It’s been a brutal 12 months for crypto, with prices plummeting, companies collapsing, and one-time industry leaders heading to prison. But amid the negative noise, blockchain firm Polygon has quietly thrived and persuaded some of the biggest names in business to take up its technology.
Those include Mastercard, which is using Polygon to help fledgling music artists mint their own NFTs, and Starbucks, which is running a rewards program on the platform. The company also cut partnership deals with Meta, Disney, and the NFL. Meanwhile over 6 million Redditors have used Polygon to create custom blockchain avatars.
One of several blockchains built to complement Ethereum by bringing it to scale, Polygon is a success story as it bucks the brutal forces of Crypto Winter. Yet even with millions in the bank and a major upgrade set for March, it must overcome doubts about its security and break free from a well-funded pack of competitors.
The first thing to understand about Polygon is that it doesn’t work on its own—it needs Ethereum.
That’s fine, because Ethereum doesn’t really work on its own either, at least not when demand is high. The Ethereum blockchain, built to be a decentralized global computer quickly, can get bogged down at times of high demand. It slows to a crawl and so-called gas fees soar if the network is flooded by transactions from NFT owners, gamers, DeFi traders, and others.
Hence the need for services like Polygon, which acts as a sidechain that relieves congestion by connecting to Ethereum and letting users process transactions on it. Just as subways and buses increase the number of people who can travel through a city at once, scaling solutions such as Polygon allow more transactions on Ethereum—and they’re faster and cheaper.
Scaling Ethereum has become its own industry. Polygon alone raked in a staggering $450 million in funding in February 2022 at a valuation of $20 billion. Meanwhile, competitors Optimism and Matter Labs (makers of zkSync), both of which count Andreessen Horowitz as a lead investor, last year raised $150 million and $200 million, respectively.
Polygon competes with so-called layer-2 blockchains that sit atop Ethereum. These layer-2s use different rollup approaches to scaling—putting transactions in batches and then processing them on their own chain before stamping a summary of those transactions on the main Ethereum blockchain.
One such approach, known as zero-knowledge or zk-rollups, is employed by the likes of Starknet and zkSync. This approach relies on a cryptographic proof that is super lightweight in data terms but not especially fast.
The other main approach is known as Optimistic rollups. Used by outfits like Optimism and Arbitrum, this approach is cheap and speedy because it assumes transactions are valid unless proven otherwise.
Despite their differences, these layer-2s all inherit the stringent security standards of Ethereum. Polygon’s sidechain doesn’t; it has prioritized onboarding users while maintaining its own, lower security standards—though that’s set to change.
All the deals
Out of all the scaling solutions on the market, Polygon, founded in 2017, is the one consistently attracting big-name partners with in-built customer bases. The first reason for that is being among the first to the game.
“We have been in Ethereum scaling research since, I would say, day one,” says Polygon cofounder Mihailo Bjelic. Polygon’s first-mover status and early decision to create its own token gave the project momentum. As of publication, the market cap of its MATIC token is $11.2 billion, the eighth-highest of any cryptocurrency.
Polygon is also stimulating demand for decentralized computing by building on its own network projects in gaming, NFTs, and the metaverse. That creates a natural landing space for Web2 businesses looking to move into Web3. That effort is helmed by Polygon Labs President Ryan Wyatt, who last year was poached from his role as YouTube gaming head.
Wyatt credits a hiring strategy that has targeted traditional tech veterans like himself to round out Polygon’s team of Web3 natives and speak directly to Fortune 500 execs.
“We knew from the Big Tech side what these companies like a Starbucks or Nike or Meta are looking for, from the point of first outreach and conversation all the way through the tech integration, authentically landing it in the space, implementation, [and] go-to-market.”
Some companies, he says, have a “crystal clear vision” of how they want to use Web3, pointing to Starbucks’s NFT-based membership rewards program. Polygon Labs works with other companies to flesh out ideas and push them beyond simple use cases, such as the NFT profile pictures that spread like a virus across social media during the pandemic.
Still other companies have started using the chain without any involvement from Polygon Labs. “I think last week I saw Doritos launched on Polygon doing something,” says Wyatt. (It was a giveaway for digital wearables in the Decentraland metaverse.) “We never even worked with them. They come right in, they know how to use the protocol, they know how to deploy [and] build off of it.”
It’s still early
The business partnerships double as marketing and onboarding campaigns. While they cost Polygon nothing in dollar terms, they nonetheless represent a massive investment in building up the ecosystem—though one that has yet to turn a profit.
According to data from Messari, the company brought in $4.2 million in revenue in Q3, its lowest total since Q3 2021. Messari told Fortune that figure in Q4 slipped below $4 million. Nick Garcia, a Messari research analyst, said that fr Polygon to take the next step, “They’ve got to see some adoption. That’s kind of the crux of it.”
Despite the users onboarded via Reddit and other partnerships, Polygon remains in a battle with other scaling platforms. According to analytics site DeFi Llama, there’s more value (in dollar terms) floating around on the Arbitrum network than on Polygon, and Optimism is nipping at its heels.
This lack of a profitable business strategy has also led Polygon to join other big crypto names in tightening its belt. It announced this week it was laying off 100 employees, about 20% of its workforce, as part of a plan to consolidate business units.
But Polygon has the funding and temperament to win the war, with a company representative telling Fortune that it has “hundreds of millions of dollars on hand after last year’s fundraise and over $1 billion in treasury.” The latter figure is in MATIC tokens but Bjelic says that even if the token went to near $0—implausible but not outside the realm of possibility in crypto—its dollar holdings would be enough to handle company operations “for several years.” Polygon declined to provide specifics about its burn rate or operational budget.
Security and centralization
Polygon’s ample fundraising rounds from venture capital will help it ride out the current crypto winter. But that funding, along with the company’s operational structure, have fueled a long-running critique of the network: that it’s overly centralized.
Ethereum cofounder Vitalik Buterin stated in 2021 that, as part of the tradeoff for faster, cheaper transactions, Polygon remains centralized compared to Ethereum. Messari’s Garcia, though he’s very bullish on Polygon, admits its sidechain is “very centralized.” According to him, you’d only need to take over four validators—the computers that run the blockchain and process transactions—to take over the entire network, at which point you could theoretically drain it of value. Such concerns were heightened this week after hiccups with some of Polygon’s validators led to unfounded reports on Twitter that the network had collapsed or vanished.
Bjelic downplays those concerns, noting that the economics render it impractical. “It only makes sense if you can do some huge exploit,” he says. “And I think, as we know, nowadays it’s practically impossible to cash out that amount of stolen tokens.”
Nonetheless, Polygon is taking security threats seriously. During the pandemic, it dipped into its massive treasury to buy a rollup project and fund efforts that would make Polygon more secure.
The result is the Polygon zkEVM, which it recently announced will be released in beta in March. This “zero-knowledge Ethereum Virtual Machine” replicates much of Ethereum’s current setup for executing transactions but makes it even more hospitable for zk-rollups. Bjelic even suggests that it could be integrated directly with the Polygon sidechain, providing instant gains to security without much friction for users.
Even with zkEVM on the horizon, it won’t be easy to hold a lead on the technology side given how competitive the rollup space is. “The zkEVM is going to be behind the eight ball,” says Garcia.
Nonetheless, Bjelic believes there’s plenty of room for everyone. “The cake is so big, and what we are aiming to disrupt is so big, that just fighting over the current cake doesn’t really make too much sense. We have this grand vision and we’re working toward it.”