Polygon (MATIC) - A Potential Multibagger Coin (1.5x in 1.5 months!!)

*Disclaimer: I am an independent investor, not a financial advisor, and all information presented in this article are merely my opinions and are not meant to be construed as portfolio recommendation. Like I said in my previous article, I don't view crypto investments as a short-term bet to lock in quick profits. It is a long-term play on the decentralisation of the digital world, and it is best to DYODD before investing in cryptocurrencies.

**This article was written on 12 June 2021 when MATIC was trading at ~$1.20 and this will not be updated going forward.

Hi there!

Since my previous Opinion piece on investing in ETH, a few of y'all have initiated discussions with me on my views on Polygon, and I thought it would be best for me to pen my thoughts down in this article! I also realised that my previous article was more focused on my investment philosophy as opposed to why I was bullish on ETH last year, so before we dive right in, let's take a step back first and understand the primary value proposition of Ethereum.

Ethereum - An Open Internet

The Internet that we know of today is centralised and largely defined by dominant and oligopolistic entities that offer indispensable services in exchange for our personal data. Big Tech firms monitor our online presence and construct digital identities of each and every one of us. Leveraging on their knowledge of our individual taste and preferences, these corporations profit from advertising-based business models. In the end, as users of these platforms, we benefit from the convenience of online services at the expense of our own privacy.

But ever since the Cambridge Analytica scandal, it appears that 'digital wokeness' is gathering momentum and now, Internet users are increasingly motivated to regain autonomy over their personal data. This renders the eventual decentralisation of our Internet inevitable, and herein lies my perceived value proposition of Ethereum.

Ethereum is essentially a decentralised network that is powered by distributed ledger technology (DLT). Unlike Bitcoin, Ethereum is a programmable and Turing-complete blockchain such that smart contracts and decentralised applications (dapps) can be written and run constantly on the Ethereum network. This inherent decentralisation implies that there is no single entity that can govern anyone's online activity and there is no single point of failure in the network, thereby ensuring privacy and security. Gradually, monolithic tech giants that rely on cookies to monitor and keep track of our digital presence will lose market share (but not completely) to the likes of Ethereum and its cohort of Web3.0 disruptors.

Current Problems with Ethereum

However, with ~80% of the dapps market relying on Ethereum's network, certain problems have come to light:

1. Network congestion: Ethereum can only process ~15 transactions per second (tps), which is inadequate compared to Visa's 24000 tps.

2. The increased demand is also exerting upward pressure on transaction fees (gas fees).

3. Operating under the legacy Proof of Work (PoW) consensus mechanism, Ethereum currently consumes the energy equivalent to that of a medium-sized country.

In tackling the issues plaguing the Ethereum network, developers are working on an upgrade to Ethereum2.0 in order to:

1. Improve scalability on the network by sharding to create more chains that can handle more tps.

2. Move away from energy-intensive PoW to environmentally-friendly Proof of Stake (PoS). This allows the network to be ~99.95% more energy efficient.

However, most of these changes will likely take place next year. There are some short-term improvement initiatives such as the upcoming EIP-1559 in July to reduce transaction costs, but this won't be sufficient to tackle the root of the problem.

As such, while waiting for Ethereum2.0 in 2022, there are some Layer-2 solutions that can be implemented, the most notable one being Polygon :D

What is Polygon?

Polygon is commonly touted as Ethereum's Internet of Blockchains, and according to Mark Cuban, Polygon is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development.

As a Layer-2 network, Polygon sits on top of the Ethereum blockchain to provide faster and cheaper transactions, effectively neutralising the myriad of issues faced by Ethereum.

This is achieved by means of an additional layer called a sidechain that functions like a load balancer. In layman's terms, this sidechain runs parallel and concurrently with the existing blockchain technology to improve Ethereum's performance.

As a result, Polygon is able to solve the 3 main issues Ethereum faces:

1. Polygon is able to handle wayyy more transactions (~65000 tps)!

2. The gas fees are also much cheaper than that of Ethereum. Presently, you can use 0.001 MATIC for 100 transactions on the MATIC network, which is super cheap!! In contrast, one transaction costs at least $10 on the Ethereum network.

3. As we can see below, Polygon's PoS consensus mechanism is more energy efficient than the PoW mechanism currently utilised by Ethereum, and this is arguably the most salient quality given the heavy emphasis on ESG investments nowadays.

Personal Strategy

I've been buying MATIC since end April when it was $0.50 and my average cost works out to $0.80. At the current price level of $1.20, that's a 1.5x increase in 1.5 months! Given that MATIC already constitutes half of my portfolio, I don't intend to add anymore soon. The only MATIC I'm accruing right now will be from my rewards on AAVE, Curve and Sushi.

Risks

All investments come with risks, especially in the crypto world where many are speculating an impending crypto winter. There are also political risks, not just from the US, but also in India, where Polygon is based. This stems from the governments' fear of being unable to control and regulate the crypto industry effectively, and all this FUD has contributed to weak price action in recent times.

Still, Polygon has fared better than most cryptocurrencies, having gained a whopping 6,600% YTD! On May 19th, the top 100 cryptocurrencies by market cap were all in the red during the crypto market crash, except for Polygon! But this engenders further reservations regarding the potential upside left.

Looking Ahead

Perhaps the biggest elephant in the room is the apprehension that the eventual upgrade to ETH2.0 may render Polygon obsolete, and I share the same concern. After all, my investment thesis is based on Polygon resolving Ethereum's root issues before its upgrade, so will this caveat spell the end for Polygon's future?

Well, I honestly have no idea what the future holds given the rapidly shifting dynamics of the crypto world. In keeping up with the developments in Polygon, I chanced upon an interview with the co-founder and COO of Polygon, Sandeep Nailwal, and here's a brief summary:

• ETH2.0 will be able to achieve up to 3200 tps, but the omnipresent demand will eventually increase proportionately, resulting in network congestion once again, thus requiring the need for L2 scalability (Polygon's network)

This concept is known as induced demand and I interpret it using this analogy: Traffic congestion on expressways during peak hours is an issue faced by many and the trivial solution presented is to build more lanes. Ostensibly, this motivates people without cars to buy cars and before long, traffic congestion will arise once again! Evidently, a confluence of strategies (ie Polygon) must be executed simultaneously to rectify this problem.

Conclusion

Before I end off, it is worth noting that this article is meant to provide a very brief overview of the Polygon network. For the sake of brevity, there are many other aspects I didn't expound on such as the Plasma framework, L2 rollups etc that you ought to familiarise yourself with before committing to an investment in Polygon.

With that being said, I hope you enjoyed reading my Opinion, although it's much longer than I expected! Let me know in the comments if you have any feedback, and if you would like to share your insights on the future of Polygon, don't hesitate to contact me on LinkedIn :)

Thanks for reading!! :D