Analyzing the Recent Challenges Faced by Polygon

Analyzing the Recent Challenges Faced by Polygon

Polygon’s native token (MATIC) recently experienced a 16.4% rally following the launch of the Polygon 2.0 Goreli testnet on Oct. 4. However, the resistance at $0.60 proved to be stronger than anticipated, leading to a 10.6% decline over the six days that followed. This decline was exacerbated by negative news regarding the departure of a key co-founder and weak activity in Polygon’s zero-knowledge rollup (ZK-rollup) subnet.

The Disappointment in Polygon 2.0

Polygon 2.0 is a network of ZK-based layer-2 chains unified via a novel cross-chain coordination protocol. The technology was unveiled in June 2023 with the aim of creating a scaling ecosystem consisting of four layers: staking, execution, interoperability, and proving. These layers were expected to contribute to the creation of a secure, fast, and highly cost-effective interconnected ecosystem of chains. However, the recent decline in MATIC’s price has wiped out the gains from the earlier rally, erasing the enthusiasm surrounding the protocol’s upgrades.

One of the factors contributing to the worsening sentiment toward Polygon is the weaker performance of the ZK subnet, zkEVM, compared to its competitors. Metrics from Artemis, an on-chain data provider, reveal a significant disparity in the number of active addresses and daily transactions between Polygon’s zkEVM and its competitors StarkNet and zkSync ERA. The lower level of activity and deposits in Polygon’s ZK-rollup raises concerns about its competitiveness in the market.

Despite being launched earlier than most Ethereum layer-2 solutions in June 2020, Polygon is now facing direct competition from Optimism and Base. The departure of Polygon’s co-founder, Jaynti Kanani, on Oct. 4, and the CEO of Polygon Labs, Ryan Wyatt, in July 2023, have also created discomfort among investors. These departures come at a critical time for the project, as it is trying to complete its multiple-layer scalability solution. It remains to be seen how Polygon will address this challenge and maintain its position in the market.

The Decrease in Network Activity

Another concerning factor is the decline in the number of active addresses using the Polygon network’s decentralized applications (DApps). The top 12 DApps on the Polygon network have experienced a 17% decrease in the number of active addresses over the last 30 days. This decline has particularly impacted the NFT and decentralized finance markets, affecting popular applications like Uniswap, OpenSea, and Move Stake. This reduced network activity adds to the negative sentiment surrounding Polygon and its token.

While the initial rally in MATIC’s token price was met with optimism, the subsequent decline can be attributed to various factors. The weaker performance of Polygon’s ZK subnet, the departure of key team members, and the increased competition in the layer-2 scaling space have all contributed to the negative sentiment surrounding Polygon. However, it is important to note that the Polygon team has been consistently delivering updates and improvements to the network. Investors should closely monitor the project’s progress in addressing these challenges and capitalizing on the innovations of Polygon 2.0 in determining their investment decisions.

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