Polygon, pursuing its objective to be The Value Layer of the Internet, has recently proposed an evolution of MATIC token, POL. POL is defined as the 3rd evolution of tokens, hyperproductive tokens, where holders can become validators in multiple chains and every chain can offer different roles and rewards to validators.
We're going to simulate these new tokenomics using Cenit’s technology, using agent-based simulation methods. First, let us share our main insights (this is Not Financial Advice):
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In this article we are going to:
Want a direct look at our results? Dive into our interactive dashboard here.
Polygon envisions itself as the Value Layer of the internet, where value is freely exchanged as information is today. In order to achieve that, it needs an infrastructure supported by a token that is able to scale without compromising security. That’s where POL enters into the equation.
POL tokenomics operate on an incentivized staking model. Validators secure the network by staking tokens to authenticate transactions. To motivate these validators, a reward system offering a ~5% APY has been established, granting them rewards both from the networks they validate and directly from the treasury. Validators can accrue additional incentives through:
POL begins with an initial supply of 10 billion tokens, intended to facilitate the token swap from MATIC to POL. In addition, POL has an emission policy with a deterministic emissions rate, in two parts:
Full overview in the whitepaper.
Now that we’ve had an overview of the new token, it's important to identify its various users and understand their incentives. This is the essence of agent-based simulation: a group of users (agents) interact within an environment (the POL ecosystem) with different objectives, and we analyze how these interactions influence factors like token price, buying pressure, and more.
Under this economy, it’s the stakers that are going to want to accumulate tokens and act as a drain, since it’s only their utility that increases in value as long as the protocol grows. If there are no new stakers, probably there will not be additional net buying pressure.
Some users will buy tokens to pay for their transactions, but in general someone else will be selling those tokens, so the net effect is neutral in terms of buying pressure for the token.
A key aspect of simulations and assumptions is the flexibility to test various premises to understand their impact on the overall economy. Using our POL tokenomics simulation dashboard (https://templates.cenit.finance/?template=05-polygon ), you can explore and comprehend how different "what if" scenarios might influence the broader economic landscape. The following hypotheses are as outlined in the whitepaper:
In terms of token holders and their behavior, based on current wallet distributions we have:
Validators are the cornerstone of the staking economy, ensuring the network's security. But there is an important question to answer through our simulations.
“Can Polygon sustain the stakers incentives and the protocol market cap until the ecosystem reaches self-sustaining performance, and if so, how?”
The whitepaper doesn't specify the mechanics of this additional incentivization, but we can logically deduce different potential incentivization scenarios:
We want to address this for the three possible adoption scenarios for Polygon, based on the assumptions in the whitepaper: Low, Medium, and High Adoption scenarios.
Now that we have defined the economy, the different growth scenarios and incentivization scenarios, we will report the key findings from our 10-year simulation that integrates all these scenarios.
Remember that you can create your own scenarios here.
Let’s first examine the results for the different incentivization policies through some of the most important KPIs:
Note that the simulations indicate a 10x increase in token value in 10 years. This seems high outside of speculative movements, but it stems from the expected sharp rise in demand for Polygon, which if materialized could cause the price to quadruple in the last 3 years of the simulated timespan.
The results show that the best scenario in terms of lowest expenditure and highest token price is the incentives for constant APY given in stablecoin. The second best is incentives in token. It's worth noting that the treasury might not have the capacity to sustain the first case with such extensive payments only in stablecoins.
While the 'no incentives' model might seem appealing at first glance, it isn't without significant drawbacks. In the absence of incentives, the token price drops to a minimum of $0.25.
A similar result is observed in the policy of maintaining an 5% APY for at least 35% of stakers.
Moreover, in these two scenarios the treasury reserves run dry by the 56th month in the most pessimistic growth hypothesis case. As a result, this introduces a significant risk to the project's long-term survival.
Note: It might seem counterintuitive that the amount of tokens in the treasury at minimum level is lower when there are no incentives. The explanation is that the treasury needed to sell way more tokens to reach the $75M/year baseline rewards due to the lower token price.
Although the POL economy should not be at risk under the medium adoption scenario, there should be a mechanism to ensure that the market pressure is balanced with newcomers, and therefore the POL ecosystem should be ready to provide enough incentives for that.
Let’s have a deeper look at the simulation results when these scenarios of high additional incentives are active.
We modeled a policy centered on stabilizing the token price with rewards given in tokens, in the medium adoption scenario. This approach requires distributing additional rewards as incentives to validators in POL tokens.
Protocol & token perspective
By the end of the 10 years of simulated time, our model anticipates that the protocol will generate approximately $100 million per month in fees. In this scenario, the token price remains steady at around $5.
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Stakers
From the operator's perspective, looking at their profit and losses of running a node, in this context, we can see how the costs of running an operator generate a big margin in comparison to the profits, ensuring that they are always economically incentivized to keep up with their activity.
Treasury and incentives
The POL token will necessitate additional incentives until the 5-year mark in our base scenario. This corresponds to a cost of about $5 million monthly, culminating in a total projected expenditure of $168 million on rewards.
One key takeaway is the resilience of the treasury. Throughout the simulation, it consistently maintained enough reserves to bear these costs and keep additional reserves in the treasury.
Assuming no additional sales by existing token holders and a policy of keeping the token price based on token rewards for stakers, Polygon's intrinsic token price after a decade could range from $1.31 to $9.51 USD, depending on actual user adoption—be it in accordance to the low, medium, or high adoption scenarios from the whitepaper.
Notably, as the scenario becomes more optimistic (from Bear to Bull), the expenditure by the treasury decreases, indicating a more self-sufficient ecosystem.
Any other questions, ideas or scenarios to model, reach out at alex@cenit.finance and don’t forget to visit the dashboard in order to test the simulation and play around with the design parameters and hypotheses.