The Tie Research

[Recap] Polygon Q2 2024 State of the Ecosystem

By Al-Muthanna Atieh
May 15, 2024

On April 16th, 2024, The Tie hosted a webinar moderated by Heidi Pickett, Chief of Staff & SVP of Strategic Initiatives at The Tie, alongside Colin Butler, Head of Institutional Capital at Polygon Labs, and Matt Blumberg, VP of Institutional Capital at Polygon Labs. The discussion centered around the latest developments in the Polygon ecosystem, including advancements made in 2024 since the last call in Q1. It also highlighted what people should watch for in the coming months.

Watch the full webinar here:

Addressing Scalability

Polygon has witnessed a significant demand for building and utilizing new Layer 2 solutions that inherit Ethereum's security while enabling elastic demand for block space. While zk-rollups address security concerns by eliminating the need for trusted operators to maintain asset security, they still encounter challenges related to the fragmentation of users, liquidity, and attention. This issue prompted the Polygon team to develop the AggLayer as a solution to address fragmentation.

Aggregation Layer (AggLayer)

The AggLayer aims to resolve scaling issues by aggregating ZK proofs from all connected chains and ensuring the safety of near-instant atomic cross-chain transactions. It achieves this by providing two main functionalities: 1. Safe asset transfer and 2. Facilitating cross-chain applications. Liquidity will no longer be fragmented across chains; for instance, a user holding DAI on a connected chain can purchase an NFT on Polygon zkEVM without the need to bridge funds first. This seamless experience creates the impression of using a single chain for the end user.

"These new primitives enable L2 developers focused on various verticals to access a unified pool of liquidity without straying from their specialization, allowing them to focus on refining their core product and maintaining the unique strengths of their chain," Matt explains.

The initial essential components of the AggLayer are already operational, with three chains becoming part of this connected ecosystem. Meanwhile, Matt commented that “other chains are actively working to integrate with the AggLayer soon.” 

Unified Bridge Deployment and Impact

Since the last Q1 State of the Ecosystem call, Polygon has shipped the first essential component of the Agglayer, the unified bridge. A single bridge contract on Ethereum that connects to all the L2’s within the Polygon AggLayer ecosystem. Each chain will have a local copy of the unified bridge root, enabling cross-chain transactions that don’t require withdrawing to Ethereum or the security risks of third-party bridges. As of April 16th, 2024 the number of chains connected to the unified bridge is three: OKX’s X Layer, Astar, and Polygon zkEVM.*

*The number of connected chains can be monitored using the ‘rollupCount’ function of the PolygonRollupManager contract, which is located at the contract address 0x5132A183E9F3CB7C848b0AAC5Ae0c4f0491B7aB2.

Expansion of the Polygon CDK Ecosystem

"The demand for developers to build within the Polygon ecosystem has grown since the last quarter, with over 100 chains in the pipeline and increasing demand for AggLayer integration," Matt says. This diversity within the pool of chains highlights several notable examples:

"For consumer-focused applications, Arianee stands out," Matt notes, "leveraging Digital Product Passports and engagement tokens at scale." This allows brands such as Audemars Piguet, Breitling, and Moncler to launch their own DPPs and loyalty tokens, providing access to customer demographics based on consumption habits. "These integrations demonstrate real-world adoption and demand for inclusion within Polygon’s ecosystem beyond the usual players," he adds.

In the realm of niche applications, API3 has emerged as a dedicated chain, allowing dApps and their users to benefit from oracle extractable value (OEV) typically captured by third parties. The network captures value from all dApps using API3 data feeds across all chains and returns it to the protocols, leveraging the extensive customizability offered by the Polygon CDK to meet specific needs.

In gaming, Hypr Network utilizes Polygon CDK’s customizability to create user experiences tailored to the diverse needs of players. Hypr will use Celestia’s data availability (DA) layer, among other modular options offered by Polygon CDK, to become one of the fastest and most affordable gaming-focused chains. Other gaming-focused chains like Immutable zkEVM and Moonveil are leveraging Polygon’s CDK and future AggLayer integration to build gaming ecosystems spanning the entire aggregated network.

For general-purpose applications, OKX, the fourth-largest crypto exchange, has launched X Layer, the newest Polygon CDK chain tapping into the AggLayer. "This provides an easy onboarding path to X Layer and all other chains connected to the AggLayer for its 50 million users," explains Matt. With more than 200 dApps currently building on the network and integrations with major players like Eigenlayer, Chainlink, and Curve, X Layer represents a significant addition to the ecosystem.

Matt concludes, "The Polygon CDK ecosystem spans from application-specific chains focused on consumer, gaming, NFTs, etc., to general-purpose chains like X Layer."

Tokenization Applications and Use Cases

Libre, a ZK L2 powered by Polygon's CDK, went live in March, enabling seamless and compliant avenues for major financial institutions to tokenize assets. Eligible investors now have access to tokenized funds from Brevan Howard and BlackRock. “Polygon’s CDK is uniquely useful,” Colin says, “as the developers are able to control the entire validator set, making the chain permissioned in order to fall within regulation standards. As regulations change, the team can easily open up the chain to new use cases and products.” Libre’s on-chain solution addresses the question of how to efficiently service smaller clients. By setting up users on-chain with Libre, it comes with specific technical flags. If a user’s flags are not aligned with a particular instrument or asset, then the user can’t execute. Once done on scale, it allows the whole compliance solution to work a lot more seamlessly.

Institutional Adoption and Market Dynamics

When asked about new collaborations or integrations, Colin commented "The ones that I really want to share? I actually can't, unfortunately for me, but I'm wildly excited.” He also conveyed the significant potential impact of blockchain technology on traditional financial systems, particularly in making high-frequency trading operations more efficient and cost-effective. "If you're talking about users and adoption, if you're getting a significant chunk of that market, making it more efficient, lower cost, so on and so forth, then I think you're capturing a lot of the vision for the blockchain," he stated.

Discussing the complexities of integrating blockchain with existing financial infrastructures, he noted, "You have to be extremely conservative when you're a global financial organization." When questioned about whether regulation or integration complexities were the main drivers for delays, he clarified that the primary concern was ensuring absolute reliability and efficacy before launching a live product. "If you launch a product at the scale of... beyond 500 billion or trillion in assets, or you're a giant international bank, you essentially have to work 100% of the time," he explained.

Another driver for institutional adoption could be the introduction of unified liquidity as the AggLayer continues to grow in chains, users, and liquidity. In this context, Polygon plays the role of a nexus, connecting all the different players in mutually beneficial ways.

Future Outlook and Roadmap

As Polygon continues to evolve, Matt emphasizes the importance of monitoring the AggLayer. "Keep an eye on the AggLayer," he advises, highlighting the anticipated growth in the ecosystem. "We're going to see so many chains launch, join, and bring users into the AggLayer ecosystem. As that grows, it's a network effect," he explains. The increase in chains and users is expected to naturally attract more liquidity and spur more app development, which in turn draws even more users and liquidity, creating a flywheel that is just beginning to gain momentum.

Colin also stresses the pivotal role of the AggLayer in enhancing user experiences and enabling mass adoption. "The AggLayer is what creates the user experience that allows for mass adoption," he notes. Focusing on how the AggLayer evolves is crucial, as it will set the tone for accelerated adoption across the ecosystem.

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.

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Al-Muthanna Atieh

Al-Muthanna Atieh

Al-Muthanna Atieh, Author at The Tie

Research at The Tie
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