One of the primary reasons Polygon (CCC:MATIC-USD) is garnering such attention of late is that it – for a time, managed to escape Bitcoin’s (CCC:BTC-USD) downward pull in May while the vast majority of cryptos could not. It has since faltered to a degree but remains interesting.
That made it an interesting outlier. And although Polygon, a sidechain running tangent to Ethereum (CCC:ETH-USD), ultimately fell, it didn’t suffer as much as many other cryptos. That again, makes it an interesting outlier.
So, what should we know about Polygon and Matic?
Runs Tangent to Ethereum
Matic is a network which offers secure and instantaneous Ethereum transactions. That may not seem particularly interesting, but it is due to a few factors which currently plague Ethereum. I’ll discuss those later, but for now let’s continue on discussing Matic.
To understand why Matic is getting so much attention right now it’s critical to understand the balancing act it is attempting to achieve. Per Matic’s blog:
“Matic strives to solve the scalability and usability issues while not compromising on decentralization and leveraging the existing developer community and ecosystem.”
I alluded to the idea that simply offering Ethereum transactions isn’t particularly interesting above. I then mentioned that Polygon and Matic are interesting in that they solve some of Ethereum’s problems. Well, actually Matic stock allows users to avoid Ethereum’s current issues rather than solving them.
Either Way, Let’s Delve Deeper into That.
Scalability and usability issues are precisely the issues that Ethereum is dealing with currently. Congestion and high costs are a problem for Ethereum. These are scalability and usability issues to be sure. Ethereum has a throughput problem given that it is congested. And cost issues – Ethereum transactions aren’t cheap at $4.07 per transaction(1) – are usability problems.
As long as congestion remains an issue for Ethereum’s network sidechain protocols like Matic will garner interest. Further, the transaction costs are far lower than those for using Ethereum.
Gas costs on the Ethereum network aren’t a minor issue. While transaction fees are necessary to fund the development of a network, they simply have to come down at some point. Ethereum’s mass adoption is going to occur in conjunction with that transaction cost decrease.
In any case the point here is this: Matic transaction fees are far lower than those on Ethereum. A recent article from Coindesk summarizes the stark contrast well:
“Throughout 2021, Ethereum fees skyrocketed up to 845% compared to the year before; currently, a transaction on the network costs around $4.819,on the other hand, transacting on the Polygon network only costs around $0.001 to transfer $200.”
Matic has validated the idea that it can solve scalability and usability issues.
Not Immune to Downdraft Effect
Although Matic did prove its strength in the recent crypto downturn, it wasn’t immune to losses. It has risen while Bitcoin has lost a great deal of value since May 1. In that time Bitcoin is down 37%. In that same period Matic nas appreciated by 97%. That seems impressive, and it is, but it isn’t an apples to apples comparison.
As we know, Matic stock runs on a sidechain of Ethereum and should therefore be highly correlated with its movement. And in truth it is.
Ethereum has also dropped in price of late. It dropped 37% from May 14 to today. Matic stock decreased 42% from May 17 to today. The takeaway here is that while Matic solves some of Ethereum’s problems and is attractive from that perspective, it also suffers in lockstep with its bigger brother.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.