You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $20/month you can upgrade to our FULL library of 50+ reports (including this one) and complete industry-leading analysis on the top crypto assets. 

Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:

• Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
• Early access to future CORE ratings: Being early is sometimes just as important as being right!
• Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
• CORE report Audio playback: Don’t want to read? No problem! Listen on the go.

Core Report Network Effects

MATIC’s growth and usage are closely tied to the network effects and usage of the Polygon sidechain and scaling solutions. Additionally, the more adoption and usage of the main Ethereum network, the greater desire in the market for the sort of scaling solutions that Polygon offers. Polygon is home to over 1,500 dApps per Dappradar with a top-five DeFi and NFT community in crypto. 

Number of Polygon Apps by Category, Source: TechDreams

User Growth and Network Statistics

Polygon’s PoS chain functions as a top alternative for users wanting to avoid the Ethereum base layer’s high transaction fees. This puts it squarely in competition with other alt-L1s and Ethereum rollups as a cheaper alternative smart contract chain. The daily transaction count on the PoS chain overtook the Ethereum network for the first time in Q2 2021, and at its peak, Polygon processed almost 7x more transactions than Ethereum.

Transactions, Ethereum vs. Polygon, Source: nansen

Since Q3 2021, the ratio of Polygon transactions to Ethereum transactions has fluctuated between 200% - 300%. This graph indicates that the Polygon network is maturing and approaching its average transaction volume versus Ethereum. The chart below illustrates how similar the daily transactions on BNB Chain and Polygon are while also highlighting Optimism’s rise over 2022. Despite Optimism’s (and Arbitrum’s) best efforts in 2022, Polygon's PoS chain still processes approximately five to six times as many transactions per day than both Arbitrum and Optimism combined. This significant edge over emerging ETH scaling projects, as well as the vast community of developers, can't be ignored.

Daily Transactions, Source: Artemis

The number of daily active addresses on Polygon is holding steady going into 2023 at ~300,000. Again, we see BNB Chain in the lead with Ethereum, Solana, and Polygon jockeying for second place, while Optimism looks to catch up heading into 2023. 

Daily Active Addresses, Source: Artemis

However, most Polygon wallets, according to Dune Analytics, are merely holding NFTs, with nearly 75% of them having less than $10 of ERC20 tokens. Furthermore, of the ~14 million wallets on Polygon, only ~4.9 million wallets own any ERC-20 tokens.

Polygon ERC20 balances, Source: Dune Polygon daily NFT wallets and NFT transactions hit all-time highs in Q4 2022, Source: Messari

Competition from Alt-L1s and Rollups

Polygon competes with Starkware, Arbitrum, Loopring, and Matter Labs, among other blockchain-as-a-service companies and scaling technologies that also focus on increasing blockchain scalability. Polygon’s future adoption may be impacted by the overall arms race for scaling solutions, alt-L1 blockchains, and the uncertain future and development timeline of Ethereum upgrades. 

Polygon vs. The World

Consequently, as the network seeks to onboard an ever-increasing volume of transactions, it competes not just with other L2 scaling solutions, but also indirectly with any alternative L1s in development. A danger associated with Polygon's varied strategy to become an all-encompassing provider of scaling solutions is that it may dilute its potential, particularly in comparison to more specialized scaling solutions, given the robustness of the competitive landscape.

With the Merge behind Ethereum, it can now focus more on sustainable scaling and rollup improvements for the foreseeable future. Future upgrades, such as proto-danksharding, Verkle trees, and ultimately full danksharding are all expected to help Ethereum to surpass even Polygon’s current scalability limits. Because of this, there's the question of whether the increased throughput from a major public blockchain, such as Ethereum, has the potential to make other scaling solutions obsolete or significantly reduce their usage upon release.

The real-world level of scalability that Ethereum will provide is still unknown. The final phase of migration to the consensus layer will unlock smart contract execution capabilities within shards, and this is currently estimated to be as soon as 2024. 

Given that Ethereum adoption and development as a whole will continue to increase, Layer 2 solutions may still have a use case even with Ethereum’s upgrades. Ultimately, Ethereum’s evolution is a dynamic process, and the need to solve issues, such as high gas fees, scaling, and competition, means various stages of the Ethereum upgrade may be prioritized. In the meantime, scaling solutions, such as Polygon, have a chance to obtain significant market share and develop novel technologies.