Summary This week, Polygon launched its new zkEVM chain. This new chain enables smart contract migration from Ethereum to Polygon more seamlessly. So far, the chain has just $1.5 million in deposits and a little over 5 thousand unique users. Activity lags the recently launched zkEVM competitor zkSync Era. Polygon zkEVM brings slightly different token economics than the PoS chain as ETH is the gas fee currency rather than MATIC. It's been a big couple of weeks for the Ethereum ( ETH-USD ) ecosystem. In addition to Arbitrum ( ARB-USD ) airdropping roughly 13% of a new governance token to network participants last Thursday, the developers at Polygon ( MATIC-USD ) launched a new zkEVM chain earlier this week. zkEVM stands for "Zero Knowledge Ethereum Virtual Machine" and it could be a significant product for crypto developers. In this article, we'll explore what this new zkEVM will enable, compare post-launch activity to a similar peer, and address the possible impact on Polygon's MATIC token. What is zkEVM? Simply put, zkEVM chains offer another technological method for scaling Ethereum's base layer through secondary layers. There are several different ways Ethereum L2 chains have attacked the scalability problem. Those approaches include Plasma, Optimistic Rollups, and zkRollups. While each approach has different technical specifications, one of the core elements important to a rollup is that not every piece of information in a transaction is communicated on-chain. This allows for faster transactions, added privacy, and a much larger throughput capacity among other improvements. Alex Gluchowski is the founder of Matter Labs, the core developer of zkSync. Gluchowski previously published this table comparing some of the key differences between the scaling approaches: As of 2/18/21 (Matter Labs/Alex Gluchowski) According to this table, there appears to be a reasonable expectation that zkRollups have more advantages than alternative chain structures if they can be implemented properly. Though it should be noted this graphic comes from the founder of a chain developer that, now like Polygon, offers an Ethereum scaling chain that utilizes zkRollups. The biggest element that has been missing from the leading zkRollup chains like zkSync Lite or StarkNet to this point is EVM compatibility. That's what the zkEVM chains now bring to the equation. This is important because the zkEVM chain will allow EVM developers to migrate any applications they've built on Ethereum natively to zkEVM chains seamlessly and enjoy the benefits of the scalability enhancements. zkEVMs have been in development for a while and there are several teams that have been working on this technology. As fate would have it, a lot of these zkEVM chains are going live at the same time. In recent weeks, we've seen the launches of Polygon zkEVM, zkSync Era, and Scroll testnet. Early Network Indications It's important to keep in mind that Polygon's zkEVM is a new chain that works differently than Polygon's main proof of stake chain. As such, any assessment of network adoption of the zkEVM is a very small sample size and these are developments that investors in both ETH and MATIC should keep an eye on over time. Unique Users (Dune Analytics/Marcov) After roughly 3 days, Polygon's zkEVM chain has seen a little over 5.2k depositors and just $1.5 million in deposits. The overwhelming majority of which has been ETH: Token Amount TXS ETH $1.3m 5.4k USDC $125.4k 54.0 MATIC $72.8k 27.0 USDT $26.3k 46.0 DAI $193.7 7.0 Source: Dune Analytics/Marcov This level of activity is dramatically less than what has been observed on zkSync Era, which has gone from essentially nothing to over $69 million in just 1 week: zkSync Era TVL (L2 Beat) The kneejerk reaction here could be that zkSync Era is simply a better chain than Polygon zkEVM. But I think there is more to it than that. For one thing, we're still fresh off the Arbitrum token airdrop from last week and there has been rampant speculation online that zkSync will be one of the next chains to do an airdop. This is something that Alex Gluchowski has already thrown cold water on according to CoinDesk. But even the small prospect of an airdrop could conceivably juice activity from speculators. That element is missing from Polygon's zkEVM because Polygon already has a native token on its PoS chain. And this brings us to the MATIC token impact of the Polygon zkEVM. zkEVM Token Impact One of the key distinctions Polygon bulls should consider is the fact that MATIC is not the gas token of Polygon's zkEVM, ETH is now the gas token on that chain. However, MATIC will still be required for staking validation of the zkEVM. But this is a fundamental shift in the utility of the MATIC token that admittedly could make MATIC much less interesting as an investment idea if you don't plan to stake either through validation or delegation. However, it's important to note that this does not change MATIC's utility as gas on Polygon's PoS chain. But if developers do choose the Polygon zkEVM over the original Polygon chain, MATIC would transition into more of a staking token than the multi-faceted utility token that it currently is. And that would be something that long term MATIC bulls like myself would have to consider in our own assessments of whether MATIC has a place in a crypto portfolio or not. Summary While the action on Polygon's zkEVM chain has been admittedly slow, the PoS chain continues to make blocks and generate fees. Daily active users of the PoS chain have remained high in the 325-350k area on a regular basis going back to October 2022. Polygon (Token Terminal) Polygon is building out an impressive ecosystem on top of Ethereum. This new zkEVM chain is exciting but does potentially have a tokenomic drawback from the new transaction fee model. While the MATIC token is still necessary for gas on the original chain, its utility on the new rollup chain theoretically lessens the organic bid for MATIC as transactions scale over time. I personally haven't sold any MATIC and maintain that it will be one of the best performing cryptocurrencies of 2023. But crypto investors should consider the competitive landscape in the L2 market when allocating portfolios.
