Polygon is a suite of decentralized Ethereum scaling solutions that aim to provide developers with the tools necessary to build scalable, user-friendly dApps with low transaction fees and high security guarantees. This report maps the Polygon ecosystem and provides a valuation framework for the MATIC token.

Polygon’s Suite of Scaling Solutions

Ethereum handles a majority of settlement, execution, and data availability functions, but is plagued with high transaction fees. The Ethereum community has prioritized decentralization through lower resource requirements to run a fully validating node over the scalability of the base layer. Polygon’s products aim to offload the task of execution to rollups and the task of data availability to Polygon Avail. The Ethereum base layer is now being optimized to serve as the settlement layer for a rollup centric future and Polygon is positioning itself accordingly.

Rollups (L2s) are a scaling solution that utilize zk cryptography or fraud proofs to execute transactions off-chain. The data is compressed and bundled into one batch that is then posted to Ethereum for final settlement. Optimistic rollups utilize fraud proofs, which assumes every transaction is valid unless otherwise challenged by someone observing the network for malicious transactions. Zk-rollups utilize zk proofs to ensure off-chain transaction validity.

Polygon announced their commitment to zero-knowledge cryptography in August 2021. A zk proof provides a method of proving that a user knows something without requiring the users to reveal the information that is known. Polygon uses zk proofs to prove the validity of transactions that were executed on rollups to Ethereum mainnet. There are two types of zk proofs: Succinct Non-Interactive ARgument of Knowledge (SNARKs) and Scalable Transparent ARgument of Knowledge (STARKs). SNARKs have been around for longer and are more common as a result, but they require a trusted setup. STARKs, on the other hand, do not require a trusted setup but have a larger proof size that results in more gas consumption and longer proving times. The following table provides a high-level overview of Polygon’s product suite, which includes many solutions that rely on zk technology.

Polygon PoS Commit Chain

Polygon’s most popular “scaling” solution is a PoS commit chain that does not actually inherit its security from Ethereum, so is in fact not a scaling solution at all. The EVM-compatible commit chain has its own validator set that consists of 2 different layers: the block production layer and the validator layer. The block production layer, referred to as the Bor, is responsible for aggregating transactions into blocks. The validator layer, referred to as the Heimdall layer, handles the aggregation of blocks produced by Bor into a Merkle tree and publishes the root to Ethereum periodically. The Heimdall layer is essentially Cosmos’ Tendermint consensus engine with a few tweaks to data structures and the signature scheme.

The native token to the PoS commit chain is MATIC, originally designed to secure the MATIC network, which was later rebranded to Polygon. MATIC is used to secure Polygon’s commit chain through staking/delegation contracts that reside on Ethereum. There are also checkpoints on Ethereum that pay attention to the state of Polygon, but this is much different than sharing the same consensus layer for security. A dishonest two-thirds majority of the 100 permissionless validators securing Polygon could collude to attack the network. However, because the core staking contract resides on Ethereum, the community could fork the chain and slash the malicious validators if such an attack were to occur. For a deeper dive on Polygon PoS, refer to their wiki page.

Polygon zkEVM, formerly Hermez

The Hermez Network was acquired by Polygon Studios for 250 million MATIC tokens, worth roughly $250 million at the time of the merger, on August 13, 2021. Since dubbed Polygon Hermez, the v1 product was designed for payments and token transfers that supports around 2,000 tps. The Hermez v2 product, now called the Polygon zkEVM, announced it would soon be launching its testnet in July. The zkEVM is optimized for EVM compatibility to ensure the easy deployment of existing Ethereum smart contracts on the L2. It will ditch the consensus algorithm used in Hermez 1.0, proof-of-donation, for a newly designed consensus algorithm, proof-of-efficiency (PoE), in an effort to improve decentralization and reduce complexity.

The zkEVM introduces an alternative runtime through its zkExecutor, which runs through its own internal language, zkASM, rather than EVM opcodes to improve proving times. This creates quite a bit of overhead for the developers because every EVM opcode must be recreated to fit their own custom virtual machine. It is likely that there will be some incompatibilities with existing L1 applications, but most Solidity code will be able to run on Polygon’s zkEVM as is. The zkEVM is therefore EVM compatible and not EVM equivalent, an important distinction.

The zkEVM will rely on a set of sequencers to collect transaction requests and a set of aggregators to verify the validity of those transactions through proofs. Sequencers will need to pay a fee in MATIC in order to create and propose transaction batches. The first aggregator to submit a proof will earn that MATIC. Polygon’s innovative approach utilizes both zk-STARKs and zk-SNARKs to speed up computations and minimize proof sizes. Instead of publishing zk-STARKs, which require a hefty computational load, as validity proofs, a zk-SNARK is used to attest to the correctness of the zk-STARK proofs. Further reading on the architecture behind Polygon’s zkEVM can be found here.

Polygon Zero

On November 26, 2021 Polygon agreed to acquire Mir, a zk rollup startup, for $100 million and 190 million MATIC tokens, or roughly $400 million in total at the time. Now dubbed Polygon Zero, the project claims to have built the world’s fastest zk scaling technology by an order of magnitude of 100x through recursive SNARK proofs. Polygon Zero is still in the development stages.

Generating a proof to verify a large batch of transactions is time and resource intensive. To solve this, Polygon Zero introduces Plonky2 which pairs each transaction with a machine to produce proofs in parallel for every individual transaction. Each proof is then recursively aggregated into a layer with each transaction proof verifying two transaction proofs with the process repeated until only 1 proof remains as verification for every transaction within the batch.

The main takeaway is that Plonky2 is able to produce recursive proofs in 0.17 seconds, compared to 2 minutes in 2019. Plonky2 is also natively compatible with Ethereum, making it easy to verify proofs of transactions done on Polygon Zero on Ethereum mainnet. More can be read about Polygon Zero and Plonky2 here.

Polygon Miden

Polygon Miden is an EVM compatible STARK-based zk rollup that is still under development. At its core is the Miden VM that supports arbitrary logic and transactions, as well as automatically generated STARK proofs for any program executed on its state. The reasoning behind auto-generated STARK-based proofs is to empower users to verify that a program was executed correctly without the need to re-execute the program themselves. Miden is the next generation of the Distaff VM that replaces the underlying proving system with Winterfell, a STARK prover developed at a project started by Facebook.  

Miden’s primary focus is EVM compatibility. This is achieved by offering the ability to compile Solidity-based smart contracts directly into Miden Assembly; the native language of the Miden VM. This can also be done with other smart contract languages, providing developers with an easy to implement Ethereum-secured L2 solution. Miden is Polygon’s only zk-STARK focused scaling solution, the same zk technology that Starkware focuses on, and is expected to go live on testnet sometime this year. To learn more about Miden, visit Polygon’s website.

Polygon Nightfall

Nightfall is a privacy-preserving Ethereum L2 designed in collaboration with Ernst & Young (EY) that targets blockchain use cases, such as tracking supply chains, for enterprises. The solution uses both optimistic rollup and zk cryptography to enable TradFi companies to leverage a public network while maintaining privacy and security.

Nightfall aggregates zk proof transactions into groups using a dual approach referred to as a  zk-Optimistic rollup. Similar to Optimism and Arbitrum, the assumption is made that all transactions are valid unless they are challenged via fraud proofs. A PoS based consensus mechanism is run by the validator set to select block proposers. “Challengers” monitor the network for invalid blocks and retain the proposer’s stake if the fraud proof is deemed successful. A simplified overview of Polygon Nightfall can be seen in the image below.

Three of the main barriers to enterprise adoption of blockchains have been a lack of privacy, slow transaction speeds, and centralized architectures. Polygon Nightfall aims to solve these problems. More can be read on Nightfall here.

Polygon ID

Polygon ID is a L2 decentralized digital identity solution that focuses on privacy through the use of zk proofs, specifically SNARKs. The identity solution leverages the Iden3 protocol and the Circom zk toolkit underneath the hood. The general idea behind Polygon ID is to empower individuals to prove something related to their identity without actually revealing the specific information.

It might be helpful to consider a situation where a person wants to enter a bar, but the bar is required by law to only admit people who are a minimum of 21 years old. In today’s world, this requires a third party to check the person’s ID and results in a stranger knowing your exact date of birth. The need for a third party and requiring an individual to reveal explicit personal information could be omitted through Polygon ID. The person looking to enter the bar could create a digital claim that can then be verified through Polygon’s zk proof request language by the bar to ensure the claim’s validity without revealing the actual age of the person.

Decentralized identity is a hard concept to grasp and its use cases are still being uncovered. Some use cases on the Web3 front could include gamer reputations, credit scores for undercollateralized lending, social media applications, and verifying DAO membership. Enterprises could leverage Polygon ID for KYC/AML attestations, insurance claims, etc. The use cases span far and wide but have yet to be iterated on. Polygon hopes to release private access for web2 and web3 companies this quarter.

Polygon Avail

Polygon Avail, live on testnet since June 29, 2022, is a modular solution that hopes to help other blockchains scale by providing data availability services. There are three primary functions that monolithic blockchains must tackle: settlement, execution, and data availability. A vast majority of computational resources/storage can be attributed to full nodes checking the validity of every transaction stored within a block’s body. Zk and Optimistic rollups post all transactional data to Ethereum as “calldata” today, but as L2 adoption scales so too will the amount of data posted to Ethereum, thus limiting the scalability they can offer. This is the primary problem Avail aims to solve: how can nodes, specifically light client nodes, ensure all the data of a newly proposed block is in fact available? If this availability cannot be fully guaranteed then a block could contain a malicious transaction and users/nodes would never know.

Avail solves the data availability problem through data availability sampling, KZG commitments, erasure coding, and light client P2P networking. Through the culmination of these technological innovations, Avail enables light client nodes to independently verify whether data is available without the use of fraud proofs. Any type of chain, regardless of its execution environment, can build on top of avail to vastly improve its transaction throughput while lowering transaction costs and ensuring it is safe from data withholding attacks.

By creating a base consensus layer that focuses solely on what the transaction data is and how it is ordered, Avail hopes to become the data availability layer for thousands of different chains. This solution has the potential to help blockchains scale transaction throughput, remove the need to bootstrap a validator set, and enable light clients to verify data availability regardless of block size. Click here to learn more about Polygon Avail and the data availability problem.

Polygon Edge

Polygon Edge, formerly referred to as the Polygon SDK, is a modular framework for building EVM compatible blockchains, scaling solutions, and sidechains. It has been live since May 2021 and operates on the IBFT (Istanbul Byzantine Fault Tolerant) consensus mechanism. Proof-of-authority and proof-of-stake are both supported, with the former being the default option.

Projects that opt for Polygon Edge have the advantage of being EVM compatible and leveraging ChainBridge, a multi-directional bridge that connects Substrate networks (Polkadot) and any EVM compatible chain to transfer ERC-20 and ERC-721 tokens. Another significant draw for projects looking to build on Edge is the ability to outsource security by relying on an external validator set.

Edge offers instant finality of transactions and 2-second block production times, but has a relatively small number of validators. A comprehensive view of all Polygon Edge modules can be seen in the diagram below. It has struggled to garner significant adoption to date, but it appears the Polygon team is hoping to fix that with the launch of Polygon Supernets.

Polygon Supernets

Supernets, similar to Avalanche’s subnets, are a horizontal scaling strategy that allows web3 founders to quickly set up a blockchain network by pairing projects with a validator set populated with trusted 3rd party node operators. Supernets can be application-specific networks that do not have to battle other dApps for block space.

Polygon Edge supports both proof-of-authority and PoS Supernets. Chains that opt for PoS can leverage MATIC and Polygon’s validator set through shared security. If a project wishes to use their own token as the means for security incentives, Polygon has established Certified Edge Partners: a group of certified developer shops that have experience establishing and maintaining blockchain infrastructure.

There are also plans to create a cross-chain communications protocol to connect Supernets with Polygon’s entire suite of scaling solutions and Ethereum mainnet for enhanced interoperability. Additionally, the team announced it would commit $100 million to incentivize the development of Supernets in the form of grants, third-party partnerships, liquidity mining rewards, and acquisitions.

Polygon: BD Success

Polygon controversially marketed its PoS commit chain as an Ethereum L2, drawing criticism from many in the scaling solution space. However, there is no denying the strength of Polygon’s business development strategy. While many of the partnerships displayed in the following table will inevitably fail, brand awareness is undoubtedly one of Polygon’s strengths.

DraftKings runs the 12th largest validating node on Polygon, with just under 55 million MATIC staked. Polygon also launched Polygon Studios in 2021, now led by former Google and Youtube gaming head Ryan Wyatt, assembled to spearhead blockchain gaming and NFT efforts on Polygon.

MATIC Valuation Framework

The total MATIC supply is fixed at 10 billion tokens with just over 9.726 billion tokens in circulation. There are 2.56 billion MATIC tokens staked, representing 25.6% of the total supply. A majority of the inflation today comes from validator incentives to continue securing the chain. The genesis MATIC distribution and emissions schedule can be seen in the following chart:

EIP-1559, an Ethereum upgrade implemented in early August 2021 that introduced a new fee structure that includes a base fee and priority fee, was also implemented into Polygon’s PoS chain on January 18, 2022. The base MATIC fee paid by transacting users is now burned, with just under 3 million MATIC tokens burned since its implementation. A study was conducted in November 2021 that concluded 0.27% of the MATIC supply would be burned annually as a result of the upgrade. However, the burn rate has not been nearly as drastic as originally forecasted with only 0.02% of the supply being burned in over 7 months.

The utility for MATIC as it stands today is largely related to fee payments and staking incentives on the PoS commit chain. However, Mihailo Bjelic, the Polygon co-founder, went on CNBC in May 2022 and more recently on Bankless at ETHCC stating that there are plans underway to redesign the MATIC token to better serve the entire suite of Polygon scaling solutions and provide it more utility. While predicting the proposed tokenomics revamp would prove to be an impossible task, we can compare the value of competing blockchain scaling solutions to Polygon’s in order to get an idea of whether MATIC looks over or undervalued.

It’s important to note that these are broad comparisons. Cosmos and its SDK have built a vibrant ecosystem of application specific chains while Polygon Edge has seen lackluster adoption. Public support of Avail is trailing Celestia by a significant margin. Avalanche has numerous subnets live whereas Polygon’s announcement of Supernets seems forgotten about. Optimism, and Arbitrum as well, have seen great momentum in adoption and Polygon’s zk-Optimistic solution tailored for enterprises could be going after the wrong market. Polygon’s zkEVM faces stiff competition from zkSync and Scroll. Starkware has been dominating STARK technology with Starkex’s application specific rollups and Starknet live on testnet, while Polygon Miden is still under development.

With all of that being said, MATIC will power Polygon’s entire stack of solutions that is tackling the Ethereum scaling debacle from virtually every angle. While it is highly doubtful that every solution will be successful, owning MATIC could be seen as a proxy for betting on various blockchain scaling tactics while maintaining loyalty to the Ethereum community. The table above outlines the bear market FDVs and private valuations of projects in relation to Polygon’s stack. The depressed valuations imply a greater than $20 billion opportunity, without including Polygon ID or Polygon Zero, versus MATIC’s current FDV of $6.8 billion.

Polygon has an additional competitive advantage over up-and-coming ETH scaling projects: a huge ecosystem of developers, dApps, and users. Polygon’s PoS commit chain sees nearly 10 times more transactions each day than both Arbitrum and Optimism combined, and consistently more than double the transaction count on Ethereum.

Polygon has nearly double the number of dApps and TVL of Arbitrum and Optimism combined. There are now millions of users who feel comfortable with Polygon, and this PoS chain could prove to be a strong top of funnel marketing strategy for their entire suite of products. This type of network effect cannot be ignored.

Final Thoughts

The Polygon Team was able to offload a significant amount of MATIC at a high valuation to acquire innovative teams/projects in its long-term commitment to zk cryptography. Their business development is unrivaled, as evidenced by ongoing partnerships with web2 powerhouses. MATIC will be the token to power Polygon’s entire suite of scaling solutions and will undergo a tokenomics redesign sometime next year. 97% of the supply is in circulation with early investor unlocks in the rearview mirror and minimal inflation going forward. Owning MATIC can be viewed as a diversified bet across various technologies devoted to scaling Ethereum.