Token of the Month

Let’s take a closer look at Polygon!

Disclaimer: All investment strategies and investments involve risk of loss. Nothing contained in this post should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit. The data collected for this publication was gathered during the month of April 2021.

Ticker: MATIC

Market Cap: $9B

Price: $1.60

YTD Return: 8700%

Key Takeaways

  • Near term growth will continue to be driven by Polygon’s ability to attract popular DeFi protocols onto its platform as well as, incentivize users to pool their capital onto the Polygon network.
  • Its suite of scaling solutions makes the Polygon network “sticky” for projects.
  • EIP-1559 could be just as bullish for Polygon as it is for Ethereum.

Brief Overview

Polygon, formerly known as Matic Network, is an all in one scaling platform helping to solve network congestion problems on the Ethereum blockchain. Polygon offers Ethereum developers a suite of tools in order to build decentralized and scalable applications. Since Polygon is EVM compatible, Ethereum developers can easily transfer their application onto Polygon as well. Currently, Polygon enables developers to scale their Ethereum application via two side chain solutions: Proof-of-Stake (PoS) Commit Chain or its More Viable Plasma (MoreVP) Scaling Solution. However, Polygon also plans to roll out several Layer 2 scaling solutions such as Zk Rollups, Optimistic Rollups, Stand-Alone Chains and Shared Security Chains in the near future. Polygon makes checkpoints on Ethereum to inherit some of its security. Its native token, MATIC, is primarily used to pay for fees and gas on the network and can be staked by participants in the network.

Recent Success

Although Polygon is just one of just many scaling solutions hoping to ameliorate Ethereum’s congestion problems, Polygon has been the most successful to date. Its PoS blockchain has already attracted over 80 Ethereum Dapps onto the Polygon network. Since its rebrand from Matic Network to Polygon in February the platform has already garnered a total of $4.9B in total value locked (TVL). Likewise, the scaling solution has attracted several of the largest blue chip DeFi projects from Ethereum such as; Sushiswap, Curve and Aave. With over 3M in daily transaction volumes, investors have been cognizant of the platform’s success, bidding up the token over 5000% YTD.

Investment Thesis

Polygon’s rapid rise to dominate market share in the Ethereum scaling space has and will continue to be driven by the scaling solutions ability to attract popular Ethereum based projects onto its platform, while also incentivizing user adoption. To give a few examples of Polygon’s recent success, the scaling solution has rolled out successful liquidity mining campaigns across several of the most popular Ethereum based DeFi protocols. Its $5M liquidity mining campaign on Curve Polygon has incentivized investors to pool over $350M of TVL onto the platform in just under a month. Polygon’s most recent liquidity mining campaign on Sushiswap, which has been live for just over a week, has seen its $30M campaign attract over $400M onto Sushiswap Polygon. Finally, its most successful campaign, which offered $40M in liquidity mining rewards to Aave Polygon users, has seen over $4B in TVL pooled on its platform in just over a month of the campaign’s launch. Polygon should continue to be able to replicate its prior success as its recent launch of its $150M ecosystem fund is designed to continue to attract both projects and capital onto the network.

It is important to note another key part of Polygon’s success is not just its ability to attract capital, but the underlying tokenomics that helps capture this value. It should not be understated that Polygon, like most successful Layer 1 platforms and unlike some of its competitors, uses its native token, MATIC, in order to pay gas and platform fees. This causes there to be a natural bid (demand) for MATIC tokens as users need to own MATIC in order to transact over the Polygon network.

Polygon has not only captured a kind of first mover advantage by front running some of the most anticipated Ethereum scaling solutions to their main-net releases such as Optimism, Arbitrum and OMGX (Omesigo’s new scaling network), but the TVL on Polygon’s platform will also most likely remain “sticky”. In other words, a feature that makes Polygon extremely unique from the rest of Ethereum’s other scaling platforms is that, in essence, it’s a general purpose scaling platform enabling the Polygon network to support all the scaling solutions being rolled out by its competitors, in addition, to its current ability to support PoS Commit Chains and MoreVP. This characteristic incentivizes projects to both build and remain on the Polygon network as projects can adapt their method of scaling all on one network.

A notable upcoming catalyst that could continue to propel Polygon’s success is the release EIP-1559. Although EIP-1559 has successfully propagated the narrative that Ethereum will now be a store of value amongst crypto investors, there is a concern that Ethereum’s network congestion will negate the impact of EIP-1559 effect on Ethereum’s fee level post launch. If this happens to be the case, then Polygon may then be utilized as the primary “transaction layer” on top of Ethereum until Ethereum 2.0 is fully released.

Polygon’s ability to attract popular DeFi protocols as well as, incentivize users to pool their capital onto its platform will be the primary driver of Polygon’s growth for the remainder of the year. MATIC’s role in the Polygon ecosystem, similar to the way most Layer 1 blockchains use their native token, to pay for transaction fees and gas, is an important part of Polygon’s value capture as it creates a natural bid for MATIC. Several catalysts in the near future could also act as a unique driver of growth for Polygon. Its upcoming rollout of its support of various scaling solutions could cause both TVL and projects to be “sticky” on the Polygon network. Finally, EIP-1559 could be much of a bullish catalyst for Polygon as it is for Ethereum, as there is a worry that gas fees could continue to remain at high levels after EIP-1559’s rollout potentially rendering Polygon the primary “transaction layer” on top of Ethereum.

-Edward Puccio, Analyst BKCoin Capital LP

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BKCoin Capital LP is a New York-based digital asset quant hedge fund dedicated to delivering consistent uncorrelated absolute returns.

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BKCoin Capital LP

BKCoin Capital LP is a New York-based digital asset quant hedge fund dedicated to delivering consistent uncorrelated absolute returns.