Polygon (MATIC +0.00%) may be down 30% for the year, but it's now trying to reinvent itself as "Polygon 2.0." In mid-September, Polygon Labs, the company behind the crypto token, announced the official kickoff of a new strategy that could fundamentally change the value proposition for Polygon and make it more attractive for investors.
The big question for investors, of course, is whether anything will actually change. Is this just a last-gasp effort to reverse the downward trajectory of a crypto token in free fall, or is this really the start of something new? Let's take a closer look.
Why the transformation to Polygon 2.0?
First up, let's address the question of why Polygon Labs is choosing this moment to implement an ambitious strategic transformation. Despite all the marketing lingo about the need to create a new "value layer of the internet," it all comes down to one single concept: Polygon is in a lot of trouble right now.
At one time, Polygon was the premier Layer 2 scaling solution for the Ethereum blockchain. This means that Polygon was the go-to option for brands and companies looking to launch new blockchain projects, especially those related to non-fungible tokens (NFTs). By using a Layer 2 such as Polygon, these brands could get the reach, power, and security of the Ethereum blockchain (the Layer 1), all with faster speeds and lower transaction costs. But now the Layer 2 space is getting very crowded, and Polygon is no longer the premier Layer 2 scaling solution. That does not bode well for Polygon's future growth prospects.
CRYPTO: MATIC
Key Data Points
And, of course, it's impossible to ignore what's happening to the price of the Polygon token. The crypto has been in free fall since mid-February, losing 65% of its value since attaining an intra-year high of $1.57. There were substantial layoffs at Polygon Labs earlier in the year, and then in mid-June, the Securities and Exchange Commission (SEC) suggested that Polygon might actually be an "unregistered security" when it filed its court cases against cryptocurrency exchanges Binance and Coinbase Global. So you might say that Polygon is facing the "perfect storm" right now: internal upheaval, external competition, and potential regulatory action.
What's really changing with Polygon 2.0?
It's difficult to parse all the technological terminology surrounding the transformation, but from my perspective, there are three key issues to consider.
First of all, Polygon has to convince users, developers, and investors that it is still the premier Layer 2 blockchain. So it is doubling down on the fact that it still offers the best technology out there (known as ZK, for Zero Knowledge), which offers substantial advantages in terms of liquidity and scalability.
Second, Polygon has to grow its utility and possible use cases beyond just Ethereum. The Layer 2 space for Ethereum is getting very crowded, and one strategy is to look to other blockchains for growth. Thus, Polygon 2.0 also focuses on creating a network of interconnected, interoperable Layer 2 blockchains.
And, finally, Polygon has to address the concerns of the SEC, in order to avoid potential regulatory headaches. So it is fundamentally changing the architecture of its blockchain so that it can't possibly be mistaken for a security. This includes the creation of a brand-new "staking layer" that will presumably keep all of its crypto staking activities separate and distinct.
Can Polygon pull it off?
Taking a big-picture view of things, the transformation to Polygon 2.0 is actually fairly comprehensive. It seems to address all three of the major problems Polygon is facing, and it even includes a ticker change for the crypto token (from MATIC to POL). In the tech world, these types of strategic pivots are extremely common, and it's not like Polygon is trying to fundamentally change what it does or how it offers value.
Image source: Getty Images.
However, I am concerned about the speed and suddenness of this transformation. According to Polygon Labs, the transformation could start as soon as early as the fourth quarter of this year. And Polygon Labs promises that the modification will be entirely seamless, without any disruptions of any kind. If Polygon is, indeed, getting a massive technical upgrade, this seems a bit Pollyannaish to me.
Generally speaking, I'm very bullish on the Layer 2 space, because this is where all the action for Ethereum seems to be happening right now. During The Merge, Polygon was one of the most talked-about crypto tokens that might benefit from Ethereum's transformation. Now, other Layer 2 blockchains are claiming the spotlight. For that reason, I'm taking a wait-and-see approach with Polygon to see what actually changes later this year, and how seamless those changes really are.
