In-depth Analysis of Polygon's Expansion Plan and Ecosystem Development Strategy
Polygon has always been one of the most active EVM-compatible chains in the market.Original Title: "Back to Basics: Analysis of Polygon"
Author: Newman Capital
Introduction
The L2 ecosystem of Ethereum has been rapidly growing over the past year. In this field, Polygon has particularly caught our attention. With its large developer and user base, continuous collaborations, and strategic acquisitions, it is an undeniable force in the L2 and zero-knowledge proof (ZK) ecosystem. This article will delve into its scaling solutions, ecosystem, valuation, and recent on-chain activities.
Polygon: The Blockchain Internet of Ethereum
Polygon is known as the blockchain internet of Ethereum, focusing on scaling Ethereum through ZK technology. It is currently developing seven scaling solutions, ranging from various ZK-rollups to sidechains and software development kits (SDKs) as infrastructure. Polygon's ecosystem boasts over 7,000 dApps spanning DeFi, GameFi, the metaverse, and NFTs.
Multiple Scaling Solutions
Polygon offers a variety of scaling solutions, each with its unique features, supporting a range of use cases based on user needs and their research, testing, and release timelines. Some products are already live, while others are still in testing/development. The following diagram illustrates the suite of scaling solutions and their focus areas.
Figure 1: Various Scaling Solutions of Polygon
Utility of MATIC Token
MATIC is the native token of Polygon, which has three main utilities within the Polygon ecosystem:
- Gas Payment: Transaction fees on the Polygon chain
- Governance: Voting on Polygon Improvement Proposals (PIPs) to determine the direction of Polygon
- Network Security: Staking MATIC to contribute to network security while earning rewards
Since Polygon's rebranding in February 2021, it is expected that Polygon will announce an update to its token redesign this year. The future token will be applicable to all Polygon products.
As of the writing of this article, approximately 9.7 billion MATIC tokens are in circulation, with 26% of the total supply staked. On August 2, 14% of the total supply (1.4 billion MATIC) was released from vesting contracts; among them, 640 million MATIC were claimed by Polygon's founders, who pledged to stake all tokens in the network. All token supply will be fully released by October this year.
Figure 2: MATIC Token Unlocking Timeline
Polygon's Ecosystem Development Strategy
Corporate Development Strategy: Corporate development is a key focus for expanding Polygon's multi-chain Ethereum world. These developments are not limited to Web3 companies but also include multinational corporations and enterprise groups from the traditional world. Notable partners include Disney, Wintermute, Outlier Ventures, The Graph, and Chainlink. Additionally, Polygon has been developing its NFT and gaming ecosystem and operates an internal investment fund.
Figure 3: Partnerships
Indian Cryptocurrency Community: As a unicorn based in India, Polygon has a strong influence in the Indian cryptocurrency space. The company has been actively hosting developer training, collaborating with top universities, and organizing hackathons to grow its developer talent pool and incubate startups.
Lack of Innovation: Some critics have pointed out a lack of innovation in Polygon, as Ethereum Virtual Machine (EVM) compatible chains allow developers to easily replicate models from Ethereum to Polygon. For this reason, despite the large number of projects in the Polygon ecosystem, many are multi-chain projects on Ethereum.
Recent Developments
Polygon Studio: In the summer of 2021, the team launched Polygon Studio, an internal unit aimed at attracting existing gamers to participate in blockchain gaming. Since then, the team has onboarded over 100,000 gamers and 500+ applications, including major brands like The Sandbox, Decentraland, and OpenSea.
Mobile Integration: Polygon announced a partnership with Nothing Phone (1) to provide easy access to dApps, blockchain games, and payments through the Polygon network.
Funding: In February 2022, Polygon raised $450 million in a funding round led by Sequoia Capital India, Softbank, and Tiger Global.
Competitive Analysis: Piecing Together Data
Daily New Unique User Addresses: Polygon has been one of the most active EVM-compatible chains in the market. According to The Block, during most days in the first half of August 2022, Polygon maintained around 400,000 new unique user addresses on a 7-day average, the highest among major competitors like BNB Chain. During the same period, Polygon's performance in this metric also surpassed other major L2s; its daily new unique user addresses were 168 times and 167 times that of Arbitrum and Optimism, respectively.
Figure 4: Daily New Unique User Addresses of EVM-Compatible Chains
Transaction Volume: Data also shows that Polygon's transaction volume has significantly outpaced Ethereum over the past year. A report from Nansen indicated that in Q3 2022, Polygon's transaction volume was over 700% higher than Ethereum's. Although transaction volume has gradually decreased, it has remained consistently 200-300% higher than Ethereum's even today. On the other hand, during the same period, Polygon's transaction volume was 30 times and 23 times that of Optimism and Arbitrum, respectively.
Figure 5: Transaction Volume of EVM-Compatible Chains
Total Value Locked (TVL): Polygon's TVL stands at $1.91 billion, effectively capturing the value of L2, second only to Ethereum and BNB Chain. Polygon's PoS chain dominates in terms of scaling, but its presence in the ZK-rollup space is weak, holding only 0.05% market share.
Figure 6: Total Value Locked of EVM-Compatible Chains and L2 Chains
Figure 7: Total Value Locked of ZK-Rollups Chains
Valuation: In our research, we compared key valuation metrics of leading L2 companies and found that Polygon outperformed its peers in several aspects, including market capitalization, revenue, and price-to-sales (P/S) ratio. As of August 18, Polygon's fully diluted valuation (FDV) is 1.55 times that of its primary competitor, Optimism. Additionally, Polygon's annualized revenue is equivalent to the combined total of Arbitrum and Optimism, with Polygon and Loopring's P/S ratios being 529.84 and 231.99, respectively, indicating that investors believe Polygon's value is approximately three times that of Loopring when generating the same amount of revenue.
Figure 8: Valuation of L2 Chains
Pricing Analysis: Our research indicates that since July 2019, the price correlation between MATIC and ETH has been very high. The only exception was in Q1 2022, when MATIC's price surged by 200% due to its launch. Major catalysts for the Polygon ecosystem include product releases, updates, acquisitions, and partnerships, while negative catalysts include overall market downturns and technical issues. (Note: In March 2022, Polygon encountered technical issues, resulting in no new blocks being produced for 11 hours).
Figure 9: Price Correlation between MATIC and ETH
Conclusion
Polygon is positioned as the "Swiss Army Knife" of Ethereum scaling solutions, and we see promising valuations, solid on-chain data, and corporate development strategies from it. Through its comprehensive rollup scaling solutions, whether users seeking faster transaction speeds, enterprises looking for privacy, or developers in search of scaling solutions, Polygon's offerings can provide something for everyone. In the current landscape of the secondary market, it is still too early to determine who will emerge as the leader, but what is fairly certain is that with Polygon's aggressive expansion and growth strategy, it can maintain its current position as long as it continues to attract projects to its platform.
