- Institutional investors recognize the value of holding cryptocurrencies, more so than just holding straight equity in the companies working on protocols
- Cryptocurrency tokens allow a myriad of income opportunities for investors, from price appreciation to a share of transaction fees
For investors in traditional assets, cryptocurrencies can appear to satisfy very little outside of a speculative itch – they don’t confer equity ownership or pay out dividends like stocks, they don’t track the general movement of the economy and they aren’t tied to any “real” assets.
Yet for those astute investors willing to look through the noise, cryptocurrencies represent an entirely new facet of investing – future control of key software protocols that allow cryptocurrency holders to determine their path of development or earn returns from securing their blockchains.
Which may be why some of the world’s most savvy investors are taking a substantial bet on Polygon, a protocol used by developers to make Ethereum transactions a lot faster and cheaper.
Polygon raised US$450 million from investors not by selling equity, as is typical for most venture investments, but by parting with its Matic cryptocurrency to receptive buyers from SoftBank Group’s Vision Fund 2, Mike Novogratz’s Galaxy Digital and investment giant Tiger Global Management.
Over 40 investors participated in Polygon’s token sale which was capped at 10 billion tokens.
But these tokens represent far more than a traditional equity holding.
A Layer 2 protocol, Polygon offers tools for developers creating decentralized applications or dApps, which tackle some of blockchain’s most vexing challenges, including network congestion and transaction fees.
Transaction fees have soared in the wake of Ethereum’s growing popularity and periods of peak transaction volume have seen interest in so-called Layer 2 protocols as a potential solution.
Layer 2 protocols work by taking transactions from Layer 1 blockchains like Bitcoin and Ethereum, compressing them and posting them back to the original blockchain at a fraction of the time and cost, taking a small protocol fee for each use.
That Layer 2 solution has enabled protocols like Polygon to support over 7,000 dApps with 130 million unique users and over 3 million daily transactions.
Selling tokens directly to investors has enabled Polygon to focus on its development, achieving the equivalent of a public offering without the cost and distraction.
Matic token holders don’t just get to enjoy the upside of any price increase in the token, they can also run validator nodes for transactions, earning a piece of the roughly US$100 million in transaction fees that Polygon earns annually from processing transactions.
In some ways, holding the token is even more powerful than holding equity.
Although this round of investment for Polygon’s Matic tokens comes with a three year lock-up, provided the Layer 2 protocol continues to remain popular, a liquid (and hopefully lucrative) market for these tokens would enable investors to trade in and out of their positions with ease.
Demand for Matic tokens is also expected to be relatively robust, as they are needed by developers and ecosystem contributors for building dApps on Polygon – akin to credits used to pay for cloud computing services.
