that are looking to move to web3) and gain legitimacy with web2 companies around the world.

Product Evolution:

L2 chains work by moving a large number of transactions off the main blockchain (the L1) and reporting the final status back to the L1. There are different ways of implementing that philosophy, including payment channels, sidechains, plasma chains and rollups (see Appendix 1 for details).

Polygon, which was founded 5 years back, built its plasma and side chains to support some of the largest DeFi and NFT projects (It supports Curve, Sushiswap and Aave via its sidechain). In fact, Polygon serves 4 of the 10 largest DeFi projects by TVL (cumulative $33b in TVL)

Largest DeFi projects by TVL; Source: https://www.defipulse.com/

Sidechains are like independent blockchains that have their own consensus mechanisms and are hence potentially slow and also not as safe as the main Ethereum blockchain. Realizing these issues of scalability, security and experience, Polygon made a bold bet on zk-rollups in early 2021.

Since then, Polygon has moved very quickly to further its zk-rollup ambitions, including:

1/ Merging with Hermez Network (now called Polygon Hermez), an open-source zk-rollup to launch zkEVM. Polygon Hermez can compress upto 2000 transactions into 1 validity proof and upto 15 validity proofs can be written into 1 block on Ethereum, supporting 2000 transactions per second. Polygon Hermez uses a different consensus mechanism called Proof-of-Donation, where 40% of the winning bid is returned as a donation to be reinvested in Ethereum and Ethereum-level security is guaranteed by zk-SNARKS. Under the terms of this merger, 1 HEZ will be swapped for 3.5 MATIC via a smart-contract. Polygon Hermez is effective in quickly, securely and cost-efficiently transferring tokens out of the blockchain.

*Diagrammatic explanation of how Polygon Hermez works; source:* https://polygon.technology/solutions/polygon-hermez

2/ Launched Polygon Miden, a STARK-based, Ethereum-compatible rollup. While ZK-rollups are promising, the issue is that they cannot support arbitrary logic and transactions, including those of the EVM. Polygon Miden hopes to solve that problem and hence make it somewhat straightforward to build a ZK-rollup.

3/ Launched Polygon Nightfall, a privacy focused rollup built in collaboration with EY. A privacy-focused rollup combines the best bits of an optimistic rollup and a zk-rollup solution.

4/ Acquired Mir for $400M ($100M cash + 190M $MATIC tokens worth 300M in Nov 2021); Mir will work under the Polygon umbrella to launch Polygon Zero, a scalable Ethereum-compatible rollup
Mir created a technique by which the throughput of a blockchain is proportional to the number of nodes in the network. This is a significant improvement over the current system, where the throughput is dependent on the weakest node, as all nodes need to verify transactions. This technique is a recursive-proof system called plonky2.

Apart from the products listed above, Polygon also has a plethora of other products including PoS (EVM compatible sidechain mentioned in ‘Context’), Edge (modular and extensive framework for building private or public Ethereum-compatible blockchain networks) and Avail (blockchain for standalone chains and off-chain scaling solutions) make the company’s product offering very robust.

Team:

Polygon’s core team have built the company frugally and persistently since 2017. The recent $450M raise is only the second round of funding the company has received, the last one being a $750k cheque.

Co-founders:
1/ Jaynti Kanani: ex Housing; Dharmsinh Desai University ’11; he’s known to be an incredible technology leader
2/ Sandeep Nailwal: ex Founder of startup creating dapps and other blockchain products
3/ Anurag Arjun: ex Product / Project Manager at business consulting firms in India; Nirma ‘06
4/ Mihailo Bjelic: Recently came on as co-founder

Competition:

Polygon faces competition from L1s like Solana and Avalanche, as well as other L2s like zksync and Starkware (see full list below)

List of competitors — Polygon’s many competitors

However, there are three reasons why Polygon would win in the market:
1/ Significant in-roads to leading DeFi and NFT projects (4/10 top DeFi projects are built on Polygon solutions that total $33b in TVL). Polygon can ‘upgrade’ these projects to zk-rollup solutions
2/ Furthest ahead in the creation of an EVM-compatible zk-rollup solution via Hermez and Mir
3/ Dynamic team that moves quickly. Polygon has created a significant dent in the zk-rollup space in just 12 months (launch of Polygon Hermez, Miden, Nightfall and Zero amongst others like PoS, SDK and Avail)

Metrics (for Polygon’s Sidechain Solution, PoS):

Polygon’s usage increased dramatically post June ’21, with cumulative wallet addresses rising quickly to ~140M today within 8 months. With this, daily transaction volume increased to hit ~9M in June ’21 and now fluctuates between 3–4M/day (cumulative 1.4b+). While transactions have risen sharply, this hasn’t led to a consequent rise in avg gas price, which remains around 150–200 Gwei (which translates to ~$0.001). Overall, the Polygon network makes ~70k MATIC/day (1 MATIC = 1.5 USD), not including the subsidies from the Polygon treasury. This dramatic growth is driven by ~7000 dapps, including Aave, Sushiswap, Uniswap, Opensea, Decentraland and Sandbox. Block times have remained broadly constant at 2s/block, far lower than Ethereum’s 13s/block.

Source: polygonscan.com

Path Forward:

Polygon is uniquely positioned in the L2 scaling ecosystem, with the largest network of dapps building on its network and cutting-edge zk-rollup tech with Hermez and Mir. Going forward, this is what I envision Polygon would do:

Increase the developer / dapp ecosystem building on its sidechain and zk-rollup: I believe each L2 scaling tech will have its own takers, with sidechains appealing to gaming devs and zk-rollups appealing to DeFi protocols. Polygon would look to increase the number of developers on their platform by both (A) aggressive outbound sales and (B) investing in promising developers via their $100M developer fund. With Ryan Watt joining Polygon, I am bullish on their gaming community growing rapidly in the coming months
Build more L2 scaling solutions and go deeper in the existing solutions: In line with the philosophy that there would be specific L2 scaling solutions for different use cases, it might also make sense for Polygon to continue to invest in discovering new scaling solutions (become the ‘swiss-army-knife’ for L2 scaling solutions) as well as refine their existing offerings
Inorganic growth via acquisition: With the recent sale of tokens to Sequoia, Tiger, Softbank and others, The Polygon treasury is well capitalized to acquire businesses that lie in-line with their product roadmap

Risks and Challenges:

Despite Polygon’s emerging market leadership, there are two main risks:

Execution risk: L2 scaling solutions truly work when they help solve Vitalik’s trilemma of scalability, security and decentralization. Executing against that vision for the zk-rollups is key.
Competition risk: There are plenty of competitors in the market as shown earlier, and each of them is well-funded.

Another risk, though noticeably small, is Ethereum losing the battle to become the L1 solution of choice and hence by default, L2 solutions built on top lose as well.

Appendix 1 — Ways to Deploy an L2 Chain:

Reference: https://medium.com/amber-group/ethereum-layer-2-solutions-aa95c1a1821e

TL;DR: State channels and Plasma chains not used as much now. Sidechains are independent blockchains that periodically sync their ledger with Ethereum. Are hence slow and not as secure and rollups are touted as the future as they are faster and rely on the Ethereum main chain for security. Within rollups, optimistic rollups rely on a 7-day dispute window and hence is inefficient and zk-rollups aim to fix that problem. Within zk-rollups, Starkware (uses Cairo to code, not Solidity) is Sequoia US + Paradigm funded, zksync is a16z funded.

1/ State channels (also called payment channels): Is employed by Bitcoin Lightning. Opening transaction written to the L1 chain -> Crypto added to a smart contract to execute payments between two parties -> both parties complete their transactions -> Ending transaction written to the L2 chain

2/ Sidechain: Has its own validators and consensus method and is only viable if a certain # of validators are on board

3/ Plasma chains (used by Ethereum): Similar to sidechains and that a compressed representation of each block is committed to a smart contract on Ethereum

4/ Rollups: The transaction is executed off-chain and the answer is posted on the L1 chain. Rolllups aim to reduce the computational burden on the main-chain.

(A) Optimistic rollups:

They’re slow because it takes 7 days to confirm a transaction. Optimistic rollups assumes all transactions are valid by default and allows network participants / validators to dispute a transaction for 7 days after they’re confirmed by the rollup
People who commit the fraud are penalized and those who catch fraud are rewarded.
The advantage of optimistic rollups is that the validator needs to validate only the disputed challenge, not all transactions, saving computation resources
Optimistic rollup projects include Arbitrum (developed by Offchain Labs — https://offchainlabs.com/) and Optimism; both of which have enabled support for the Ethereum Virtual Machine (EVM
Diagrammatic representation of an ‘Optimistic’ rollup:

(B) Zero-knowledge rollups:

Bundles (or rolls up) hundreds of transactions on L2 and generates a cryptographic proof called SNARK (succinct non-interactive argument of knowledge) which is a validity proof. This validity proof is posted on the L1 chain.
Even less computational power is needed (as compared to Optimistic rollups) because you only need to check the validity proof, not all the transaction data.
Zkrollups don’t need validators to check but relies on mathematical proofs, which makes it more secure than Optimistic Rollups
ZK-rollup projects include zksync (by Matter Labs) and StarkEx (by Starkware)