WisdomTree US Quality Dividend Growth UCITS ETF – EUR Hedged Acc (WDGE ETF) försöker spåra WisdomTree US Quality Dividend Growth (EUR Hedged)-index. WisdomTree US Quality Dividend Growth (EUR Hedged)-index spårar utdelningsbetalande amerikanska aktier med tillväxtegenskaper. Aktierna som ingår filtreras enligt ESG-kriterier (miljö, social och bolagsstyrning). Indexet är ett fundamentalt viktat index. Valutasäkrad till euro (EUR).

Denna börshandlade fond har en TER (total cost ratio) som uppgår till 0,35 % p.a. WisdomTree US Quality Dividend Growth UCITS ETF – EUR Hedged Acc är den enda ETF som följer WisdomTree US Quality Dividend Growth (EUR Hedged) index. ETFen replikerar det underliggande indexets prestanda genom samplingsteknik (köper ett urval av de mest relevanta indexbeståndsdelarna). Utdelningarna i ETFen ackumuleras och återinvesteras i den börshandlade fonden.

WisdomTree US Quality Dividend Growth UCITS ETF – EUR Hedged Acc är en mycket liten ETF med tillgångar på 0 miljoner GBP under förvaltning. ETF lanserades den 31 juli 2023 och har sin hemvist i Irland.

WisdomTree US Quality Dividend Growth UCITS ETF – EUR Hedged Acc

Fonden strävar efter att spåra pris- och avkastningsutvecklingen, före avgifter och utgifter, för WisdomTree U.S. Quality Dividend Growth UCITS Index. Andelsklassen strävar efter att leverera exponering mot indexet samtidigt som den neutraliserar exponeringen mot fluktuationer i euron genom att implementera en valutasäkringsmetod.

Varför investera?

• Få tillgång till högkvalitativa, utdelningsväxande företag från globala utvecklade marknader som uppfyller WisdomTrees ESG-kriterier (miljö, social och styrning)

• Dra nytta av riskscreening för att utesluta företag baserat på egenutvecklade kvalitet och momentum

• Direktavkastning och inkomstpotential kan vara högre än ett börsvärdesindex

• Används som ett komplement till globala högavkastande utdelningsstrategier eller som en ersättning för aktiva tillväxt- eller kvalitetsstrategier med stora bolag

• Valutavolatiliteten minimeras genom användning av valutaterminskontrakt

• ETFen är fysiskt uppbackad och UCITS-kompatibel

Potentiella risker?

• Utdelningsviktade index kan prestera annorlunda än ett börsvärdevägt index

• En investering i aktier kan uppleva hög volatilitet och bör betraktas som en långsiktig investering

• Direktavkastning och inkomstpotential kan vara högre än ett börsvärdesindex

• Investeringsrisken kan vara koncentrerad till specifika sektorer, länder, företag eller valutor

• Avkastningen av valutaterminskontrakten, som rullas på månadsbasis, är utformade för att minimera valutafluktuationer men kanske inte perfekt kompenserar de faktiska fluktuationerna.

Denna lista täcker inte alla risker – ytterligare risker beskrivs i KIID och prospekt

Handla WDGE ETF

WisdomTree US Quality Dividend Growth UCITS ETF – EUR Hedged Acc (WDGE ETF) är en europeisk börshandlad fond. Denna fond handlas på flera olika börser, till exempel Deutsche Boerse Xetra och Borsa Italiana. Av den anledningen förekommer olika kortnamn på samma börshandlade fond.

Det betyder att det går att handla andelar i denna ETF genom de flesta svenska banker och Internetmäklare, till exempel DEGIRO, Nordnet, Aktieinvest och Avanza.

Börsnoteringar

Börs	Valuta	Kortnamn
Borsa Italiana	EUR	DGRE
XETRA	EUR	WDGE

Största innehav

Namn	Kortnamn	Land	Vikt %
1. Microsoft Corp	MSFT US	US	8.49%
2. Apple Inc	AAPL UQ	US	6.12%
3. Johnson & Johnson	JNJ UN	US	3.98%
4. Broadcom Inc	AVGO US	US	3.57%
5. Procter & Gamble Co/The	PG US	US	3.16%
6. Home Depot Inc	HD UN	US	2.78%
7. Coca-Cola Co/The	KO UN	US	2.54%
8. Merck & Co Inc/NJ	MRK UN	US	2.50%
9. Cisco Systems Inc	CSCO UQ	US	2.34%
10. Walmart Inc	WMT US	US	2.24%

Innehav kan komma att förändras

Markets flourished in November. The total crypto market cap increased by ~13%, month-over-month, with increased institutional interest in this burgeoning asset class. Stocks also had a comeback last month, with S&P 500 and Nasdaq recording their best performance since July 2022. In line with the market sentiment, Europe’s inflation dropped more than expected to 2.4% in November, down from 2.9% in October, the lowest over two years. The cost of living has eased with plummeting energy prices, but higher interest rates limit the economy’s ability to grow. However, with a cooling inflation towards the ECB’s 2% target, markets are hopeful that interest rates will stop by April 2024. In the U.S., inflation data is coming out on December 12, with indicators like the personal consumption expenditures price index (+0.2% month-over-month) already pointing towards cooling inflation and potential interest rate cuts in 2024.

Ahead of the historically calm holiday season, Bitcoin and Ethereum increased by 9.31% and 13.38% in November, respectively, as shown in Figure 1. The biggest winners of last month were Solana (+69.28%), Avalanche (+86.72%), and Uniswap (+42.34%). Additionally, in this report, we’ll explore what Argentina’s new president could mean for South America’s troubled, second-largest economy. We’ll also discuss Bitcoin’s expanding utility and how it reflects on its fundamental metrics; exchanges looking at Polygon for deploying their own custom blockchain; Avalanche aiming to position itself as the platform for financial institutions; and Lido decentralizing its node-infrastructure operations.

Figure 1: Price and TVL Development of Major Crypto Sectors in November 2023

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Source: 21shares, CoinGecko, DeFi Llama. Data as of November 30, 2023.

5 Trends to Remember from November

Argentina’s New President

Bitcoin rallied back to pass the $37K mark as Argentina elected a pro-Bitcoin, right-wing president, Javier Milei. Although the president-elect made no promise to make Bitcoin a legal tender, the volumes indicate some hope that Milei’s appointment could mean economic revitalization for South America’s second-largest economy with the help of Bitcoin, a la El Salvador. El Salvador’s GDP is expected to reach $33.4B by the end of 2023, a ~20% increase from when it declared Bitcoin as a legal tender in 2021. With an inflation rate exceeding 140% in 2023, Argentina’s GDP growth has been sluggish, averaging 0.51% from 1993 until 2023, as shown in Figure 2.

“The central bank is a scam. What Bitcoin represents is the return of money to its original creator, the private sector,” Argentina’s president-elect said as part of his presidential campaign, vowing to shut down the central bank, replacing the Argentine peso with the US dollar, and embracing decentralized finance. Samson Mow, CEO of JAN3 (a startup scaling Bitcoin) and an advisor to El Salvador during its adoption of Bitcoin, has said he’s planning to meet with Argentina’s new president. Indicators of whether Milei’s plan will work in Argentina’s favor are yet to be discovered.

Figure 2: Argentina’s GDP Growth Rate

Source: Trading Economics

Bitcoin Fees Skyrocket While the Network Expands its Utility

Bitcoin’s fees have increased by 593.94% over the past month, mostly driven by Ordinals, a protocol that allows users to inscribe digital assets akin to nonfungible tokens. Ordinals have had the most inscriptions since May 2023, as shown in Figure 3. With the backdrop of Ordinals’ success rate, Bitcoin developer Robin Linus introduced BitStream, a decentralized file hosting on Bitcoin, where users can upload unique files, enabling anyone to monetize their excess bandwidth and data storage capacities without relying on trust or heavy-weight cryptography. BitStream’s pay-to-download approach allows the server to charge for each download, ensuring that the revenue scales with the popularity and demand for the media, creating a balanced and profitable ecosystem. This development is another expansion of Bitcoin’s burgeoning use cases and would onboard a diversified audience. With BitStream’s promise, Bitcoin can capture the total addressable market of data storage, which stands at at least $230B. Although BitStream’s pricing scheme is not clear yet, decentralized data storage solutions, like Filecoin and Arweave, have been proven to be a lot cheaper than Google Cloud, Amazon S3, and its other centralized peers, varying by usage, as showcased extensively in the tenth issue of our State of Crypto, which you can find here.

Figure 3: Fees from Ordinals and non-Ordinals (%)

Source: 21.co on Dune Analytics

Exchanges Looking at Polygon for Deploying their Own Custom Blockchain

Kraken and OKX are strategically eyeing the Polygon network, aiming to capitalize on its CDK framework for constructing their individual blockchains. This strategic move aligns with Coinbase Base’s remarkable success, amassing approximately $5.4M in profit since inception, translating to an annualized profit of around $20 million. Boasting 9M and 50M monthly users, respectively, Kraken and OKX processed a daily average of ~$1B in 2023 and would potentially foster substantial growth within the on-chain ecosystem. Both moves would contribute to Ethereum’s revenue via anchored networks paying security costs to settle their transactions. Additionally, leveraging CDK modules proves advantageous for Polygon, empowering network stakers to bond POL and enhance earnings amid escalating network usage — a positive demand loop for the POL token within the new Polygon 2.0 staking layer design. Notably, Polygon’s efforts to onboard diverse companies are gaining traction, surpassing BNB and Ethereum in supporting new applications (Figure 4).

Figure 4: Total number of new applications on the five leading Smart-Contract Platforms

Source: Artemis

Avalanche Aiming to Position themselves as the Platform for Financial Institutions

For instance, Citibank and Fidelity unveiled a foreign FX exchange solution operating on a private permissioned Avalanche Subnet to enable instantaneous settlement and cost-effectiveness. Further, JP Morgan and Apollo Global collaborated on an asset-agnostic portfolio management solution. The latter empowers fund managers to tokenize portfolios using JP Morgan’s ONYX and the Oasis Pro asset-issuing platform while leveraging multiple crypto interoperability protocols to seamlessly exchange and rebalance portfolios across various blockchains, bridging EVM and non-EVM, private and public chains.

The experiment demonstrated the power of smart contracts in automating over +3000 operational steps and reduced costs by almost 20% via programmatic settlement despite involving multiple parties in the asset management process. The experiment also demonstrated the benefits of interoperability, providing a holistic solution for managing traditional and alternative assets in a single discretionary portfolio spanning multiple asset classes.

Both initiatives underscore Avalanche’s unique value proposition, positioning it as a standout choice among smart contract platforms. The Evergreen subnets, designed for compliance with KYC and AML checks, offer native privacy and customizability, providing enterprise-level blockchain support without the constraints of a siloed private blockchain system. The model also facilitates a pioneering connection between traditional finance’s proprietary software and native crypto railways, potentially fostering synergies and accelerating ecosystem integration. Ultimately, despite the initial surge in Avalanche’s transaction volume following these integrations, reaching its peak since inception, as illustrated in Figure 5, the network activity sharply declined after that. This underscores the imperative for the network to intensify its initiatives in onboarding high-demand projects as subnets.

Figure 5: Total number of transactions on the Avalanche Network

Source: Subnets.avax.network

Lido is Decentralizing its Node-Infrastructure Operations

Lido DAO, the largest non-custodial staking provider, approved two proposals to adopt Distributed Validation Technology. DVT refers to a mechanism spreading out key management and signing responsibilities across multiple parties to reduce single points of failure and increase validator resiliency. That said, Lido will integrate DVT modules with Obol and SSV protocols, which is set to introduce a more diverse profile of node operators beyond its current list of 38 validators and help address a key concern around centralization. This is a key development as Lido stirred a debate since it’s close to accounting for a third of staked ETH (see Figure 6); it could have undesired influence over the network’s validation process and block production. This implementation is crucial to ensure the diversification of the protocol’s node operators and increase their reliability in case of validator failures or censorship attempts. Conversely, SSV and Obol networks represent new primitives, so they must remain vigilant regarding any unforeseen vulnerabilities they could introduce.

Figure 6: Dominance of Entities Staking on the Ethereum Network

Source: 21co at Dune

What to Expect

Binance, CZ, and the softening headwinds leaning into 2024

On November 21, Binance pleaded guilty and agreed to pay over $4 billion to resolve the Justice Department’s investigation into violations related to the Bank Secrecy Act, failure to register as a money-transmitting business, and the International Emergency Economic Powers Act. Binance’s founder and CEO, Changpeng Zhao (commonly known as CZ), also pleaded guilty to failing to maintain an effective anti-money laundering program and has resigned as CEO of Binance. The world’s biggest crypto exchange by assets under management has experienced $47.3B in outflows and $44.6B in inflows in November, as seen in our Dune Analytics dashboard tracking Binance’s proof of reserves.

What should we expect in 2024? CZ could face up to 18 months in prison after his sentencing in February 2024. Binance’s new CEO Richard Teng, has outlined his vision to continue building on Web 3, with a special focus on decentralized applications that empower data ownership. With Binance’s Greenfield venturing into decentralized file storage, we can expect more investment in this space to diversify revenue streams and return Binance’s brand image to industry leadership. One catalyst for that is the fact that Teng is a member of the World Economic Forum, which can yield further institutional interest in the broader industry of decentralized finance. One challenge remains untackled: Binance’s dwindling market share, especially in derivatives. In the first weeks of November, the Chicago Mercantile Exchange (CME) toppled Binance in Bitcoin futures following speculation around a spot Bitcoin ETF in the U.S.

Figure 7: Binance Asset Flow

Source: 21.co on Dune Analytics

Interoperability Protocols are Rethinking Strategies to Remain Relevant

Polkadot, for instance, is replacing its long-standing parachain auction system with Bulk Coretime and Instantaneous Coretime. For context, the existing auction system is a model for applications to enter into a competitive bidding war to lease a slot on the Polkadot network as an interconnected network known as a parachain. That said, the new two models would introduce either a pay-as-you-go model where developers rent blockspace as needed for their projects or alternatively use the conventional lease model with shorter rent periods that make it more cost-effective for projects.

Polkadot’s imminent 2.0 system redesign, slated for the second half of 2024, incorporates the aforementioned modules and introduces a trustless bridge to link with the Ethereum ecosystem. These enhancements, addressing the network’s waning interoperability against competitors like Chainlink, are pivotal for Polkadot to sustain its relevance and fortify its accessibility towards more vibrant ecosystems such as Ethereum.

On the Cosmos side, the community approved a proposal to decrease the network’s inflation from 14% to 10%, reducing the staking APR from 19% to 13.4%. While the proposal addresses the challenge of ATOM’s high inflation, which dilutes the token’s value, it highlights a utility conundrum. ATOM lacks a clear role in facilitating access to the Interchain security economy powered by its InterBlockchain Communication protocol (IBC). This absence of a distinct value proposition beyond its attractive yield may prompt smaller validators to unstake, potentially leading to increased centralization and compromising IBC security.

That said, the discord led the founder to propose a hard fork of the network into ATOM1, as he argues the inflation rate cut compromises the security of the Cosmos hub due to the network’s interoperability design, which is more crucial than elevating ATOM as a sound medium of exchange currency akin to ETH. Further, Cosmos’s interoperability technology has also been exported to the Avalanche network on testnet, a significant milestone marking the first integration outside the Cosmos ecosystem and bringing crypto closer to a trustless multichain future. Finally, Cosmos is experiencing heightened chain activity, likely driven by the launch of dYdX and USDC on Cosmos and evidenced by increased fees and active users, reaching a YTD peak, as illustrated in Figure 8, which we’ll be closely monitoring over the next few weeks.

Figure 8: Growth of Active Users and Fees on the Cosmos network

Source: Token Terminal

Bookmarks

• Get a digital copy of State of Crypto issue 10!

• Stay tuned for our Market Outlook for 2024! Join us as we share more details in our next Analyst Call.

Next Month’s Calendar

These are the top events we’re closely monitoring in December.

Source: 21shares, Forex Factory, CoinMarketCal

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

Disclaimer

The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.

Polygon is an Ethereum scaling solution as well as a platform to connect Ethereum-compatible blockchains. The key features that Polygon provides include modular security through validators, sovereignty with a customizable tech stack, economical transaction cost and instant transaction finality on the main chain. The network is also designed for high customizability, extensibility and upgradability with short time-to-market community collaboration.

The Polygon foundation, started in 2017, is based in Bangalore, India and the British Virgin islands. It was founded by Jaynti Kanani, Sandeep Nailwal, Anurag Arjun and Mihailo Bjelic. Originally known as Matic, the entity went through a rebranding to Polygon in February 2021 and released its flagship product a year before in June 2020.

In this report, we will offer an exhaustive overview of the Polygon network, Matic as a cryptoasset, and discuss the various investment risks associated with Matic — in addition to how an investor can think about the future value of its underlying cryptoasset. This report offers an exhaustive coverage of Polygon PoS and Matic available on the market.

How Polygon PoS Works

The value proposition of Polygon PoS is to create a network of different blockchains and smart contracts that will be connected to the Ethereum blockchain with the objective to augment the efficiency, in other words, the transaction capacity and speed of the Ethereum blockchain. Polygon’s PoS tech stack is as such removing computation and transactions’ storage from the Ethereum blockchain to these different blockchains, also dubbed sidechains.

What helps distinguish Polygon amongst the other promising scaling solutions is that the network extends beyond a singular provision of its flagship product, the Polygon commit chain. The platform brings in connectivity amongst other scalability applications including individual chains also called plasma chains and other L2 applications such as Optimistic and Zero-Knowledge (ZK) rollups. Additionally, Polygon provides a development framework designed to launch native applications and sovereign blockchain compatible with Ethereum. First, are stand alone chains – independent networks that rely on their own security and personalized consensus mechanism, which make them fitting for prevalent projects as it’s easier to integrate their strong communities into serving as validators and securing the network. Second, are secured chains – networks anchored to Ethereum which utilize security-as-a-service for directly leveraging the reliability of ETH through validity and fraud proofs, or by a set committee of Polygon validators where their underlying smart contract logic resides on the Ethereum main chain, resembling a correspondent model to Polkadot’s shared-security archetype.

As seen, Polygon seeks to cater to crypto’s wider expansive ecosystem by serving as an AWS-like open-source aggregator of scaling solutions for developers. This is manifested with their offering of Polygon SDK, Polygon Avail (data availability layer for independent blockchains), Polygon’s Hermez and Miden (ZK-rollup-based ETH scaling solutions), interoperability protocol for data interchange along with 2-way-pegged bridges for cross-chain asset exchangeability. And finally, Polygon’s commit-chain, where most of the activity currently exists.

On this note, it’s important to realize how Polygon’s main chain stacks differently from other side-chains, and how its security is improved upon by virtue of making it more reliant on Ethereum’s base layer security. Understanding the POS architecture will delineate the relationship between the 2 chains – particularly when viewing the staking and checkpointing logic.

Polygon uses the Proof-of-Stake consensus mechanism and a unique crypto-based architecture to run its most widely used commit-chain, consisting of three layers:

1. The Ethereum layer: a set of contracts on the Ethereum network.
2. The Heimdall layer: a set of proof-of-stake Heimdall nodes (ie, downloaded softwares in computers) running in parallel to Ethereum and monitoring the set of contracts on the Ethereum network.
3. The Bor layer: a set of block-producing Bor nodes shuffled by Heimdall nodes.

Polygon validators intermittently perform periodic proofs of blocks produced by block producers in a Block Producer Layer (Bor layer) against the Ethereum blockchain. These checks settle any transaction disagreements that happen on the Polygon sidechain through a cryptographic proof for the Proof-of-Stake model. Staking is done on a set of smart contracts on the Ethereum network. Heimdall nodes monitor the set of smart contracts for the staked tokens on the Ethereum network and select Bor nodes to produce blocks on the Polygon PoS network. Bor nodes produce blocks in rounds, called spans, based on the selection by Heimdall nodes, which in turn is done based on the staked token amounts on the Ethereum network.

The process of transaction verification by network participants is done as follows: MATIC token holders (delegators) choose validators and then delegate staked tokens to them in exchange for a portion of the validators’ revenue. The Heimdall architecture chooses random block producers (miners) from a random pool of PoS validators in the MATIC network to verify transactions. Every validator set change will be relayed by the validator node on Heimdall which is embedded onto the validator node. This allows Heimdall to remain in sync with the Polygon PoS contract state on the Ethereum mainchain at all times. The Polygon PoS Chain contract deployed on the mainchain is considered to be the ultimate source of truth, and therefore all validation is done via querying the contract of the Ethereum blockchain. This practically translates to leveraging Ethereum-based finality, as well as providing a safe mechanism to restore the Polygon chain state in the event of a catastrophe through the aforementioned checkpoints.

Both delegators and validators share the risk and reward of the validation process. Validators stake their MATIC tokens on the Ethereum blockchain. If a validator acts maliciously by double-signing or has significant downtime, their stake may be slashed.

The Polygon community has been committed to building a strong staking ecosystem as they eventually move to be completely decentralized. Validators are rewarded in proportion to their Matic staked. As of writing, a total of $2.39 billion worth of MATIC has been staked, which accounts for 27.79% of all available Matic.

The MATIC Token

Polygon’s native coin MATIC is an Ethereum-based ERC-20 token that powers the Polygon network. Users can place their Ether in a Polygon smart contract, converting any value denominated in Ether (ETH) into MATIC at a 1:1 peg. Users can also withdraw back into the Ethereum blockchain in ETH.

Similar to Ether for Ethereum network, MATIC plays an important role in securing the network.It has a maximum supply of 10 billion tokens, with a current circulating supply of 6.6 billion. On a high level, the currency is used as a utility token to pay for fees, powering transactions, when issuing transfers or interacting with smart contracts. Matic can also be used in staking to secure the Proof Of Stake network as validators in return for staking rewards.

Token Distribution

The initial distribution of the matic token consisted of :

• Private Sale tokens comprise 3.80% of the total supply of 10 billion:

→ Seed Round: Sale conducted at a rate of 1 MATIC = 0.00079 USD and raised a total of USD 165,000, selling 2.09% of total token supply.

→ Early Supporters: sale conducted at a rate of 1 MATIC = 0.00263 USD and raised a total of USD 450,000, selling 1.71% of the total token supply.

• Launchpad sale tokens comprise 19% of total supply. It was conducted in April 2019 for a total raise of ~$5,000,000 USD worth of BNB at ~$0.00263 per token for 19% of the total token supply. The BNB to MATIC rate will be determined on the day of the sale.
• Team tokens comprise 16% of the total supply.
• Advisors tokens comprise 4% of the total supply.
• Network Operations tokens comprise 12% of the total supply.
• Foundation tokens comprise 21.86% of the total supply.
• Ecosystem tokens comprise 23.33% of the total supply

The token release schedule is set to be completed by October 2022.

The State Of Polygon

The Polygon ecosystem experienced exponential growth in Q2 of 2021 with Total Locked Value (TVL) at $115 million at the end of March to a peak of $10.5 billion in June 2021. It is worthy to note that despite the market crash on May 19th 2021, the network was able to sustain a rise in TVL and growth, peaking in June. This was also instigated by $40 million worth of incentives launched in partnership with Aave to lenders and borrowers on Aave’s Polygon market. This distribution accounted for 1% of the total Matic supply. The incentive program was a part of a wider plan to make DeFi on Ethereum more scalable and inclusive as an alternative to traditional finance with the drastic reduction of fees on Polygon when compared to Ethereum.

As one of the easiest to use and integrate commit chains, the Polygon ecosystem currently has 500+ dapps spanning DeFi, gaming, NFTs, exchanges and cross-blockchain solutions. The rise of Polygon dapps is widely attributed to the EVM compatibility of the Layer 2 scaling solution and ease for Ethereum projects to launch on Polygon. Aside from the liquidity mining incentives that drew users to the network, yield farming opportunities with drastically reduced fees were also attributed to the sudden rise in TVL. As of September 2021, Quickswap is the leading decentralized exchange (DEX) on Polygon PoS with daily trading volume in excess of $100 million and 15.4K users . DEX daily and total revenues from various chains are depicted as a comparison below. PancakeSwap is the primary DEX for Binance Smart Chain and Pangolin is the primary DEX for Avalanche.

Polygon is often depicted as a Layer 2 solution for Ethereum scalability. However, by definition, for a network to be considered a Layer 2, it must derive its security from a Layer 1 like Ethereum. This would mean that users would not have to rely on the validators for the security of their funds. The current architecture of Polygon as a PoS sidechain with its own validators is therefore defined and considered by many as a Layer 1. The adaptability of Polygon’s architecture may see the network evolving to integrate ZKrollups, Optimistic rollups and standalone side chains in the future, with Layer 2 like characteristics.

The current network utilization rate can be represented by several key metrics. Polygon has recorded 836.74M transactions since its launch, with over 74M unique addresses on chain of which over 200,000 are active on the network. Reviewing the performance of Matic in the last year the YTD growth is 6,768%, current validator staking APR is at ~11%, with the network supported by 100 distributed validators and 15 RPC nodes (September, 2021). In October 2021, the active Polygon PoS chain addresses overtook Ethereum to a record high of 566,516 unique daily addresses. This accounts for a 168% growth in 30 days compared to Ethereum’s 0.6%.

The Future of Polygon

The arrival of Ethereum 2.0 , often referred to as ‘the Merge’ will enable better security, faster and more economical transactions on the Ethereum network, bringing the question to many: Will Polygon be able to maintain its relevance?

The recent rise of competing Layer 2s to meet the scaling problem of Ethereum such as Optimism, Arbitrum, Starkware, Loopring and many others has diverted much of Polygon’s initial TVL to other chains. As of September, not including Polygon, Arbitrum is the leading Layer 2 with 59% of the remaining market share equalling to $1.45B, the current TVL of Polygon is approximately $4.5B, down from its $10.5B peak.

Optimistic rollups use fraud proofs, the resolution of theses on the Layer-1 base chain involves a challenge of state changes. The way in which these rollups are validated makes moving tokens from a rollup to its Layer-1 base chain extremely time consuming. Typical exit times between rollups and Layer-1 base chains vary between a day and a week. In comparison to Optimistic rollups, the withdrawal of assets from the Polygon network usually takes 45 minutes, with the exception of Matic withdrawal, which takes seven days.

The time delay in the asset withdrawals from Layer 2 solutions can play an important role in the decision making process in the cross-chain distribution of assets. Particularly, in a time of market volatility, quick access to liquidity and the ease of asset movement are crucial for DeFi users. There are multiple projects working on possible solutions to mitigate this risk, manage challenge-period inefficiencies and minimize opportunity costs associated with this period. Not only will these solutions provide cost savings but it may also enable cross-rollup composability of applications in the future. To remain competitive, Polygon has an ambitious roadmap to implement optimistic rollups, ZK-rollups and Validium chains. Most notable in their recent progress was a $250 million deal made with Hermez, open-source ZK rollup scaling project, in August 2021.

The future of Polygon will likely see a greater number of dapps verticals taking advantage of the network’s ultra low cost transaction fees.The drastic reduction in transaction fees compared to any other chain, can lower the barrier for entry and use for new DeFi users. One prime example is the number of users on Aave on Polygon vs Aave on Ethereum. Despite the TVL on Ethereum being over $12.B and only $1.9B on Polygon, there are 26,000 Users on Polygon vs 10,000 on Ethereum.

At the end of July, Binance also announced that users could withdraw Matic directly from and onto the protocol’s mainnet. This integration granted a direct, low cost, seamless route for onboarding into Polygon PoS without having to bridge through Ethereum. These established avenues of capital flow that Polygon provides for new DeFi users will without a doubt serve Polygon well in the future. As we see a greater flow of capital from centralized exchanges into DeFi, the ease of this onboarding process will play a critical part on which scaling solution will come out on top.

Notable partnerships include DraftKing’s announcement to use Polygon to support custom NFT drops and secondary-market transactions. Ernst & Young also recently selected Polygon to deploy EY blockchain solutions, demonstrating the trend of professional services to onboard blockchain solutions for transaction verification that prioritise privacy technologies whilst supporting regulatory compliance.

Aside from the advantage of Polygon PoS’s EVM compatibility reducing the friction for developers building on Polygon, the network’s ability to aggregate scaling solutions is a definitive competing edge. Rather than focusing on one scaling solution like Optimism, Arbitrum or Starkware, it is designed to be adaptable and to accommodate multiple Layer 2 solutions. Polygon envisions and provides the base infrastructure for the future of cross chain interoperability, similar to Polkadot.

Valuing Polygon

There are two ways we can think of the potential value of Polygon’s native asset, Matic. The first is carrying out a market sizing exercise to compare its value to that of its main competitors as its target market. Secondly, we can compare Polygon’s current adoption — through the proxy of fees paid on the network — to that of Ethereum in order to understand if the current value of Polygon can be justified whether there’s product-market fit.

Market Sizing:

The chart below shows the current market capitalization of Solana, Polygon, Ethereum, and Binance Smart Chain. Ethereum represents what the market has judged, as the current best use-case of blockchain technology while the smart contracts use case can be argued to be just as valuable in the long term. Binance Smart Chain and Solana are networks that similarly experienced substantial growth in the first half of 2021 and serve as comparison for ecosystem development.

Total Value Locked

This section compares the current TVL of Polygon relative to other major networks such as Ethereum, Binance, Terra, Solana and Bitcoin. TVL can be a useful tool to compare network utilization and a method to measure the flow of capital within DeFi.

Fees

Revenue generation is often a key metric when assessing network value. By assessing the total number of transactions and the average cost per transaction we are able to estimate the total revenue generated. Fees are a good signal for the overall demand for a given smart contract platform and arguably the strongest barometer of fundamental growth. Polygon’s 881.46M transactions give an estimated annualized revenue of $14.1 million. Ethereum’s annualized revenue stands at $13.32 billion.

Price-to Sales (P/S) Ratio compares a protocol’s market cap to its revenues. Unlike the Price to Earnings ratio, where inflated token prices can be inaccurately depicted, P/S ratio derives the network’s value from tangible revenues. This metric is particularly useful for early-stage protocols where income is often reinvested into growth. A relatively low ratio like Polygon compared to other competitors like Solana and Avalanche, could imply that the protocol is undervalued and vice versa (Token Terminal, 2020). An evaluation of historic P/S ratio against its market cap can also demonstrate the consistency of fees and revenue. This chart indicates the P/S ratio for other Layer 1s in comparison to Polygon PoS.

Risks

Unlike Proof of Work (PoW) networks that require miners to contribute computing power to secure the network, PoS crypto networks require users to stake a share or all of their holdings in the network’s token to secure the network and keep it running.

Liquidity risk: Illiquidity of staking returns to be converted into bitcoin or stablecoins may be difficult if there is little to no volume of the staked asset. Polygon PoS has a lock up period of 8-10 days.

Rewards duration: Like lockup periods, some staking assets may not pay out staking rewards daily and make re-investments delayed. Polygon PoS pays out every 8-10 days.

Validator risk: Running a validator node may run the risk for incurring penalties if a disruption or double-signing occurs (slashing). Slashing is designed to incentivize node security, availability, and network participation.

Slashing: If a validator misses a certain number of validations or engages in certain manipulative acts on the network, staked assets may be slashed (ie. claimed by the network as a fine). This risk is minimal under normal operating conditions.

Technological risks: A double spending bug in Polygon’s Plasm bridge was identified in October 2021, the code relates to a contract that locks up to 1 billion USD worth of funds on Layer 1 and is utilized when users move funds to and from the Polygon network. Fortunately, the existence of Polygon’s bug bounty program on ImmuneFi helped identify and rectify the vulnerability before it could be exploited23. Gerhard Wagner discovered the vulnerability which could have led to a string of attacks totalling approximately $850 million, it took 30 minutes for Polygon to begin fixing the issue and Wagner was subsequently awarded with $2 million from the bug bounty program.

Disclaimer

This report has been prepared and issued by 21Shares AG for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable. However, we do not guarantee the accuracy or completeness of this report. Crypto asset trading involves a high degree of risk. The crypto asset market is new to many and unproven and may have the potential to not grow as expected.

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