In the run-up to The Merge, some investors focused on Polygon (MATIC -0.58%) as a potential beneficiary of the major technological upgrade Ethereum (ETH 1.28%) was about to undergo. After all, Polygon is generally considered to be the premier Layer 2 scaling solution for Ethereum, so it made sense that Polygon would benefit from The Merge as well. There was a brief spike over the summer when Polygon tokens tripled in price from $0.30 to $1, but they now seem to have settled into a trading range around $0.75.
Does this mean investors have cooled on Polygon's prospects? Or is it simply a realization that it will simply take longer than expected for Ethereum to realize all of the performance enhancements the community has promised? Either way, with the completion of The Merge behind us, this could be a good time to reevaluate the investment case for Polygon.
Battle of the Layer 2 solutions
The good news is that, even after The Merge, Ethereum will continue to rely on Layer 2 scaling solutions like Polygon to reduce "gas fees" and clear up blockchain congestion. Ethereum co-founder Vitalik Buterin has already told us that. However, there are plenty of other Layer 2 solutions out there, including Optimism (OP -1.50%), Loopring (LRC 1.07%), and Arbitrum. So there's certainly no guarantee that Polygon will hold onto its position as the premier Layer 2 scaling solution for Ethereum.
Image source: Getty Images.
The problem for investors is that it is ridiculously difficult for any non-blockchain expert to make sense of what differentiates all of these solutions. The current buzz is around the "ZK rollups" that Polygon offers, but this probably will mean nothing to the average investor who is unfamiliar with ZK (zero knowledge) proofs. Are you willing to invest your hard-earned money into something that you don't understand? That might explain part of the reason Polygon's price hasn't been above $1 since August, despite all the excitement surrounding The Merge.
The new Layer 3 solutions
Making things more complex, Buterin recently said he's thinking about Layer 3 solutions as another way to reduce fees and congestion on Ethereum. He's not exactly sure what form these Layer 3 solutions will take, but he seems to suggest that the Layer 2 ecosystem has already matured, so it's time to look for what's next.
Unlike Layer 2 solutions, which sit right on top of the Ethereum blockchain, Layer 3 solutions will not be stackable, says Buterin. This makes issues like security and scalability much more complex. However, as soon as the first Layer 3 solution appears, investors may be tempted to move out of Layer 2 solutions and into Layer 3 solutions as they chase The Next Big Thing. What this might mean for Polygon is unclear.
High-profile brand partnerships
That's why I'm using a simple variable to determine whether Polygon is still a buy after The Merge: the number of high-profile brand partnerships it announces. There was a brief wave of euphoria after Polygon announced a partnership with Meta (META 3.04%) for non-fungible tokens (NFTs) on Facebook and Instagram, and another after it announced a partnership with Disney (DIS 1.54%) during the summer. Along the way, it has inked partnership deals with many other high-profile brands. In September, Polygon announced a partnership with Starbucks (SBUX -0.11%). I think these brand partnerships are the key to unlocking the full value of Polygon. As long as Polygon continues to announce similar types of partnerships, I will remain bullish on the token.
Is Polygon a buy?
Right now, I think Polygon is the clear leader in the Layer 2 blockchain business. However, it pays to watch out for competitors. Arbitrum, for example, does not yet have a crypto token, but has been widely hailed as one of the best Layer 2 scaling solutions.
At the end of the day, Polygon has the highest market cap of any Layer 2, the best technology, and the most high-profile brand partnerships. If the world's top brands are picking Polygon to help them launch their new NFT and Web3 projects, that's a huge factor for me. Polygon is still a buy after The Merge, and I'll be looking to add to my position while this crypto is trading at bargain prices of less than $1.
