MATIC Struggles as Ethereum Upgrade Favors Rivals

MATIC struggles with a 32% decline amid leadership changes and stiff competition from layer-2 solutions like Arbitrum.

By Barry Stearns

2/21, 03:48 EST
Bitcoin / U.S. dollar

Key Takeaway

  • MATIC underperforms with a 32% decline, lagging behind rivals IMX, OP, SKL, and ARB due to less favorable positioning for Ethereum's Dencun upgrade.
  • Ethereum's Dencun upgrade benefits optimistic rollups like Arbitrum and Optimism more than Polygon's zkEVM, impacting MATIC's appeal.
  • Former Polygon President Ryan Wyatt’s move to Optimism and the superior performance of competitors in DeFi space further pressure MATIC.

Navigating the Shifts: Polygon's MATIC Faces a Challenging Horizon

In the ever-evolving landscape of cryptocurrency, the performance of Polygon's native token, MATIC, has taken a notable downturn. Over the past year, MATIC has seen a decline of over 32%, a stark contrast to its meteoric rise during the 2021 bull market. This downturn is particularly pronounced when juxtaposed with the performance of other layer-2 solutions. For instance, Immutable X (IMX) has surged by an impressive 216%, while Optimism (OP) and Skale (SKL) have enjoyed gains of 46% and 50%, respectively. Even more striking is the performance of Arbitrum's ARB, which, despite being a newer entrant, has outshone MATIC in just six months.

The Ethereum Dencun Upgrade: A Double-Edged Sword

The impending Ethereum Dencun upgrade, scheduled for March 12, looms large over MATIC's future. This upgrade is set to introduce a new transaction type known as a "blob," aimed at reducing transaction costs and enhancing efficiency for layer-2 scaling solutions like Arbitrum, Optimism, and Polygon zkEVM. However, the upgrade presents a mixed bag for Polygon. While it promises greater efficiency, the resource-intensive validation process of Polygon zkEVM could lead to higher transaction costs post-upgrade, unlike its counterpart, Optimistic rollups, which are poised to benefit from reduced costs.

Leadership Changes and Competitive Dynamics

The departure of former Polygon President Ryan Wyatt, who has since joined forces with Optimism, marks a significant blow to MATIC's prospects. Wyatt's role was pivotal in securing key partnerships for Polygon, and his exit is perceived as a setback for the platform. Furthermore, Arbitrum's ascendancy, underscored by its dominance in trading volumes and assets locked in DeFi protocols, has cemented its position as a formidable competitor to MATIC. This competitive landscape has seen traders increasingly gravitate towards Arbitrum, leaving MATIC to navigate a challenging market environment.

A Closer Look at Valuations and Tokenomics

A comparative analysis of MATIC and its competitors sheds light on the valuation dynamics at play. At the onset of the recent crypto market uptrend, MATIC's valuation appeared to be on the higher side. When examining the relative valuations of the top 10 apps' Total Value Locked (TVL) on each chain, alongside Fully-Diluted Valuations (FDV), a nuanced picture emerges. Both ARB and OPT have continued to reward stakers through native token unlocks, a strategy that not only reduces token supply on exchanges but also incentivizes Pool/TVL contributors. This approach could potentially alter the market dynamics, impacting MATIC's standing in the competitive landscape.

Looking Ahead

As the cryptocurrency market continues to evolve, the trajectory of MATIC amidst these developments remains to be seen. The Ethereum Dencun upgrade, leadership changes, and the competitive pressures from rivals like Arbitrum pose significant challenges. However, these also present opportunities for MATIC to recalibrate and adapt in its quest for dominance in the layer-2 space. Investors and market watchers alike will be keenly observing how Polygon navigates these turbulent waters, as the broader implications for the layer-2 ecosystem and the cryptocurrency market at large unfold.

Street Views

  • Katie Talati, Arca (Neutral on Polygon):

    "The upcoming Ethereum Dencun upgrade will decrease costs for Layer -2s to post data back to the Ethereum mainnet. Although Polygon will benefit from the upgrade, other L2s like Arbitrum and Optimism, which use optimistic rollups, will see more significant cost reductions, which has caused these L2s to rally... Most of the cost for optimistic rollups comes from posting transaction data back to Ethereum (which is what Dencun will reduce), but they hardly post fraud proofs. On the other hand, Zk rollups post fraud proofs far more frequently and, therefore, would not see the benefits of lower transaction data costs."

  • Kenny Hearn, SwissOne Capital (Neutral on MATIC):

    "The toughest competitor to MATIC is Arbitrum (ARB), and unfortunately for MATIC, Arbitrum is the go-to blockchain for traders... Looking into the numbers, one can easily find the relative valuations stacking up. The top 10 apps’ TVL on each chain totals ARB $1.9bn, MATIC $800mn. Then comparing their Fully-Diluted Valuations (FDV) of $20bn and $10bn respectively; the relative valuations make more sense... When comparing tokenomics both ARB and OPT are still rewarding stakers though native token unlocks; and like it or not it can add to reducing token supply on exchanges while rewarding Pool/TVL contributors."