Polygon (MATIC-USD): The Missing Piece Of The Puzzle

Thesis Summary

Polygon (MATIC-USD) is a Layer 2 solution built specifically for Ethereum (ETH-USD). Following the Merge, Ethereum has set itself up for improved speed and overall efficiency, but I believe scaling solutions will still be relevant in the long term.

With that said, MATIC is, in my opinion, the best L2 out there for ETH scaling, and it has recently cemented its position as such with the launch of zkEVM rollups. Though this is just a testnet, it lays the foundation for completely seamless integration between ETH and MATIC.

Finally, if we look at MATIC’s chart, we can see a very clear structure developing, which projects us into the $5 target region.

Is Polygon Still Relevant?

Before we get into why MATIC is such a great blockchain, we have to address the elephant in the room. Following the Merge, in which Ethereum became a PoS blockchain, many people think that the network is now more efficient, which, if we think about it, should render L2 solutions like Polygon useless. However, nothing could be further from the truth.

For starters, the Ethereum Merge did not make the network more efficient in terms of speed and cost. The consensus mechanism changed, from PoW, which involves mining, to PoS, which involves staking. This affects the issuance of new Ethereum, which is now produced at a slower rate than before, and it does mean less environmental impact since staking consumes 99% less energy than mining. But gas fees remain the same, and so does throughput.

Ethereum will only become more efficient once sharding is introduced, which breaks up the blockchain into smaller, more manageable shards. Sharding, though, will not be implemented for at least another year.

Even when sharding is introduced, it won’t mean that L2 solutions like MATIC become obsolete. For starters, current estimates show that, with sharding, ETH might be able to carry out 3,000 tps. This is still not that impressive when compared to some of the other up-and-coming blockchains. On top of that, MATIC does much more than scaling. It provides an Erthereum-compatible ecosystem, which can more easily connect with other blockchains and has greater flexibility. Also, it is estimated that a single Polygon parachain can already process 7,000 tps.

Introducing zkEVM

MATIC has already made a strong case for itself as a top-notch L2 solution, and it continues to make that case stronger with new updates and constant improvements.

Earlier this week, Polygon opened up the testnet for its zero-knowledge EVM.

Let’s start by explaining zero-knowledge proof, often referred to as zk-Rollups. In essence, this technology enables data to be verified outside the main chain, and then a more “simplified” form of the data can be sent to the blockchain to be “officially” verified.

Another way to look at it is that the zk-Rollup takes various transactions and packages them into blocks so that the blockchain doesn’t have to. Ultimately, this serves to take the strain off the network.

In short, zk-Rollups allow us to process more data with fewer transactions, and this results in higher throughput and lower gas fees.

But the big news here isn’t the introduction of zero-knowledge proof, this has been around for a while. The key issue is that MATIC’s new update is EVM-compatible. The Ethereum Virtual Machine is the software that executes smart contracts on the Ethereum network. It also validates the status of the chain after every new block.

So when we talk about zkEVM, we are talking about the scaling solutions provided by zk in an environment which is not only compatible but equivalent to Ethereum. Building dApps using Layer 2 solutions can be challenging because the code may not adapt well to the Ethereum blockchain and vice versa.

Polygon’s zkEVM aims to create an environment which is identical to Ethereum in terms of building apps. It benefits from the security and decentralization of the Ethereum blockchain but also leverages zero-knowledge proof to make the network more efficient.

With that said, we have to understand that this is still a public testnet, with its bugs and limitations. But still, this is great news for the Ethereum and Polygon communities alike.

The proof, as they say, is in the pudding, and Polygon recently reached a new record of active users.

Price Analysis

Polygon has rallied strongly since it reached a bottom back in June. It has not been immune from the recent sell-off, but the chart now suggests that the bottom is in, and a strong reversal could be near.

In the chart above, we have my current analysis on MATIC based on Elliott Wave Theory. We can see that MATIC almost tripled since its low in June, and formed a very clear impulsive five-wave move. Since then, we have been in a corrective wave II, which may have taken the structure of a triple three correction.

Until yesterday, I was expecting a low into at least $0.66, which is the 38.2% retracement. However, with the rally yesterday, this could be an early sign that wave II already bottomed at the end of September (what we have labelled here as the bottom in wave Y). In order to confirm this, though, we need to break above the $0.88 level. This is a key area of resistance because it is the top of the channel, the top of wave X and the 200-day MA.

Risks

Although I am very bullish on MATIC, there are risks to consider. The fate of this token is linked to that of Ethereum, and there are things that could go wrong. For starters, following the Merge, a lot of questions have arisen around the increase in centralization. Furthermore, there is stiff competition from other blockchains. Cardano (ADA-USD) in particular is a strong contender.

Lastly, though I think we are near a bottom, the crypto winter could still last some time, especially as the Fed continues to tighten.

Takeaway

Polygon is, in my opinion, the best Ethereum scaling solution, and Ethereum is so far the most relevant blockchain in crypto. With the introduction of zkEVM, Polygon has taken another great step to cement its position. Network activity and MATIC price show strong conviction, and for this reason, I am very bullish on this token.