Grayscale's Deeper Dive into Polygon

Rayhaneh Sharif-Askary: Hi, everybody. Welcome to Grayscale's Deeper Dive with Polygon. We are fortunate enough today to be joined by Co-Founder, Sandeep Nailwal. As always, the goal of these deeper dives is to shed light for investors and to make tangible the protocols, that underlie our products. In this case, our Smart Contract Platform Fund Ex-Ethereum. Before we kick it off, I have the pleasure of reading through a few disclosures, so bear with me. Nothing we say here today is investment advice. You should always consult your own broker or advisor. This call is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy or sell any security, and should not be relied upon as basis for investment decisions. Clients of Grayscale may maintain positions in the digital assets discussed on this call. Our private placements, including Grayscale Smart Contract Platform Ex-Ethereum Fund are available to accredited investors only. So let's kick it off. Thanks again for joining. Sandeep, let's hand it to you. Will you give us some background on yourself, on Polygon, how it came to be created, perhaps touching on the types of problems you guys had set out to solve and maybe like some anecdotes about the early days and how you actually got started?

Sandeep Nailwal: Yeah, so I'm also a computer science engineer. Although at Polygon, my role has increasingly become like everything business at Polygon, but I'm also the co-founders. I think all of us are engineers and we started Polygon. Before Polygon, I and my other Co-Founder Jaynti, we were both building dApps, so decentralized applications, believing in the vision of Web3 and building these user-owned, community-owned businesses, and things like that.

So, but I think, this was end of 2017, when the CryptoKitties moment happened. So at that point in time, we certainly realized that there is this one app, which became mildly successful, which got like 5-10K users in it. And suddenly it choked the Ethereum network for more than a week. So, it was a big wake up call that the blockchain technology is not ready for larger user adoption yet. You need to scale the blockchains. And then we were already very much involved in the Ethereum community, loved the tools and all that. And then by that time, everybody was looking to build, like raising funds for building a new Layer 1, new Ethereum killer and this, that. So that was the time when we also evaluated that when we want to scale the blockchains, what should be the right approach. And I think, I'm very happy and proud of that thesis, that thesis has survived even today is that, even by that time with Ethereum, initially having that DAO moment, and after that the ICO boom, and all that. I had already achieved a place where we were like, for a smart contract platform, it's very, very hard for anyone to achieve these kind of network effects and all that, so. And we also could see that Vitalik had published that scalability trilemma, that out of decentralization scale and security, you can only choose two. So as a blockchain, you choose decentralization and security, and the scale gets compromised.

So we evaluated hard that is it possible to achieve scale on the Layer 1 and our thesis by that time also, and that has stood the test of time that it's not possible to achieve the scale on one particular layer or achieve the scale on Layer 1 itself. And I think that's what we are seeing even today. Some of the biggest Layer 1 projects with huge fanfare came in and then we saw that what kind of stability issues the blockchains have over there, the chains go down and there are a lot of things that keep on happening. So we had this thesis very clear that the scalability trilemma is a real thing. And in order to scale blockchains what you need to do is, rely on a Layer 1 which has strong security, security guarantees, and decentralization. And you try to scale the user transactions on these Layer 2 or you want to call it secondary layer because Ethereum community becomes very specific about what Layer 2 is and what's not Layer 2. But secondary layer, tertiary layers and all that.

So that was our thesis that the user transactions will live on these Layer 2s, Layer 3s, Layer 4s, whatever it is, but the base layer, which is Ethereum in our thesis will be that settlement layer, which will provide you the security and decentralization. So that's when we were very clear of that thesis. And we started Polygon as a Plasma project where we originally started to work on the Plasma technology for the Layer 2. And then we built out, like probably we were the only team that actually ended up building out that Plasma solution, in spite of the fact that there were so many Silicon Valley-based teams and all that do this as well.

But then eventually, and we started getting a lot of adoption, but we also realized that the Layer 2 technology is still a moving target. So in order to be a limby project, as you say that even the thing that survives the test of time, we did not want to bound us with one particular approach on this Layer 2 scaling. So hence, we rebranded from Matic Network, we used to call, which was building Plasma Layer 2 solutions, to this generic, all-purpose Layer 2 solution, all-approach Layer 2 solution called Polygon. Where our thesis is that, the user interactions, user transactions will live on these secondary and tertiary layers, and Ethereum will provide that security in the settlement layer. And on this secondary layer, you can have multiple different approaches, right now is not the time to finalize or put an opinion on that this approach will survive. So the Polygon in a nutshell is the secondary layer scaling solution, which is approach agnostic. It has side chains. It will have app specific chains and it'll also have a full blown Layer 2s like Optimistic rollups and zk-Rollups. Zk-Rollups are the ones we are most bullish on. So that's in a nutshell Polygon and Polygon story in short.

Rayhaneh Sharif-Askary: That's great, thank you. And to take a big step back and just kind of belabor the point for anyone out there, who's not yet super clear on Layer 1s versus Layer 2s. Can you just explain that from a high level, how we should think about the different layers, how they're different?

Sandeep Nailwal: Sure, so it's very simple, actually. It's nothing technical about it. So basically, Layer 1 blockchain is the main blockchain. Let's say in case of Bitcoin or in case of Ethereum. And then these blockchains have limited bandwidth because what exactly is blockchains? Let's consider the simplest example, Bitcoin. Bitcoin is a blockchain or a computer in a way, or we call state machine, which processes are very small, kinda logic, which is payment logic. Like A pays to B, A's balance goes down, B's balance goes up. This small logic is computed by not one single computer, but thousands and thousands of computers. And they all compute the same logic, so that you can ensure that no one single party can lie about it. Like that's what is called consensus mechanism. So all of these thousands of nodes in the network have to agree and have to have a consensus that this was computed, this payment was computed in a proper manner. That is Bitcoin for you.

And that is Bitcoin Blockchain is the Layer 1 blockchain, because if the simple payment, if you were computing on my laptop, it would be like, I could process millions of payments, but if the same payment has to be processed with hundreds of laptops, hundreds of nodes in the world, then obviously you are, what task could have been done in one computation cycle. You are computing in a 10,000-computation cycle because everybody's doing it. So definitely bandwidth becomes a constraint fundamentally for blockchains. And so in order to achieve more scalability, because we want more and more users and these Web3 kind of applications to be built, you want to scale these blockchains. You want to make sure that these blockchains can have more transactions, more users and everything. So you can then think of like, either you scale this Layer 1 blockchain like Bitcoin or Ethereum level itself, or you build these Layer 2 blockchains, which are blockchains kind of these... What should I say? Like these microsystems, which are just connected back to the Layer 1 chain. They derive some part of the security from the Layer 1 chain, but these chains, then these Layer 2 chains can trade-off a bit of decentralization because they're getting it from Ethereum. But then they focus on computing large amount of transactions.

Because for the Layer 1, you need to have maximum focus on decentralization because that's the whole purpose of blockchain. I mean these days we have this false narrative in the crypto industry that users don't care about decentralization, but they do care when it comes to the times. And we all saw the times where decentralization did matter and the whole market actually collapsed because of that. So that's why you need, like you can either try to scale on the Layer 1, which is very hard as I discussed about the theoretical scalability trilemma that you can either choose security, decentralization or scale either two of them. So you choose decentralization security on the Layer 1, and these Layer 2 chains are more focused on achieving the scale, so they compromise a bit on decentralization, but security is needed. So that's how you segregate between Layer 2 and Layer 1. So Polygon chain, for example, they are nothing but chains collected back into Ethereum. They won't exist alone, standalone, they are connected over Ethereum. So you can think of them as kind of these compartments. So instead of computing everything on Ethereum, you compute things on these multiple chains and you get more bandwidth.

Rayhaneh Sharif-Askary: Well, that's a really great explanation and it kind of follows, I always ask everybody who does these to explain their protocol, to me, like I'm a five-year-old. I think you've pretty much done it, but if there's any other analogy that you would like to evoke, I have, historically

Sandeep Nailwal: I could actually consider this as a two-story or multi-story building, or two-story building. Layer 1 blockchain means you are working on the ground floor. Everything is being worked on the ground floor. Now you want more people to fit in, what do you do? Either you expand the ground for itself, but there are challenges to it. But, or what you can do is you can build another story on top of it. The second floor or the first floor, second floor. That second floor is basically Layer 2.

Rayhaneh Sharif-Askary: That's awesome. Yeah, second story. Okay, I think you had some things in terms of, again, in the interest of making these tangible for folks, I'm very visual. So I think, you were gonna share your screen, show people some things about the protocol. Let's jump to that now, if you're amenable.

Sandeep Nailwal: Yep. So let me on this screen itself, I would probably show this that the future of Web3 that we see how Web3 can achieve mass adoption, is basically this, that we have these, like, let's say this is the Layer 1 chain Ethereum. And it has limited amount of bandwidth. But it is very secure and decentralized and it has some logic with which you can do anything. Like you can write any complex business logic into it. So either you try to scale these boxes here, on the Layer 1, which is very, very hard because you have to decentralize, you can't have big boxes. Imagine like 10,000 computers are collaborating with each other and each box starts becoming a hundred MB. So everybody has to transfer those a hundred MB to each other at the right time because there's a risk to mine and all that. Proof-of-work also like a lot of people might relate to it, like why you can't have block size beyond a certain size and all that.

So it's very hard to scale here, there have been multiple attempts and we all know that many of those attempts on the Layer 1 have not succeeded. What we believe is that instead of like scaling on the Layer 1, we scale blockchains on this Layer 2. So Layer 2 means like you have multiple boxes and building our blockchains in themself, and they are connected back into Ethereum. And they kind of derive socio-economic security, they will put the proof, cryptographic proof of everything back on Ethereum. If something goes wrong, here, you have the security deposit of the people running the chain here. So these people put a security deposit, let me call it SD, Security Deposit. And then they do everything. They do all the computation. So users don't interact with Ethereum, this chain user don't interact here, users interact here, then to the Layer 2 chain. And the Layer 2 operators who are running the Layer 2 chain, they commit proofs back on Ethereum and they put security deposits. And Ethereum, because it's computing business logic, so if they do something wrong, Ethereum can penalize them. So you can have less number of that maybe even 50 to a hundred number of nodes instead of like, 10,000 nodes, 20,000 nodes that are available, that needs to be there on Ethereum on Layer 1 because it needs to be extremely decentralized. You have 5,200 nodes there, and you can be rest assured that they're computing everything well because they're judgment is happening on the Layer 1. And that way, because this is not very complicated, so you can have hundreds and hundreds of these chains, or as of now on the Layer 2 like, technically, you can have probably a few hundred chains on the Layer 2. So you scale vertically. This is what I was mentioning about the story that you have a ground floor, and you have multiple stories on the top of it, and then you can fit more people over there.

Rayhaneh Sharif-Askary: Great, this is a great diagram. So my next question was gonna be to ask a little bit more about the technicalities of how you're scaling. So do you wanna talk about what rollups are and how you guys use them?

Sandeep Nailwal: Yes, so I briefly explained the same thing, but let me again, it'll be a good summary for everyone. So again, going back to the basics, this is Ethereum blockchain and a Layer 2 is basically a chain which is away from Ethereum. That's why it's called off-chain scaling,

 So it's basically another chain completely separate from Ethereum and it is being run by, let's say one or more participants. And what these Layer 2 people do is that they are connected. They are connected to a smart contract code on Ethereum, which expects from them periodic proofs, cryptographic. Let me call them cryptographic proofs, CP is Cryptographic Proofs, which expects the cryptographic proofs from them. And these people who are running these off-chain, the chains, they have to put a large amount of security deposit here. Again, I'm calling it that SD. So security deposit here, and they have to put cryptographic proofs, frequently back on this Layer 1 smart contract. And I'm keeping it very layman, like tell me if I want to go in more detail, but I'm keeping very layman.

So in the simplest term, they submit the cryptographic proof back. And if on the Ethereum, you have a proper computation logic on this smart contract which is on Ethereum, it can judge that whether the proofs you are submitting by various, there are various different kind of games on this, like crypto economic games, how you actually check that this computation is right. Whether you use ZK or you use fraud proofs and things like that, but I'm not going into that. Point being. that you have mechanisms that on Ethereum, you will be able to figure out if some computation was computed wrongly. Like I paid you a hundred dollars, instead of that, it shows I paid you $1 million. If somebody does commit like these validators here, they commit any kind of fraud, then Ethereum Smart Contract and the Ethereum community who can interact with the smart contract can find out the culprit and their security deposits can be taken off. And the users also, because they are committing proof back on Ethereum. So if I had $1 million here and I see that there's fraud happening, I can using the proof because they're submitting periodic proof. I can go to a particular proof and say that, “Hey, I have $1 million of this I want to withdraw right away from here and I can withdraw from here.”

So this is what is exactly a rollup here. And why we call it rollup? Is like, now I'm going into a bit of technicality. Why it is called rollup is that this proof, cryptographic proof, I told you, what you do is that you submit two things. You submit proof, you submit the data here into Ethereum blockchain. You unify the data and you put it back on Ethereum. This is especially through for Optimistic rollups, zk-Rollups are slightly more complicated and why that's why they're superior also. But I'll come that come to that later on. So you submit proof and data both back on Ethereum. And this is why they're called rollup because if let's say at one point in time, you are able to find that somebody was a culprit, like some operator here, some operator here committed a fraud, then you detect him. And then once you detect him, then the chain, like some other people have to now to run the chain. So using the previous data and the proof, you can rollup the new chain. The same chain, you can roll it up completely from Ethereum itself because you have all the data, all the previous proofs, what you do is anybody from the community can come download all the proofs and the data, and then run this chain from there and say that, okay guys, that chain was either fraud, like I am not running this chain. So that's how the Layer 2 and rollups work. Yeah, if guys want

to go more deeper into what is Optimistic and what is zk-Rollup, I can explain, but yeah.

Rayhaneh Sharif-Askary: Oh, well maybe we'll come back to that 'cause I actually, this is great. I wanna step at back a little bit. And you're scaling Ethereum, Ethereum's undergo a major change. We had the merge. What are the implications of Ethereum moving from proof-of-work to proof-of-stake? How does that impact what you're doing?

Sandeep Nailwal: Yes, so for this particular merge that happens, that's very important to note that nothing on this chain, let me change the color. So nothing on this chain here, nothing, like the block space, anything, nothing changes there. No change. So actually for any anybody who's building, either on this layer or on top of Ethereum, they have zero impact of this. That's why you never saw any app saying that there was a change in this thing and all that. Now what change is how this chain was being run was, previously, it was being run by these proof-of-work miners, which were mining using the electricity and all that. This change to proof-of-stake Let's call it boxes, this change to proof of-

Rayhaneh Sharif-Askary: You're saying the consensus mechanism on the Layer 1 doesn't really impact at all what you guys are doing?

Sandeep Nailwal: No, no, no, no, no, no. This is consensus mechanism on itself. Like on the background consensus mechanism, I am saying the app layer or we call virtual machine. Where people are running the code, where apps are running the code. DEX is running and all that. That VM has no impact.

Let me try to draw it, like the diagram also. Ethereum diagram, you can draw it like this, that on this layer you might have like, let's say three layers. So you have this layer which is the VM layer, let me call it the VM layer or code layer, where the code actually executes. Where what you are doing like the apps, basically this layer has apps and all that, so virtual machine. Then you have, let's say, and this is a very simplistic diagram I'm trying to draw. So everybody understands. Then this is the consensus layer. Consensus layer is where people are doing this mining. So previously it was proof-of-stake mining. Oh, proof-of-work mining, previously. And then there's a networking layer, which is the P2P layer and all that.

So only this layer changed, which is basically, instead of people putting in electricity and mining these blocks, now you have to put the stake, which is nothing but the security deposit. And then you have cryptographic ways and socio-economic ways that to make sure that you still will produce the blocks properly and not kind of... And cannot cheat into the networks. Does that make some sense?

Rayhaneh Sharif-Askary: Yeah.

Sandeep Nailwal: So that's why like no impact on apps or anything built this layer and above, only impact was this layer, which was the consensus layer. That means the people who are running the blockchain.

Rayhaneh Sharif-Askary: Okay, so let's talk about the token. What is the role? Where does money fit in? How does it fit into everything that we are just talking about now?

Sandeep Nailwal: Yes, so again, let's go back to our simple diagram that this is Ethereum and this is, let's say Polygon chains, like multiple chains. Yeah, so there are multiple chains running on top of Ethereum. All these chains are proof-of-stake chains, even though they have less number of validators, like let's say on the Polygon's most popular chain, Polygon PoS is roughly 105 validators. So these people run proof-of-stake, and proof-of-stake is basically, that's where you need the token because these people are actually, if you see in purely economic sense, what is happening is these people stake the tokens in this chain, on this chain here. And they then get the responsibility or opportunity to validate transactions. These are called validators. They validate the transactions. So they get the opportunity to validate the transaction.

Why you get this opportunity? Why do you need the opportunity to validate transaction? Is because you get transaction fees. So you stake your tokens, proof-of-stake tokens, and you get transaction fees. And that's the fundamental simplest model of any proof-of-stake token. It is through with Ethereum, it is through with Polygon chain. So all Polygon chains are run by multiple validators, depends on how much that particular chain or app wants the security, how much security they're looking for. And then all of these chains are run by these proof-of-stake validators. And then like more and more transactions come into the network, more transaction fees is generated in the network. More people would want to run this validators by putting their stake and getting that transaction fees as yield.

So Matic token is a pure proof-of-stake token, which is used to stake in the network to earn transaction fees. But you have to do work to do transaction fees. That means you have to run a validator node, or if you are a passive community member and you hold Matic, you have to find a good validator and delegate to them so that they can make good blocks and you can earn transaction fees. That's the simplest model, all those like Vayo token, your question of Vayo token, all those kind of monetary premium, store of value, medium exchange, everything. Those are applicable to the Layer 1 chains. Layer 2 is pure like AWS. More people, more apps are demanding more computation power. That means more chains are being spawned off and more chains, and more apps means they are generating more transaction fees. That transaction fees is going to the proof-of-stake validators and that's in the purest form, that's the purpose of these proof-of-stake tokens.

Rayhaneh Sharif-Askary: So if you're gonna speak, if you were gonna kind of go out on the limb and try to compare this token to like a Bitcoin or a Litecoin, or something like that, how would you compare it to Bitcoin?

Sandeep Nailwal: Yeah, so Bitcoin like is completely, like this token actually, I mean there might be a lot of Bitcoin supporters in the audience. So, but as of today, being a crypto team or crypto community member and all that, like I fully respect this whole revolution was started by Bitcoin. And even though I do have those, like stock to flow model and all that, but I still feel that Bitcoin is stuck in the previous kind of era over there, like where Bitcoin, actually, if you see the Bitcoin blockchain, people are mining the blockchain. Every time they mine a block, they get some free coins, Some X Matic Coins or Bitcoins they get. And then those blocks they are producing, if people are making the payments.

And then this is kind of like, that's why it's very hard to understand and Bitcoin has become a very bad representative also of the crypto industry to the mainstream world because that's why like Jamie Dimon from JP Morgan recently said, or Goldman Sachs, I don't know yesterday only that, Bitcoin's kind of Ponzi scheme and all that because they don't understand this that you are saying that, okay, you are mining Bitcoins here. And then on this chain, these Bitcoins will bit transacted. So there is no real value being generate- like where the real value is coming? I don't understand, I don't subscribe to that view. And there are like lot of store or value, kind of gold comparisons. I kind of get them, but I'm more of the Web3 builder who wants to see the Web3 apps coming into the blockchain space where people actually are using some of these decentralized user-owned companies, user-owned the apps.

So there, for a Polygon proof-of-stake system or any proof-of-stake system, this will be true for Ethereum also, is that you have this chain and each chain, you have huge number of users who are actually users at - Oh, I got interrupt- the screen share also went away.

Rayhaneh Sharif-Askary: That's okay, you can speak to it.

Sandeep Nailwal: Yeah.

Rayhaneh Sharif-Askary - Yeah, and while you'll do that, again, everybody has different views around the tokens they think are the most important. I think from our perspective, there is gonna be 3, 5, 10 years from now, there's gonna be different tokens each with different types of use cases. And there's a place for Bitcoin, Ethereum, Polygon. So that's not really like one size fits all from our perspective.

Sandeep Nailwal: Yes, yes, yes, absolutely. And again, I'm saying that these are my views because I am building in one particular part of the industry where I feel that this is where the industry should go. And there might be some people with very legit comments and theories about why they think that it should go into the monetary and become a currency, and all that.

So yeah, but I'm explaining what Polygon does. So Polygon is very simple or any proof of like, when I'm explaining, I'm explaining every kind of proof-of-stake chain. And any proof-of-stake chain is, there are many number of users here and they are interacting with the blockchain. And they are interacting, not with the blockchain, but they're interacting with an app.

So for example, somebody is interacting with a Decentralized Twitter, let's say in coming time. And they are paying some sort of transaction fees. Doesn't matter if the user is paying like somebody, some people will say, why user will pay transaction fees here and all that? We can debate that user doesn't need to actually pay that, that can be paid by the app itself. But the user is interacting and the user would want to interact with this Decentralized Twitter.

Like, let's take a digression from there, like why decentralized apps, why dApps? Let's address this question also. And everybody in the audience, I would want to think, you know what? I would want them to think from the first principles. Imagine three years from now, four years from now, you have two Twitters, which is both have equal user experience. Both have network effects, like your friends are here and they're also both sides they have network, let's assume for a minute. And user experience are the same. The network effects are, or the network is also the same. Then as a user, you have these two Twitters, one Twitter can any time ban you, no matter how many followers you have, the President of America can get banned and all that. On the other side, you have this Twitter where you own your followers. You can anytime move from this UI to any other UI, which you feel like, and anything, any assets, any revenue you are getting, you are directly getting it from the users. Like if you are a content creator, you're getting in the revenue, you're getting directly from the end users to you. And nobody can ban you, you own your own destiny, which one you will choose if you go by the first principles?

And I think the answer would be very resoundingly through if these things happen, now we can debate, oh, this kind of system will never achieve network effects and all that. Those are other subjective debates. But I am saying objectively, if you had these two applications, one an app, and one a dApp, you would definitely 200% choose a decentralized application. So that's what the future we are betting at. We are saying that whether it's a game, whether it's kind of a social media, whether it's content creation or DeFi decentralized, like finance, all of these things will move into here. And then users would want to use these applications, and for that, users or somebody has to pay the transaction fees.

And that transaction fees, imagine, let me draw... This has the cumulative transaction fees are needed in this chain on a particular yield, let's say. Who gets this transaction fees? This is received by the proof-of-stake validators who have put in their Matic Token or the proof-of-stake token as the stake. And now they're earning this transaction fees. So imagine like the transaction fees is $100 million, roughly, like for example, Polygon PoS one single chain generated if you go by the daily Matic price, is generated somewhere between $25 to $50 million, but for a simplicity of calculation, let's assume the chain is generating $100 million in the transaction fees.

Then, how much these validators would be willing to stake the token. So if let's say assume 5% is a good rate of return in the market, then people would be willing to take $2 billion worth of their tokens to get this yield. And this is what I'm saying, I am talking about this as a intrinsic value or those P/E ratio, whatever you want to compare as a valuation model. And then the markets, might apply some speculative premium on that and all that. But this is how primarily, this whole proof-of-stake model works. People take X amount of token to get Y amount of transaction fees. And they will keep staking the token till the time the staking yield makes financial sense or economic sense.

Rayhaneh Sharif-Askary - So how do you think about, other similar projects or competitors to what you guys are doing?

Sandeep Nailwal: Yes, so yet everyone, let's say the other Layer 2 projects. So let's compare with because we are trying to build, as I said, that we are trying- this is the settlement layer, like Ethereum is the settlement layer and Polygon is trying to become this transaction layer with hundreds of these chains, which will include public chains as well as app chains. App chains means app specific chains. We can discuss that more. So, this is the Polygon's vision for this Web3, achieving 1 billion users, let's say, in the community.

So now we can compare that whether, when you're saying that let's do a competitive analysis, we can do at Layer 1 and we can do at Layer 2 because at the end, we are trying to become this transaction layer. Some of the Layer 1s are also trying to become transaction layer, so we can then debate. So for example, some of the other Layer 1s, I think two, three big examples that we have without taking the names, but, the biggest of one, the most popular of them has seen multiple times chain going down, developers like, this is uncontrolled report, but developers keep reporting that on the weekly basis, the chain is unusable for multiple hours. The reason for that is because you are trying to achieve the scale. Like, as we said, scalability trilemma, scalability, security, and decentralization, you can choose only two. They have chosen, scale and secure. They have chosen scale also here. I mean, you can choose for Ethereum it's this, but they chose scale and security. So definitely decentralization gets compromised. And then on the scale, also, when you have less decentralization, you are also more susceptive to DoS attacks and all that because you have few nodes in the network running and all that. So that becomes difficult.

So some of the Layer 1s, they're not be able to, some Layer 1s did it in a way where there is a base layer, but then, you have multiple layers around it as like kind of these sub-networks and all that. And they're also like, the same thing can be done on Ethereum itself. That's what Polygon is doing, that Ethereum is the main chain and then you have multiple Layer 2 solutions, much more decentralized, much more security and much more network effects. So that's why.

So on Layer 1, we've not seen many, kind of participants. There are more new participants coming in every day. So we don't see any participant, which has a long term sustainability as per our model. We can be completely again, wrong, take it with a pinch of salt, whatever. But in our mind, this thing. On the Layer 2, as I said, that Layer 2 is a multi-approach. Like there are multiple approaches on Layer 1, on Layer 2, or the secondary layer, there can be, these briefly connected commit chains.

But instead of that, let me show that as a spectrum. So if for Layer 2, this is Ethereum, and then you can have multiple solutions. Let's plot them on a spectrum where the leftmost part is least secured by Ethereum. That means no secured by Ethereum, no security provided by Ethereum and full security provided by Ethereum, security provided by Ethereum. So full security.

And you have solutions across the spectrum. So you will have a pure sovereign side chains here on this side of the spectrum. Then on the middle, you will come to Polygon PoS-type commit chains, which commit like certain part of their consensus and everything back to Ethereum. And then on this extreme, full security by Ethereum, you have Optimistic rollups, you have zk-Rollups and all that. So Polygon is present across the spectrum.

If you need a full blown sovereign side chain, you can have a Supernet. If you want to have a commit chain, like low cost, but more network effect kind of chain, then you can go to Polygon PoS. If you want to have a full security from Ethereum, you can choose Optimistic rollup, for example, which we have a privacy rollup called Nightfall, which we are building with Ernst & Young or you can have a zk-Rollup where we are the first ones to publish a full blown zkEVM already. Whereas we have three different solutions on this zk-Rollup project because we are very much focused on ZK.

Optimistic rollups, they have a lot of issue there, there's a major competitors on the Optimistic rollup site, for example, and there, the problem why they are called Optimistic rollups is, again, I will try to attempt in simplified way. They're called optimistic because in case of an optimistic rollup, you assume that everything is correct. And you put the data, the proof as well as the data of the transactions, everything back to Ethereum. And because there's an assumption, somebody needs to constantly check that whether the computation that was done was done correctly or not. If it is not done correctly, then people can challenge that. This process is called fraud proofs.

So that is why like the biggest criticism, for example, for Optimistic rollups is two. One is there is a 7-day deal withdrawal period. Like, if you take your assets into Optimistic rollup it takes seven days to bring them up. Why seven days? Because you need to give enough time to community that someone will come up with some sort of fraud proof or challenge with the fraud proof that something has been done wrong on this chain.

Second thing is because you need fraud proof, you need all the data, all the data of that transactions back on Ethereum. So for optimistic rollup, they have to submit all the data back on Ethereum, which means they are costly because Ethereum blocks space is costly. And it's kind of like, you sub minify a bit of data, but at the end, you're still submitting all the data back on Ethereum. Whereas on zk-Rollups, what happens is that zk-Rollups use the Zero-Knowledge technology where instead of fraud proofs, you use something called Validity Proofs.

And validity proof is this basically, the kind of the supremacy of the Zero-Knowledge cryptographic technology that here you only submit the validity proofs back on Ethereum. And then the ZK circuits here, when you submit the validity proof, if the proof is not good enough, then that proof will simply not be accepted. That proof will be rejected. So you can technically submit the proof every five minutes. And the moment the proof is submitted, Ethereum knows everything is correct. You don't even need to put the data back on Ethereum. You can put the data on off-chain data availability layer.

There also, we are building our own solution called Polygon Data Avail, where you can put your data on this Avail, which is very, very cheap and you submit only validity proof. So no delay period, no delay periods on delay on withdrawals, no delay. And then second thing is cheaper data because you don't have to put the data back on ZK. So that's why zk-Rollups are superior. And on there, on the ZK side, that's why we believe that we are superior than the Optimistic rollup providers. And secondly, on the zk-Rollup side also, we right now are leading the pack with the only team which has published a full blown zkEVM open source data and all that. Most of the teams are either not open source or they are very early in their stage of development. Plus all the, kind of network effects that we have on proof-of-stake chain. The moment we have this proof-of-stake chain available, or like zkEVM available, these network effects can quickly materialize on these other chains also.

Rayhaneh Sharif-Askary: So jumping around a little bit. I know, so you've talked about the different types of rollups, it sounds like you're focused on zk-Rollups. One of the questions actually that came in from the audience was why are you guys focused on these different types of rollups instead of just doing one? If you feel like addressing that.

Sandeep Nailwal: Sure, so...sorry you are saying why we have multiple rollups?

Rayhaneh Sharif-Askary: Yeah, instead of just focusing on one, this is one that came in, actually, and it just seemed like the right time to bring it up.

Sandeep Nailwal: No, perfect, perfect. This is a very valid question and let me... Okay, maybe screen share is not needed. So why multiple approaches on ZK? So, two primary reasons. One is that on the Zero-Knowledge technology, that technology is still very early stage. So you don't really know, in terms of like you know that this can be built this way, but you don't know that if this is the most efficient way of doing it.

So that's why, like, there are multiple teams and how it has helped with Polygon is for us is like these teams were having different constructions.

So in the community, there were multiple Zero-Knowledge teams who were building, trying to build zkEVM, because all of them took some sort of, because ZK technology was so early that many of them like, imagine there's a tree, they took some path which led them to some roadblock somewhere. Whereas because we had three teams working independently on their own separate approaches on this three, they could inform other teams that, okay, this efficiency we achieved, you can also achieve it in your structure. Or this is a roadblock here, don't go on on this particular route and all that. So that made our internal collaboration very, very effective due to which I think we have been able to this zkEVM, we actually started the last and we were able to make it because some of the efficiencies that were brought in by Polygon Zero team that helped in building this zkEVM. That's one reason.

The second reason is, so the first reason is basically, you still not a hundred percent sure that, is this approach the best or this approach the best? And since I told you that Polygon is present across the spectrum, we are not betting on one particular technology that this will be the successful. We are betting on this Layer 2 scaling that if 1 billion users have to come to blockchains, then you will need them on Layer 2. So whatever it takes, whatever technology it takes, we will have that technology for the end users to build the apps. Our end goal is not to build these flashy technologies and Air Castles, which look very nice, researchy stuff, but nobody uses them. We were, from very early days, we were very pragmatic about it, that we are here for Web3 adoption. Our mission is Web3 adoption, not building some Air Castle tech.

So we build pragmatic stuff which can be built today, which can be used today. So the second part I was saying is that, apart from this, like whether not only these approaches are perfectly fine, but on Layer 2, you can do a lot of custom stuff like on Layer 1 when you're building this base layer, ground floor.

So then you can't have too many things there, so you choose your basic set of tools. But on Layer 2, we are independent that we can provide where we are saying, there can be thousand chains, 500 chains can have this version or not version, but the flavor A and other 200 can have a flavor B which supports, let's say tools to give you concrete example, which supports more, kinda efficient programming languages on Layer 2. For example, like these days we keep hearing that Move programming language is good.

Nobody is stopping Polygon from supporting Move on one of our rollup flavors. So if you are a app chain team, you want to build your own thing, and you want to be on Move, feel free to have your own rollup where you have a Move chain. So that's why the defensibility of Polygon in terms of like, for a decentralized protocol business doesn't mean much, but defensibility of like this adaptability of Polygon is much higher in terms of that.

Rayhaneh Sharif-Askary: Right, makes sense.

Sandeep Nailwal: So, yeah, so we are looking to offer multiple things on this Layer 2. So our zkEVM is there, but other solutions, for example, we can actually offer a Layer 2, ZK or Layer 2 in next one or two years where you can run extremely computation intensive, let's say, machine learning models. I mean, two years is not, let's say five years. If there was a demand for that, or we could provide extremely efficient things where let's say somebody like Facebook or Twitter, or Snapchat, or somebody wants to run one single operator pull up, which only they operate, but they want to prove everything back on the public blockchain, where they want their end users to be confident that we are not doing anything, which is not communicated to the community. So things like that, like your newsfeed. So it gives us the flexibility to offer all of those things and we are already, our roadmap is not like next two years only. Our roadmap is like 10 years ahead. So we have Polygon ID solution, which not many people are working right now, but we believe that after the scalability sold, ID is the next big thing.

Privacy is the next big thing. So, the third solution that Polygon might end that is being rolled upon that has a full blown privacy roadmap later on with it. So these kind of things, we keep doing because there are a lot of things that needs to be put. If we want those 1 billion users to come in, you need privacy, you need dedicated chains, you need more efficiency and all that. So that's why multiple teams.

Rayhaneh Sharif-Askary: Then that makes sense. You've touched on demand, what are those drivers, what are the use cases? Like today, you've talked historically about, I think gaming, DeFi, what is that, what are you most excited about and how does that change, like you said, 3, 5, 10, 20 years down the line?

Sandeep Nailwal: Yeah, so when I talk about use cases, there are two kinds of use cases. So one is these crypto native use cases like DeFi and NFTs, and NFT-based stuff like, and all that. Then the other side is like, you're kind of coming up with new novel solutions. The other side is where there are existing products, which are in the Web2 world. And they see that the community engagement and everything is much better with the consumer-owned, let's say, assets and things like that. So they are adopting to some of these Web3 solutions. So on this second day, I can say, like, for example, Facebook Meta actually, had the...

Instagram has allowed now the NFTs, So Polygon is integrated over there. Similarly, Starbucks last week only announced that they're going to move their reward program and on the same day, they are also using Polygon. Then Stripe is there supporting USDC payments on Polygon, eBay, like, Adidas, like there's so many Adidas product, they did their NFTs.

So this second part of use cases is where you have existing things that have been sold, and then people are just trying to experiment and implement these Web3 cases. It's like basically shopping existed before eCommerce also. But with eCommerce you said that, okay, instead of doing this, you do it on your computer. Whereas like similar kind of these things like these, their loyalty points were completely opaque, walled gardens before.

What if we provide a loyalty point, which is an open garden, you can in future, like, I'm not saying this was started, but I feel that the way a lot of partner people are looking at loyalty points, eventually these loyalty points might become open gardens for everyone. Like if I have Starbucks point, can I swap them with a Emirates business class point and all that. So these are the business really.

There are crypto native use cases and then there are mixture of these two, for example. Let's say I talked about Decentralized Twitter or Decentralized TikTok a lot of people are trying to build where obviously the reasons are instead of the platform consuming all the value or taking all the value, you have directly the content creator and the end user directly connected. And content creator has more say in it, the content creator with their followers can move away. Like imagine if you were a YouTuber, you invested five years of your life, got 1 million users and you said something about some powerful government somewhere, and they forced YouTube to ban you, suddenly you are jobless. So definitely by first principles, it feels like there would be these platforms where YouTube and Twitters and all that will be slightly more decentralized, plus user owned.

The most important thing is these are community-owned businesses. The community takes these in. That's why it's very fascinating where you go into DeFi and NFTs. Things like DeFi projects, small, small things when you need to change, the community works. It's not like one team running them, it's a community running them. So, these kind of use cases. I see gaming is becoming a very big use case, which is, again, kind of in the middle, there is existing gaming use case in the middle, but then you have like the game trying to have NFTs and more user generate content into that and use their own content to that.

Rayhaneh Sharif-Askary: Well, that sounds like, very broad and really interesting. And obviously, this isn't the most important use case perhaps, but I, for one, I'm very excited about composability between different types of loyalty points, you know, I’m a big, avid user of the Delta points myself. Okay, well, this is great. I think that's a good note to then just kind of, since we have to wrap up, transition to some of the questions that have come in. So we talked about that, we talked about...Can you talk about the difference between Polygon's delegation of proof-of-stake model and Ethereum's new proof-of-stake model? Where do you wanna speak to the benefits and the drawbacks of each?

Sandeep Nailwal: I think like there is not much difference between Polygon. Polygon is not delegated proof-of-stake. It's the same proof-of-stake like what Ethereum is. The parameters can be different, consensus mechanism can be different, but a lot of Polygon PoS chains or the Supernet chains, the app chains that are coming up, they all use IBFP, which is like, kind of Ethereum's family of proof-of-stake, this one.

But Ethereum is like much on a much larger sense because you have a beacon chain and then you have this, the execution chain, which is there. So that's very complicated, but that is built to be more decentralized, more open, more secure and all that. Whereas the Layer 2 consensus are not built to be extremely decentralized. They are built to be okay, decentralized, but as I explained in the diagrams also that the maximum security and decentralization is coming from Ethereum, not only on the decentralization of the Layer 2 itself. So yeah, that those are smaller differences, but otherwise it's a proof-of-stake like general proof-of-stake.

Rayhaneh Sharif-Askary: One more round. So, I saw sharding come up in a couple of these questions. Ethereum's efforts, continued efforts to scale like sharding, how does that affect your operations and the success of Polygon?

Sandeep Nailwal: Yeah, but for the previous question, like some more detail, that's why I'm trying to be as simplified as possible. But otherwise you want somebody whoever asked the question, they want you to understand more that, Polygon PoS uses the Tendermint consensus. So you can actually look at that more.

But yeah, so coming to this question, that...The sharding future, so as I said, that the currently the Ethereum much does not add any scalability. I think even Vitale has also said that they're more focus is to have this Ethereum chain very, very strong than probably have EIP-4844, which will allow more data to be put, like Layer 2 chains, which is actually a pure Layer 2 optimized system where you say that, okay, the data will be pushed on Ethereum chain and the execution can stay away on that. So some people say that Ethereum might simply have this roadmap where you have this chain and more data adding capabilities. And then the Layer 2 achieves the scalability. So that's one part.

The second part is, but let's assume because I think everybody ask this question. Let's assume Ethereum goes, comes up with full blown sharding on all these, and then the it's projected that there'll be 64 shards. So let's go assume that in five years, although that's going to be a much bigger effort than this merger also itself, but it's assumed that in 3 to 5 years, we achieve full blown sharding, and the sharding will have 64 chains, like the current chain. The current chain has a TPS of 13 transactions per second. So even if let's say Ethereum have 64 nodes, 64 shards, their net TPS will be still somewhere around 700, 800 TPS, Transactions Per Second, I'm saying. The bandwidth of the network, I'm saying.

Again, you can easily ask: is 700 or 800 transactions per second on these 64 shards enough for all the world's DeFi, NFT games to exist? I think the answer would be very easily, no. So the purpose I'm coming at is that if Ethereum this settlement layer and that layer which provides security to these secondary, tertiary layers, and Ethereum scalability roadmap is more built to be more scalable settlement layer, not transaction layer. Ethereum will still not be the transaction layer because the blocks time will be still 15 seconds and all that. It's not conducive for the end user interaction. So the goal is that this change will become, you are just talking about much more expanded or 64 times bigger the settlement layer, but the transaction layer, you are expecting to exist on the Layer 2. So that's why even if Ethereum comes with sharding, it does not affect Layer 2 projects like Polygon because they have a completely different user base.

Rayhaneh Sharif-Askary: Okay, well, listen, we're actually at time. Really excited about what you guys have accomplished today and what you have yet to accomplish. A couple of other, I think I got a few questions about how Polygon fits into Grayscale's products suite. Yes, we do have opportunities.

Please email us at info@grayscale.com, or if you have any other generic questions that you want us to pass along. Thank you so much, Sandeep for taking time to join me and all of us here today. And I hope everybody has a great rest of the day.

Sandeep Nailwal: Yeah, yeah. Thanks for having me here. It was my pleasure. I hope I did not bore people because I talked too much once I get into some of these ideas, so.

Rayhaneh Sharif-Askary: Not at all, I think people, I have to suspect, I'm sure we'll get feedback, but I'm sure people loved it. So thank you. All right, everyone.

Sandeep Nailwal: Thanks guys. Goodbye. - Bye.