Polygon Acquires Layer 2 Blockchain Hermez for $250 Million

Key Takeaways

  • Polygon is spending $250 million to acquire all HEZ tokens and rebrand the Hermez Layer 2 to Polygon Hermez.
  • Polygon Hermez will be a true Layer 2 Ethereum solution, with low fees and low latency.
  • As part of the deal, HEZ holders will be able to exchange their HEZ tokens with MATIC tokens through a migration contract.

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Polygon is acquiring Hermez Network in the first merger and acquisition deal involving two projects with tokens.

Hermez To Become Polygon Hermez

Formerly known as Matic network, Polygon has recently acquired Hermez Network, a ZK-Rollups-based Ethereum Layer 2 scaling solution. The acquisition features the first token merger in crypto history, as Hermez’s HEZ will be integrated into Polygon’s MATIC token.

Polygon is an Ethereum compatible blockchain whose purpose has been to relieve some of the traffic from Ethereum while reducing fees drastically. This design decision has brought a lot of attention to Polygon, with many DeFi projects migrating to Polygon. Yield farming, often seen as too expensive on Ethereum due to high gas fees, has also seen a renaissance on the scaling solution.

Hermez’s Layer 2 solution is based on zero-knowledge rollups, often abbreviated to ZK-Rollups. This technology allows it to process transactions faster and for almost no fees while still leveraging the main Ethereum chain’s security. The merger will see the project named “Polygon Hermez,” and Hermez’s 26 employees join Polygon.

This is a historic event for crypto as never before had a project acquired another project with a token and merged both. From now on, MATIC will be used to pay for transactions on Hermez. HEZ holders will be able to exchange their tokens at a 3.5MATIC/1HEZ ratio.

Around 250 million MATIC tokens will compensate HEZ holders, representing around 12.5% of Polygon’s treasury. With Hermez, Polygon acquires what is most conventionally thought of as a Layer 2 solution, one built on top of Ethereum rather than in parallel like the Polygon Commit Chain, a proof-of-stake blockchain.

Critics have noted that the acquisition can seem like Polygon buying themselves a true Layer 2 solution rather than building it themselves. On the other hand, Polygon has announced it is doubling down on its ZK-centric strategy by committing a further $1 billion from its treasury to developing the technology.

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Disclaimer: The author held ETH and several other cryptocurrencies at the time of writing.

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Polygon acquires Hermez Network for $250M, will merge native tokens

Layer-two protocol Polygon will be merging ZK-rollup project Hermez Network into its ecosystem for $250 million worth of MATIC tokens.

In a Friday announcement, Polygon said Hermez would become a part of the network’s suite of solutions under the name Polygon Hermez. The 26 people in the Hermez team as well as its tech and solutions — including work on an Ethereum Virtual Machine-compatible solution — will join the platform.

As part of the merger, holders of Hermez’s native HEZ will be able to exchange the tokens at a rate of 3.5:1 to Polygon’s MATIC tokens. Polygon said HEZ tokens would eventually be phased out at an unspecified date.

“We believe this is in a way a historical moment since this will be (to the best of our knowledge) the first full-blown merger of two blockchain networks,” said Polygon. “[Mergers and acquisitions] in the traditional tech world are an everyday thing. In blockchains, however, they are a new and very interesting concept.”

The merger with Hermez is part of Polygon’s expansion into zero-knowledge, or ZK, proofs. The project has committed $1 billion to ZK-based solutions and plans to continue to form partnerships to grow its suite of solutions.

As a ZK-rollup, Hermez uses zero-knowledge proofs to verify the correctness of a large batch of transactions. An outside ecosystem executes these transactions and generates proofs for them, which are then posted directly on the Ethereum blockchain. The system is aimed at saving block space — a standard transfer of Ether (ETH) might take just 100 bytes on the chain, while a transaction with Hermez would only be 10 bytes.

Related: Tether launches on Hermez rollup as Ethereum starts falling behind

Though the companies will remain separate entities, Keep Network and NuCypher announced in March they will integrate their data encryption and protection protocols into a new network called Keanu. Though the projects said they will form a decentralized autonomous organization, the development will be driven by two independent teams rather than a full merger.