Overview

There is a common sentiment that the Polygon PoS network has not been able to recapture the same rollercoaster ride crypto saw in 2021, but it’s quietly become one of the most used chains in the space due to the presence of consumer apps like Polymarket and Courtyard, amongst others. As the Polygon zkEVM network actively works towards gaining traction, it was a successful execution of a functioning zkEVM network, showing that there’s been significant strides in bringing EVM compatibility to ZK technology. Further, Polygon has seen some consistent growth among key verticals: it has been at the frontlines for crypto adoption with past collaborations with Reddit, institutional web3 integrations like Libre (a dedicated chain made for asset management), and most recently, their explosive foray into prediction markets with Polymarket. These key verticals within the networks show promising growth, as Polygon PoS continues to advance with a growing application ecosystem, several key upgrades, and catalysts that could attract new users.

Polygon is moving from different, fragmented protocols to an aggregated network of blockchains. In the process, Polygon Labs seeks to tackle one of the most glaring problems in crypto: chain fragmentation. Polygon Labs' technological advancements, from Plonky3 to the Type-1 zkEVM prover, will drive progress in an aggregated network. There are ultimately likely to be three pillars to Polygon’s future growth: a robust tech stack, strong applications, and strategic collaborations.

Strong Fundamentals

Polygon Labs has launched many new technical products recently that have moved the industry forward, like the recent announcement of novel ‘pessimistic proofs’ technology. This supports more recent developments like the Aggregation Layer (AggLayer), which is a culmination of Polygon Labs efforts and open source contributions from the community.

A number of contributors are actively developing the AggLayer, or creating the technology for different, non-EVM chains to connect, including: OKX, Succinct Labs, Union, NodeKit, Movement Labs, Gateway.fm, Espresso Labs, and Irreducible, among others.

In early 2024, Polygon Labs released Miden, a STARK-focused ZK rollup, in an alpha public testnet for developers. Polygon Miden runs using the Miden VM, allowing builders opportunities that are unavailable on Ethereum mainnet. For example, Miden will allow builders to create high throughput, sovereign, private applications with access to parallel execution.

While Miden is clearly an interesting approach that will unlock new use cases with its STARK-focus, the bigger development is clearly the AggLayer. The AggLayer is a different approach to interoperability than other solutions like the Superchain or Orbit chains, introducing a new category; aggregation. Other horizontal strategies like the Superchain have yet to deploy an interoperability solution with their “many chains” vision. The AggLayer is an attempt to execute both interoperability and horizontal scalability within the Ethereum ecosystem. The AggLayer aggregates chain states through proofs received from chains connected to its unified bridge contract.

Similar to other ecosystems, the AggLayer is a solution meant to improve user experience and chain fragmentation in conjunction with a coordination service, i.e., shared sequencers. AggLayer’s unique combination of features most notably includes an inclusive infrastructure and transaction ordering independence: crucially, the AggLayer is not involved with ordering or including transitions, only the pre-sequenced blocks from chains. Since the AggLayer is not involved in block production, it can allow for more diverse network structures. These features set the AggLayer, giving it the triple threat of providing free public infrastructure, interoperability promises, and sovereignty.

Central to this is the AggLayer’s emphasis on sovereignty: regardless of VM or consensus mechanism, the end state goal of the AggLayer is to make it as easy as possible for any chain to connect. Other networks require adherence to their specific tech stack to be part of their ecosystem and interoperability. In practice, this means that users from ecosystems such as NEAR or Cosmos can seamlessly interoperate with applications that exist on Polygon PoS, or any other connected chain, and vice versa. This implies growth potential and improved network effects - building on any chain connected to the AggLayer means building on every chain.

The AggLayer will provide safety for both asynchronous and synchronous cross-chain interoperability and creates a unified bridge for all rollups, substantially decreasing gas costs (pictured). Because of AggLayer’s cross-chain accounting, it can decrease gas costs by using a single bridge for all chains. Essentially, the AggLayer accomplishes two important features: 

1. Pessimistic proofs ensure that no chain can withdraw more funds than originally were deposited. 
2. Provides an aggregated ZK proof to the L1 (gas optimization) of the entire state of the aggregated network.

This architecture does not require a specific execution environment, a common governance mechanism, a specific ZK proof system, nor a specific token design. However, it does need some coordination mechanism (relayers) between chains to work jointly together. Additionally, Polygon Labs has partnered with Succinct for development of SP1, a generalized zkVM. The development of this collaboration is worth watching, as the intention is to enable the AggLayer to be flexible enough such that non-ZK chains can join.

Existing blockchains can connect to the AggLayer through the unified bridge based on Ethereum. But as more networks connect to the AggLayer, the chance of a security risk increases. To prevent a possible security issue, AggLayer introduces pessimistic proofs. These ZK proofs assume that all chains are unreliable bad actors, and ensure that no chain can withdraw more from the bridge than what has been deposited on that chain’s end. For example, if the Ronin network claims to have 500 ETH deposited into the bridge, the AggLayer pessimistic proof ensures that it cannot attempt to withdraw 1,000,000 ETH through either double-spending attacks or other vulnerabilities on the bridge contract. More specifically, the pessimistic proof is computed over the local exit tree that represents the asset transfers from each specific chain. The exit tree is all of the asset transfers coming out of the chain, and this tree is parsed to ensure that the withdrawals do not go negative (Polygon: Pessimistic Proofs). With this system, a chain can only harm itself and cannot negatively impact any other network. This is a stark difference compared to other interoperability solutions like LayerZero. LayerZero is differentiated in the sense that it uses a relayer network of nodes and oracles to execute cross chain transactions. The usage of oracles introduces a second layer of risk for LayerZero’s relayer network, while LayerZero mitigated this with its version 2.0, it increased the resources needed by relayers. Additionally, LayerZero has yet to announce plans to bring interoperability beyond the EVM compatible ecosystems.

Notably though, while AggLayer is proof-agnostic for ZK proofs, it still requires connected chains to use ZK proofs. In other words, an optimistic rollup cannot plug into the AggLayer due to an ORU’s 7-day challenge period complicating the pessimistic proof exit tree. This isn’t a technical limitation, rather the speed of interoperability for AggLayer is slowed down by having ORUs connected. Direct L2 to L2 transactions already work with the AggLayer V1 demo, although the settlement time is only as fast as the proof speed (45 min). The V2 release of AggLayer plans to push this time down to 15 minutes by the end of Q3 2024, and V3 aims to bring the time down to sub-one minute in the following months.

By itself, the AggLayer is the guard rail for a greater, interoperable ZKRU ecosystem. With this system and some coordination infrastructure, ETH on the native PoS chain will be just as native across all of the aggregated chains, so long as the networks are plugged into the AggLayer. This is the core thesis behind account abstraction: ensuring that the end-user remains unaware of the underlying processes.

AggLayer is not the only abstraction architecture that Polygon PoS has embraced. The governance community has implemented a suite of solutions for bringing a better experience to the end-user, including current developers working on PIP-22, which would implement Ethereum’s EIP-3074 into the PoS network. This integration will enable PoS users to benefit from advanced features such as transaction batching, sponsored transactions, and meta-transactions, significantly improving the efficiency and usability of the network. This, along with pre-established standards like PIP-27 (EIP-7212), which optimize gas costs for alternative signature methods such as biometric data, positions Polygon PoS as a leader in enhancing the user experience.

Robust applications

While the Polygon ecosystem is actively upgrading to reach an interoperable future, the application ecosystem in Polygon PoS has been going under the radar. However, there are a number of native apps in the Polygon ecosystem that are becoming the breakout apps of the cycle, particularly in the prediction market, gaming, and RWA spaces, with apps like Polymarket, Matr1x, and Courtyard taking advantage of PoS’ cheap fees and fast transacting times.

Polymarket

Polymarket is a prediction market that was founded and launched on Polygon in 2021. The app hosts prediction markets in crypto, politics, sports, and pop culture. Polymarket has been a standout application of this cycle, playing a leading role with other prediction markets in the U.S. elections. Additionally, the application takes advantage of account abstraction to make betting easy, as Polygon Labs recently added support for Farcaster. Users on Farcaster can now place bets on Polymarket through a simple Farcaster frame. Prior to the 2024 election heating up, Polymarket found its first stretch of popularity in 2023 with the Titan submarine incident, where a $2.25M prediction formed around whether the submarine would be found or not by June 23rd, 2023. Importantly, this prediction was split between a small user base, between a total pool of 24 people.

The app has become a commonly cited name in mainstream media and has achieved great volumes for its election coverage. Polymarket’s monthly volume alone has achieved a new high for volumes due to the volatile political conditions of the United States, with $1B in total transaction volume. The largest prediction to date, “Will Biden drop out of the presidential race?” was created in 2023, and achieved a volume of $20.7M prior to settling. The second largest prediction by volume is currently pending, and is based on whether Biden will finish his presidential term or not. One could argue that Polymarket has found product market fit, attracting and sustaining users outside of the crypto “bubble”. At the same time though, while the number of daily active addresses grows quickly, the challenge will be maintaining momentum beyond the current election cycle. To mitigate this possibility, we believe Polymarket should funnel new and existing users to new markets outside of just election cycle politics. We see this happening in real time, where efforts are being made to expand to more trending topics in Sports prediction, such as the picking Olympic Winners and the future 2025 Super Bowl Champion.

Azuro

Azuro is another popular Polygon application that aims to be a liquidity layer for prediction markets and has found success. Azuro hosts smart contracts that manage bets, calculate payouts, and provide prediction engines alongside oracles for prediction markets. Different prediction engine contracts have their addresses stored within a Factory contract. In order to store a new engine it must be agreed upon by Azuro DAO. Currently, the only engine stored is “PrematchCore”, a contract made for speculating prior to some game that has multiple different outcomes. Azuro uses “liquidity trees” to manage the liquidity of positions in predictions. This is a data structure that is used to track liquidity specifically, where the segmented tree updates and queries overtime, and each liquidity deposit is represented as a separate leaf in the tree. The liquidity tree is strictly a method for efficient liquidity management.

Azuro accomplished considerable growth in the past quarter since its integration with Polygon PoS in February 2024. Prior to its launch, it existed on both Arbitrum and Gnosis, but did not receive much attention. Since launching on Polygon, its TVL has increased by around a factor of eight. This is presumably because Polygon has a higher liquid environment than Gnosis, and substantially less competition than the likes of applications on Arbitrum, allowing for Azuro to root itself easily. To date, Azuro has achieved over $375M worth of transaction volume, with $86M of that volume directly linked to prediction markets built on Polygon: Chiliz, BoxBet, Metavault, Purebet, Bookmaker, and other apps. Bookmaker for example has achieved a total turnover of $55M in the total amount on the platform, with the average transaction size around $106. Azuro deducts a “license fee” for its protocol calculated by deducting rewards from the total monthly liquidity pool revenue.

Perhaps most importantly, Azuro’s Polygon revenue has far surpassed any of its other established chains, sitting at $4.2M since its launch in February. While this may be considered small in the greater scheme of L2s, it must be considered due to the growth managed in such a short amount of time. The app also has market dominance and supports a large amount of volume for on-chain sports prediction. Furthermore, this trend appears as though it will continue as it remains in the Polygon ecosystem, and, if Azuro achieves an integration with Polymarket, then Polygon may have a supercharged predictions app.

Matr1x

And finally, in recent months, Polygon’s gaming activity has soared. The most popular gaming application is Matr1x, a Valorant-esque mobile first-person shooter. The game has account abstracted wallet integrations for users to claim NFTs from their victories, and other digital trinkets, like PFPs, or weapon skins. Additionally, the game has an NFT collection, KUKU, and owners in this collection can receive physical/digital merchandise. Anyone with one of these NFTs also receives an in-game ally character. According to Dune, the game has achieved activity from ~300,000 wallets in the past 7 days and claims to have over 35M users, though this is hard to quantify as it is known that bots are used within the game. For the future, MATR1X plans to build an entertainment hub for esports with possible rewards for watching matches, similar to current Twitch streams.

Expanding the AggLayer

Alongside the breakout app stories of Polygon PoS, the AggLayer has seen an influx of app-specific chains that could bring in new developer and user activity, while unifying liquidity and users, eventually creating a unified ecosystem across an aggregated network of chains.

There have been several significant announcements regarding chains connecting to the AggLayer in recent months, including OKX's X Layer, Immutable zkEVM, Ronin, and Movement Labs.

Movement Labs is developing a network of Move-related blockchains, and are a prime example of the interoperability guarantees that the AggLayer offers. AggLayer’s pessimistic proofs will allow for cross chain transactions with Movement Labs’ MoveVM ecosystem, a feat which could not be accomplished otherwise. This makes Movement the first Move network to connect to the AggLayer. Because Movement uses the Move language, it will be able to hit higher levels of throughput which EVM-compatible networks lack. At the same time, Movement is developing its ecosystem to be EVM compatible. While the level of compatibility isn’t known, deploying EVM applications in a hyper fast environment, could be a strong catalyst and an area for rapid growth in the AggLayer ecosystem.

The Ronin chain will be launching its own zkEVM with the Polygon CDK, and connect to the AggLayer in future. The Ronin chain will use governance of 12 validators that will manage upgrades and security. All future upgrades to the Ronin chain will need an onchain governance proposal with 75% approval from validators. The Ronin chain will use RON to pay for transactions on Ronin and for access to staking and governance. Additionally, RON will be the 'key revenue' currency for all gaming platforms associated. In addition, Ronin will launch with a treasury that accrues value from the application layer through fees. The chain will use a variant of EIP-1559 for the network, however unlike ETH, RON will have a capped supply. The first applications to launch on the new AggLayer Ronin chain will be Katana DEX and Mavis Market.

The aggregated ecosystem of the AggLayer could be an opportunity to users and builders alike with other collaborations like X Layer, OKX’s network, which will serve as a chain similar to Coinbase’s Base product. X Layer is also providing a native block explorer for AggLayer participants. With Polygon PoS’ account and chain abstraction methods, smart wallets through X Layer could easily interact with Polymarket, for example, purely through out-of-the-box access standards. This combined with integrations like NEAR DA for the Polygon CDK provide rollups with easy access to high-tech integrations and cheap data availability costs. Chains like X Layer can serve as DeFi activity hubs for users, with X Layer already partnering to bring Uniswap on its network later this year. Other chains like Immutable X add to the consumer application sector, as Immutable has had several popular games like Gods Unchained, Guild of Guardians, and others.

The big idea is that the AggLayer ecosystem can become an interoperable hub of network effects, unifying liquidity and users across multiple chains without being value-extractive. The advantage lies in the fact that the AggLayer is both a horizontal scaling strategy (Superchain, Hyperchain, etc) and that it also achieves some base level of interoperability. Perhaps most importantly, while network stacks like the OPStack or Orbit SDK are very flexible, they do not retain the same level of flexibility to allow L1s to connect to their networks, though this has recently changed for Arbitrum. While it’s only on V1, AggLayer on V3 will achieve the vision that other horizontal scaling solutions have strived for beyond being just application hubs. However, as other horizontal strategies evolve beyond basic partnerships and start developing their own interoperability technology, Polygon's roadmap faces potential risks. Most networks, especially optimistic rollups, are nowhere near interoperability to the extent of the AggLayer or are only beginning to embark on the development journey (zkSync).

Alignment: Community and Token Management 

These collaborations will benefit the Polygon ecosystem as a whole, and the AggLayer provides new infrastructure with strong incentives for participation. However, there remains a possibility that the market and its users may not recognize the opportunities within the Polygon ecosystem. Thus, per a community vote, Polygon governance is upgrading from MATIC to POL, which in its initial phase will be the new gas and staking token for Polygon PoS, and in subsequent phases, allow the community to decide to expand the utility of POL to serve a crucial role in the AggLayer. The upgraded token, POL, will be used in staking infrastructure and in the new governance system. The token will be required to join the validator pool for the Polygon ecosystem, and validators earn rewards as such for their duties. Upon release the POL token will be inflationary to onboard and retain validators, and to power the ongoing growth of the ecosystem via the recently launched community grants program, which commits 1bn POL over the next 10 years for builders. The yearly emission rate is fixed at 2% for 10 years. After this period, it is subject to governance decisions but can only be lowered, never increased.

POL’s tokenomic upgrade is set to go live September 4th, where the POL supply is the same size as the MATIC supply. Users will be able to turn in their MATIC for POL. The transition will occur automatically for those on the Polygon network. For those with MATIC on Ethereum or elsewhere, there will be guidelines for the transition. Polygon has stated that the POL token will be able to play a major role in the AggLayer. The Polygon governance community will be able to vote to implement an additional use case for POL stakers.

Because each chain within the Agglayer only has access to its own info, one method of achieving interoperability is by having a network of relayer full nodes between chains. This cross-network of relayer nodes would benefit from having economic security to prevent improper information disbursement. The governance community could enact a staking hub for POL that would collect fees from securing the AggLayer relayer network and perhaps REV (Relayer Extractive Value) as well. For example, a user could stake POL to the validator nodes of the zkPoS, then that capital becomes locked. Alternatively, the Polygon community could vote to create a staking hub for users to liquid stake their POL with some LST provider and use the receipt tokens to stake to the relayer network of the AggLayer or to other interoperability infrastructure. Lido already offers liquid staking for MATIC, so the possibility is already there.

Additionally, there are more interoperability projects in development that will bring more composability to the AggLayer ecosystem. Members of the Polygon Labs team are developing a shared sequencer, Fractal, specifically for the AggLayer, though the project has yet to announce any token capabilities related to the shared sequencer. Importantly, a shared sequencer for Polygon should add new cross chain MEV opportunities for players like Fastlane Labs, the pioneers of MEV in the Polygon PoS network. A shared sequencer in the AggLayer could centralize MEV opportunities by aggregating transactions across rollups. This sequencer could allow MEV to be captured more efficiently with transactions ordered and bundled prior to L1 settlement. It also could have mechanisms in place to ensure fair distribution of MEV among its participating chains.

There is also the concept of Relayer Extractable Value where Relayers can gain value from the order flow of cross chain transactions. REV is enabled through chain abstraction, where some relayer network provides gated access to cross chain transaction flow. As new chain abstraction methods like the AggLayer, NEAR, or LayerZero coalesce, Relayer Extractable Value (REV) may play a greater role. In the case of AggLayer, the relayers would serve as the transaction initiators for when a user submits a cross chain transaction. With REV there could be surplus value created by a relayer network, which would be derived from transactions that would not exist without a shared sequencer and the AggLayer. This is pure speculation, but there could be an REV opportunity that may bring value to the POL token similar to how JitoSOL holders receive value from the Jito Protocol. The AggLayer may be able to funnel tips received for REV back to users to increase their staking yield to the relayer network. This is especially likely given that Fastlane Labs is currently working on a cross-chain execution engine in conjunction with their execution abstraction system, Atlas. Fastlane Labs could become the Jito of Polygon and bring value to possible Fastlane POL stakers. The inbound would come from users that tip additionally for priority for cross chain interactions, and the relayer itself could sandwich users between networks. Users would pay a tip for these transactions, or the sequencer could perform its own interchain arbitrage, creating cross chain REV opportunities (Espresso).

Moreover, the token will be introduced alongside the Community Treasury, which according to PIP-40, will receive 1% of the POL token’s inflationary emissions. The community treasury will be controlled by the governance committee and its multisig wallet.

Conclusion

In conclusion, the technical infrastructure of Polygon’s tech stack, combined with network collaborators, will allow for further growth. Furthermore, there is already some evidence of possible expansion with breakout apps like Polymarket, Courtyard, and Matr1x that show opportunities in expanding verticals.

The AggLayer’s new take on interoperability via aggregation will serve to better the user experience while serving as a competitive ecosystem against walled gardens like the Optimism Superchain & Arbitrum Orbit. Ultimately, AggLayer could be an effective strategy for forming a unified ecosystem because of its upcoming upgrades, VM and proof-agnostic architecture, and its rent-free nature. AggLayer in its current V1 can achieve cross chain transactions with a long transaction processing time of 45 minutes. If Polygon Labs is successful with its timeline for AggLayer, there could be an AggLayer V3 in the coming months with sub-minute timing for cross chain interactions, something that is largely unheard of in crypto.

AggLayer makes choices on architecture that may be beneficial in the future as the industry trends to ZK tech. The AggLayer’s flexibility extends beyond its original design to accommodate a broad range of technology. While originally conceived for ZK rollups, the AggLayer’s architecture allows for integration with various network types, including optimistic rollups (ORUs) that are using ZK technology for future-proofing. This adaptability is further demonstrated by the connection of different VMs to the AggLayer (as evidenced by the Movement integration). As such, the AggLayer’s potential for network interoperability and liquidity aggregation across L1s, L2s, and rollup implementations expands its reach and utility.

Because AggLayer is rent-free, it could reasonably take share of other rollups from the market and onboard them into the Polygon ecosystem. Today, the rollup market remains dynamic and competitive, with no clear front-runner at present. While Optimism and Arbitrum have gained significant traction, the market remains open for diverse and innovative approaches. In this context, the AggLayer presents itself as a compelling solution, offering unique advantages including but not limited to interoperability, scalability, and user experience.