Matter Labs, the company that runs Polygon (MATIC), announced that the beta version of its zero-knowledge Ethereum virtual machine (zkEVM) would launch on March 27, 2023. Polygon may enjoy a first-mover advantage. move into this space by launching a public main network before zkSync and Scroll.
Zk-based roll-up technology is accepted as the gold standard for scaling. Existing optimism-based roll-ups like Arbitrum and Optimism have EVM capability but are less secure because they are “fraud proof”. Malicious transactions in an optimistic summary can remain valid for up to seven days or more before being reversed. Thus, giving zk technology an advantage.
Additionally, the Ethereum (ETH) community’s focus on liquid staking derivatives may shift towards L2 networks after the anticipated Shanghai upgrade in March. This is because the post-Shanghai update, EIP-4844, will reduce the cost of L2 stacks by 10-100x. A working zk-based cumulative solution is likely to attract new projects into its ecosystem.
Polygon has built a strong bullish narrative on the market with the upcoming release of zkEVM. The team’s efforts in the Web3 space are promising and show signs of increasing activity. Growth in its DeFi ecosystem has stalled, which could likely stay that way for longer periods.
Technically, Polygon’s market structure looks bullish. However, the recent 78% rise in MATIC price since early 2023 could see a correction as speculative buying cools. Such a situation could possibly provide an ideal MATIC entry for a swing trade.
Polygon’s DeFi sector has stagnated, but Web3 activity is on the rise
Since the beginning of 2023, Polygon has witnessed an increase in its NFT activity, especially for low-cost gaming assets. According to data from Dune Analytics, the number of NFT sales on Polygon surpassed Ethereum for two consecutive months in December 2022 and January 2023. While Ethereum still leads in total volumes, Nansen’s NFT activity data shows that Minting and sales volume at Polygon has been picking up since early 2023.
Meta also chose Polygon as the base layer for minting digital collectibles on its social media app, Instagram. This feature is currently in the limited testing phase, but will soon see traction among Instagram’s 1.28 billion users.
In November 2022, Matter Labs appointed former YouTube gaming head Ryan Watt to run its gaming company, Polygon Studios. Watt told Cointelegraph that Polygon’s Web3 strategy takes a holistic approach by bringing in “Web2 companies, including Starbucks, Adobe, Clinique, and Stripe, to integrate Web3 functionality.”
In addition, the blockchain hosts the development of more than 60 metaverse projects, including the leaders in the Sandbox, Decentraland, and Somnium Space. Lastly, Polygon’s $450 million raise in February 2022 will likely provide the necessary tailwinds to continue development on the Web3 front.
On the other hand, the growth of the Ethereum sidechain in its DeFi sector has stalled. It could remain stressed due to ongoing macroeconomic stress and a regulatory crackdown on stablecoins.
Total liquidity in DeFi applications on Polygon has remained below November 2022 levels, suggesting that users are still reluctant to interact with these protocols. In addition to security risks, declining performance in the DeFi space is also a major reason for the decline in activity.
By comparison, Arbitrum’s DeFi ecosystem has fared relatively better than most thanks to the anticipation surrounding its token airdrop and active development.
Still, Polygon ranks fifth in total liquidity across DeFi platforms above Avalanche, Solana, Optimism, and Fantom, which is encouraging. Favorable liquidity conditions are a crucial necessity for a thriving DeFi ecosystem, and Polygon can benefit from this when the focus on DeFi picks up. Furthermore, the launch of zkEVM may also attract DeFi development.
Investors are optimistic about MATIC
Futures market data shows MATIC traders are bullish with open interest volume increasing towards 2022 highs and a long-short ratio of 1.58. While a bullish outlook is encouraging, prices may pull back to remove overleveraged positions.
The on-chain balance on the exchanges suggests that not many investors moved their coin trades as the price rose from $0.75 to $1.25. It suggests confidence among the buyers, who are unlikely to sell unless the price breaks below the $0.75 support.
However, the price could pull back towards the $1 support level as the Relative Strength Index (RSI) metric begins to touch resistance around the $65 level. Bullish momentum is likely to require consolidation around the $1. 50 RSI level before there is more upside.
The organic development of Polgyon’s NFT trading activity and the bullish narrative around zkEVM are likely to continue to lift the price of MATIC in 2023. Needless to say, a lot will depend on the price action of market leaders in BTC. and whether Ether maintains its bullish trend.
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