Blockchain is doing serious business with big names including Starbucks and Mastercard
It’s been a brutal 12 months for crypto, with prices plunging, companies collapsing and one-time industry leaders heading to jail. But amid the negative noise, blockchain firm Polygon has quietly thrived, persuading some of the biggest names in the business to adopt its technology.
These include Mastercard, which uses Polygon to help budding music artists create their own NFTs, and Starbucks, which runs 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 counters the brutal forces of Crypto Winter. But even with millions in the bank and a major upgrade set for March, it must overcome doubts about its safety and break away from a well-funded pack of competitors.
Why polygon?
The first thing you need to understand about Polygon is that it doesn’t work on its own – it needs Ethereum.
That’s okay, 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 become bogged down in times of high demand. A review is slower and so-called gas fees rise if the network is flooded with transactions from NFT owners, players, DeFi traders and others.
Hence the need for services like Polygon, which acts as a sidechain that relieves congestion by connecting to Ethereum and allowing users to process transactions on it. Just as subways and buses increase the number of people who can travel through a city at once, scaling solutions like Polygon allow more transactions on Ethereum – and they are faster and cheaper.
Scaling Ethereum has become its own industry. Polygon alone raised 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, raised $150 million and $200 million respectively last year.
Polygon competes with so-called layer-2 blockchains that sit on top of Ethereum. These layer-2s use different digest approaches for scaling – batching transactions and then processing them on their own chain before stamping a digest of those transactions on the Ethereum blockchain.
One such approach, known as zero-knowledge or zk-rollups, is used by the likes of Starknet and zkSync. This approach relies on a cryptographic proof that is super light on data, but not particularly fast.
The other main approach is known as Optimistic rollups. Used by outfits like Optimism and Arbitrum, this approach is cheap and fast because it assumes transactions are valid unless proven otherwise.
Despite their differences, these layer-2s inherit all of the strict security standards of Ethereum. Polygon’s sidechain does not; it has prioritized onboarding users while maintaining its own, lower security standards – although that is set to change.
All offers
Of all the scaling solutions on the market, Polygon, founded in 2017, is the one that consistently attracts big name partners with built-in customer bases. The first reason is to be among the first to the game.
“We’ve been in Ethereum scaling research since, I would say, day one,” says Polygon co-founder Mihailo Bjelic. Polygon’s first-time status and early decision to create its own token gave the project momentum. As of publication, the market capitalization of the 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. It creates a natural landing space for Web2 companies that want to move into Web3. That effort is led by Polygon Labs president Ryan Wyatt, who last year was poached from his role as YouTube’s head of games.
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 executives.
“We knew from the Big Tech side what these companies like a Starbucks or Nike or Meta are looking for, from the point of initial outreach and conversation all the way through the technology integration, and authentically landing that in the space, implementation, [and] go to the market.”
Some companies, he says, have a “crystal clear vision” of how they want to use Web3, pointing to Starbucks’ NFT-based membership rewards program. Polygon Labs works with other companies to develop 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 the involvement of Polygon Labs. “I think last week I saw the Doritos launch at Polygon and did something,” says Wyatt. (There 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 days
The business partnerships act as marketing and introductory campaigns. While they cost Polygon nothing in dollars, they still represent a massive investment in building the ecosystem – albeit one that has yet to turn a profit.
According to data from Messari, the company brought in $4.2 million in revenue in Q3, the lowest total since Q3 2021. Messari told Fortune this figure in the 4th quarter fell below 4 million dollars. Nick Garcia, a Messari research analyst, told Polygon that to take the next step, “They have to see some adoption. That’s kind of the crux of it.”
Despite onboarding users via Reddit and other partnerships, Polygon remains in a battle with other scaling platforms. According to analytics site DeFi Llama, there is more value (in dollars) 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 belt-tightening. It announced this week that it is laying off 100 employees, about 20% of its workforce, as part of a plan to consolidate business units.
But Polygon has the funding and the temperament to win the war, a representative from the company says Fortune that it has “hundreds of millions of dollars on hand after last year’s fundraising and over $1 billion in the treasury”. The latter figure is in MATIC tokens, but Bjelic says that even if the token went to close to $0 — unlikely but not out of the realm of possibility for crypto — the dollar holdings would be enough to handle the company’s operations “for several years.” Polygon declined to provide details on the burn rate or operating 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, has fueled a long-standing criticism of the network: that it is far too centralized.
Ethereum co-founder Vitalik Buterin stated in 2021 that, as part of the switch for faster, cheaper transactions, Polygon remains centralized compared to Ethereum. Messaris Garcia, while very bullish on Polygon, admits that the sidechain is “very centralized.” According to him, you only need to take over four validators – the computers that run the blockchain and process transactions – to take over the entire network, and then you can theoretically drain it of value. Such concerns were heightened this week after hiccups with some of Polygon’s validators led to unsubstantiated reports on Twitter that the network had collapsed or disappeared.
Bjelic downplays these concerns, noting that the economy makes it impractical. “It only makes sense if you can do a big exploit,” he says. “And I think, as we know, today it’s virtually impossible to cash out that amount of stolen tokens.”
Nevertheless, Polygon takes security threats seriously. During the pandemic, it dipped into its massive treasury to buy a rollout project and fund efforts that would make Polygon safer.
The result is Polygon zkEVM, which the 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 to zk rollups. Bjelic even suggests that it could be integrated directly with the Polygon sidechain, providing immediate security gains without much friction for users.
Even with zkEVM on the horizon, it won’t be easy to get a head start on the technology side given how competitive the rollup space is. “ZkEVM is going to be behind the eight ball,” says Garcia.
Nevertheless, Bjelic believes that there is plenty of room for everyone. “The pie is so big, and what we aim to disrupt is so big, that it doesn’t make much sense to fight over the current pie. We have this big vision and we are working towards it.”
This story was originally featured on Fortune.com
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