MATIC Faces Investor Exodus: Why Polygon's Native Token Lags Amid Crypto Boom

Once a market favorite, MATIC struggles, down 32% in a year, outpaced by rival layer-2 coins.

In a surprising turn of events, MATIC, the native token of Polygon, which basked in glory during the 2021 bull market, is now grappling with a significant decline in investor interest.

Over the past 12 months, MATIC has experienced a staggering 32% drop, showcasing a substantial underperformance compared to rival layer-2 coins such as IMX, OP, and SKL, which have surged by 216%, 46%, and 50%, respectively, according to CoinDesk Indices. Even Arbitrum's ARB, in existence for less than a year, has surpassed MATIC's gains within six months.

In contrast, Bitcoin (BTC) has more than doubled to reach $51,700 in a year, and the CoinDesk 20 Index, a broader market indicator, has witnessed a 70% rise.

This downturn is a stark contrast to MATIC's impressive performance in 2021, where the token consistently delivered triple-digit price gains, even during corrective phases of the bull run.

Polygon's ecosystem comprises Polygon PoS and Polygon zkEVM. While the former utilizes the Plasma framework with a Proof-of-Stake (PoS) consensus mechanism as a side chain alongside the Ethereum mainnet, the latter employs ZK-rollup technology, processing transactions off the Ethereum main chain. Notable alternatives like Arbitrum and Optimism also utilize rollup technology.

The waning interest in MATIC can be attributed to several factors, including its handling of transaction validity compared to Optimism and Arbitrum, particularly concerning Ethereum's imminent Dencun upgrade, according to Katie Talati, Director of Research at digital asset management firm Arca.

The Dencun Effect

Scheduled for March 12, Ethereum's Dencun upgrade introduces a new transaction type called a blob, reducing costs and enhancing efficiency by delivering large data packets without congesting the mainnet. This upgrade favors layer-2 scaling solutions like Arbitrum, Optimism, and Polygon zkEVM that utilize rollup technology.

However, Polygon zkEVM operates under a "guilty until found innocent" principle, requiring intensive proof of validity for transaction finalization on Ethereum. This resource-intensive process contrasts with Optimistic rollups, which adopt an "innocent until proven guilty" approach, benefitting from the expected decline in transaction costs following the Dencun upgrade.

Former Polygon President Ryan Wyatt's departure to join Optimism has further impacted MATIC's performance, with many attributing Polygon's notable partnerships to Wyatt.

Arbitrum emerges as a formidable competitor, boasting a 24-hour trading volume of $420 million and $3 billion locked in decentralized finance protocols. In comparison, Polygon PoS ranks sixth with a $179 million trading volume, and Optimism follows with $133 million.

Arbitrum: The Trader's Choice

Arbitrum stands as the go-to blockchain for traders, as reflected in its leading position in DeFi trading volumes. Kenny Hearn, CIO at SwissOne Capital, notes that MATIC was likely overvalued at the start of the current crypto market surge, allowing other layer-2 coins to catch up.

Comparing the Total Value Locked (TVL) of the top 10 apps on each chain, ARB totals $1.9 billion, while MATIC lags at $800 million. Additionally, when evaluating their Fully-Diluted Valuations (FDV) of $20 billion and $10 billion, respectively, the relative valuations suggest that MATIC is facing a challenging period in comparison to its counterparts.

(Photo Source / Blockonome)