At Bitcoin Market Journal, we invest in crypto tokens as if they were stocks. While there are important differences between the two, we analyze crypto “companies” like traditional companies, and diversify our investments with a mix of both. More on our approach here.
Key Takeaways:
- Polygon has seen impressive growth in user engagement, particularly in terms of Daily Active Users (DAU) – our favorite metric – and it remains the go-to platform for Web3 gaming developers.
- MATIC, the native token of Polygon, was one of the tokens alleged as a security by the SEC in their lawsuit against Kraken in 2023, which introduces higher regulatory risk for the project.
- Polygon PoS is losing market share to rollup solutions like Arbitrum and Base, which have surged in popularity since their launch.
Origin Story
The story of Polygon began in 2017, initially launched as the Matic Network by co-founders Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun. They saw that the Ethereum network was still slow and expensive, and started working on a solution.
Their solution was Plasma chains, which offload Ethereum transactions onto sidechains to improve throughput. Their innovative solution quickly gained traction, attracting both developers and users.
In February 2021, the Matic Network rebranded to Polygon Technology, expanding from a single layer-2 solution to a multi-chain ecosystem designed to connect and grow Ethereum-compatible blockchain networks.
The rebranding also introduced the Polygon SDK, which makes it easy to create Ethereum-compatible blockchains and scaling solutions. The Polygon team, in effect, created an “internet of blockchains” that all work with Ethereum.
Polygon quickly became the leading solution for making Ethereum faster and cheaper. However, new competitors like Arbitrum and Base soon entered the scene, and blew past Polygon in users and transactions.
Today, Polygon is still a major player in the space, though no longer the leader. Polygon provides a full suite of scaling solutions including ZK rollups, optimistic rollups, and more. It has also carved out a significant niche in Web3 gaming.
Key Fundamental Data
Daily Active Users (DAU): Polygon’s DAU has registered over 385% growth over the past year, mainly attributed to Web3 gaming, with the project recording over 1.42 million DAU throughout June and July 2024. Despite a recent dip in DAU, which is being attributed to the upcoming September 4 migration of the MATIC token to a new POL token, Polygon still holds a significant lead, including against the scaling solutions leader by TVL, Arbitrum, which has 476k DAU.
Fees and Revenues: Polygon generates revenue primarily through transaction fees on its network. The fees on Polygon are considerably lower compared to Ethereum, making them reasonable for users while ensuring the network's sustainability through a steady stream of transactions and usage. Polygon fees are burned, returned to validators, or maintained by the network. This has kept revenue somewhat low, while helping to grow the network.
Market Cap: MATIC, as of writing, boasts a market cap of $5.3 billion. This figure represents a notable drop of approximately 25% from a year ago. Despite this decrease, its market cap positions it as the largest scaling token by a significant margin, more than double that of its closest competitor, Arbitrum, which holds a market cap of $2.2 billion.
Market Analysis
Problem that it solves: Polygon builds technology that addresses the scalability issues faced by Ethereum. Its flagship product, the Polygon PoS chain, operates as a sidechain parallel to the Ethereum mainnet, offering faster transaction speeds and cheaper fees.
Customers: Polygon's customers are primarily Ethereum users seeking faster and cheaper transactions within the ecosystem. General trends in the cryptocurrency market suggest a predominantly male audience, often skewed towards younger, college-educated individuals.
Value creation: Users who adopt Polygon benefit from having the same experience as on Ethereum, but at lower costs and faster speeds.
Market structure: The Ethereum-scaling solutions space is still evolving, with newer projects like Arbitrum and Base dethroning Polygon, and establishing themselves as the clear leaders of the space by a significant TVL margin.
Market size: The potential market size of Ethereum scaling solutions is significant, as projects like Polygon stand to benefit from Ethereum’s growth. Polygon has also released a layer-2 solution that leverages zero-knowledge proofs, helping to secure its future if that becomes the standard of the scaling space.
Regulatory risks: Due to its size, Polygon faces a high risk of regulatory scrutiny. Additionally, the SEC has alleged that its token, MATIC, is a security.
Our analysts rated MATIC a 3 out of 5 for market analysis. Download the complete scorecard here.
Competitive Advantage
Technology/blockchain platform: MATIC runs on Polygon PoS, which was built from the ground up and launched in 2020.
Lead time advantage: Polygon had a strong head start and was once the clear leader in the Ethereum-scaling solution space. However, its lead time advantage has since evaporated, with Arbitrum and Base leading in terms of TVL.
Contacts and networks: Polygon’s contacts appear to be well-developed; the project has secured partnerships with well-known institutions such as Meta, Nike, and Mastercard, to name a few.
Our analysts rated MATIC a 4 out of 5 for competitive advantage. Download the complete scorecard here.
Management Team
Entrepreneurial team: Polygon was created by experienced Ethereum developers: Anurag Arjun, Jayanti Kanani, and Sandeep Nailwal. The team has decades of combined experience in software engineering, data science, business development, and blockchain technology.
Industry/technical experience: Given that some members of the team contributed to the development of Ethereum, and created one of the largest Ethereum scaling solutions, it's safe to say they have the necessary technical experience.
Integrity: The team hasn’t been entirely free from controversy. In January 2023, Polygon faced criticism for executing a hard fork with the approval of only 13 validators, raising questions about the project's decentralization. The team's integrity has also been questioned.
Our analysts rated MATIC a 3.5 out of 5 for the management team. Download the complete scorecard here.
Token Mechanics
Token required: MATIC powers Polygon; the token is used to pay network fees and secure the network.
Value added: MATIC is similar to most blockchain platforms' native tokens and doesn’t necessarily add a new type of value.
Decentralized: While Polygon allows users to create and discuss proposals, the project is still largely run by the team.
Token supply: Polygon has a capped max supply of 10 billion MATIC tokens.
Public exchange: MATIC is listed on public crypto exchanges, including Binance, Coinbase, and KuCoin.
MVP: Polygon has been up and running since its mainnet launch in 2020
Our analysts rated MATIC a 3.7 out of 5 for token mechanics. Download the complete scorecard here.
User Adoption
Technical Difficulty: Polygon is compatible with Ethereum, attracting users and developers by offering a familiar ecosystem with the added benefits of faster transactions and cheaper fees.
Halo Effect: Polygon enjoys a strong halo effect, backed by well-regarded investors such as Coinbase Ventures, Mark Cuban, and Peak XV Partners, who have collectively raised over $451 million for the project.
Buzz: Polygon generates significant buzz on social media, boasting an impressive following of over 2 million followers on Twitter.
Our analysts rated MATIC a 4.6 out of 5 for buzz. Download the complete scorecard here.
Potential Risks
Team: Polygon has a capable team with extensive experience in the industry. They have demonstrated their expertise by creating one of the largest scaling solutions for Ethereum and other innovative products. However, as mentioned, the team hasn’t been entirely free from controversy, which includes issues related to decentralization and pump-and-dump allegations.
Financial: Polygon has raised over $451 million in funding (though there’s no information on how much of that remains). It recently committed to allocating 1 billion of its native token, MATIC, to continue the development of the ecosystem. That said, we’d like to see these assets more diversified to reduce risks.
Regulatory: Polygon is highly susceptible to regulatory scrutiny, being one of the leaders in its niche. Additionally, the project was called out by the SEC in 2023, when the agency claimed its token, MATIC, is a security.
Smart Contract: Polygon has been previously hacked, due to a bug on its network. However, its smart contracts were audited in 2023 by the reputable security firm ChainSecurity. It also maintains a bug bounty program that offers up to $1 million for reporting bugs and vulnerabilities.
Traction: Polygon boasts a significant audience both on and off-chain. With over 1.4 million DAU and 2 million followers on social media, the project has shown it doesn’t have a problem attracting users.
Behavioral: Many users are investing in the project likely because of its proven experience in the industry and belief that it will continue to be central in solving Ethereum's scalability issues.
Our analysts rated MATIC a 2.6 out of 5 for risk (Note that for this section lower = better). Download the complete Risk Scorecard here.
Investor Takeaway
BULL CASE: Polygon has demonstrated its capability to scale Ethereum effectively, evidenced by its significant DAU growth, which has surged over 385% in the past year. This growth is largely attributed to Polygon’s strategic partnerships with leading developers, enhancing its ecosystem and user base.
Additionally, Polygon continues to strive to remain at the forefront of Ethereum scaling solutions. For instance, it recently launched its zkEVM (zero-knowledge Ethereum Virtual Machine) to capture the rapidly growing zk-rollup market, considered the gold standard for layer-2 solutions, due to its superior compatibility, scalability and security features.
BEAR CASE: Despite its accomplishments, Polygon faces several challenges. The SEC has alleged MATIC is a security, which could lead to stringent regulatory scrutiny and potential legal hurdles.
Additionally, the Ethereum Layer 2 space is highly competitive, with newer projects like Arbitrum and Base gaining substantial market share. This intense competition and regulatory pressure could potentially hinder Polygon’s growth and market position.
Overall, our analysts rated MATIC a 3.8 out of 5 for its strong foundation and innovative product features that position it well for future growth. However, it must navigate the competitive and regulatory landscape carefully. Download the complete scorecard here.
This analysis is to help make you a better-informed investor; it is not financial advice. The future may look different than the past. All investing involves risk; see our investing approach for how we manage risk through diversification. Never invest more than you’re willing to lose, and see losses as learning.
