Polymesh Investment Report | Deep Dive

Review Date: November 13, 2021

Project Overview

Built as an institutional-grade permissioned blockchain for regulated assets, Polymesh streamlines the processes and opens the door to new ﬁnancial instruments by solving regulatory challenges with blockchain infrastructure around identity, compliance, conﬁdentiality, and governance. With regulatory restrictions in mind, Polymesh is integrating these core principles into the base layer of its chain, which is not currently possible in other Layer 1s. Using Polymath’s Token Studio, developers can tokenize assets in the private markets. Examples include equity, debt, real estate, VC/PE funds, intellectual property, and other intangible assets.

Investment Thesis

Polymesh’s proprietary technology enables anyone registered on the network to create, issue, and manage digital securities on a substrate-based blockchain. A unique feature of Polymesh’s blockchain infrastructure is the base layer of compliance and regulation they provide. By doing so, any future changes in law and regulation can easily be managed, and compliance is baked into security tokens issued on the Polymesh network. The main diﬀerence between Polymesh’s approach and that of a general-purpose blockchain (like Ethereum) is that Polymesh’s design focuses on a precise solution to speciﬁc requirements rather than a generalized solution to abstract needs. In our opinion, this helps the issuer of security tokens satisfy regulatory requirements. Since Polymesh makes it very easy for securities to bake in KYC, AML, and other regulatory requirements, whereas other blockchains currently have no mechanism to do so, Polymesh has a considerable regulatory edge when issuing security tokens.

The beneﬁts of tokenizing assets, particularly in the private markets, are that it fosters liquidity and accessibility (global access to markets 24/7) and democratizes ownership of a more comprehensive array of asset classes. Additionally, not only could you tokenize securities via Polymesh, but you could use their platform for multiple applications, like automating dividend payments, proxy voting via smart contract, and programmable equity. The total addressable market (TAM) for tokenized security is north of $100 trillion. Polymesh has a ﬁrst-mover advantage as a Layer 1 to tap into the sector and tremendous optionality to build applications to take advantage of this theme.

Technology

Polymesh facilitates the entire token journey for an end-user, from creating the security token to the ongoing management of assets trading in secondary markets. Using Polymath, issuers of security tokens have the following beneﬁts:

Security tokens can be created easily.

Security tokens created on the Polymesh network have programmable enforcement of jurisdictional regulations directly.
Accessing the Polymesh network of trusted partners (Exchanges, KYC providers, broker-dealers, etc.)
Management (dividend payment and business requirements, for example, no single investor can hold more than 10% of the asset)

Polymesh’s speciﬁcity gives it and the applications built on it a distinct advantage over those leveraging general-purpose blockchains. Its purpose-built infrastructure addresses the gaps in Ethereum’s architecture to align the functioning of the blockchain with the requirements of modern capital markets. Before we go over the key design principles built into the base layer of Polymesh, we suggest you watch this demo. This would help clarify any abstract concepts discussed below relating to the architecture of the blockchain.

Five fundamental design principles of Polymesh:

Identity – Securities issuance and transfer require a known identity, but most chains are built for pseudonymity. Polymesh uses a customer due diligence process to ensure all actors on the chain are veriﬁed and permissioned entities author all transactions. According to the whitepaper, “all actions on the chain are mediated through an identity, rather than through a simple public key like most public blockchains” to create a versatile, global system of identity. Identities are universal (that is, they can be accessed throughout Polymesh) and permissioned — they collect a set of claims or attestations issued by network-approved or issuer-speciﬁc authorities about the identity owner. These claims can then be used to manage asset ownership, transfer, and other restrictions, as well as the operation of the blockchain’s underlying consensus mechanism. Each identity has a single administration key, which can add or remove signing keys from the identity. Signing keys can execute actions through the identity and deliver granular roles and permissions for identities and associated functionality within Polymesh.

Governance – Contentious forks in the chain present signiﬁcant legal and tax-based challenges for tokens backed by real assets. Polymesh uses a governance model to prevent hard forks and guides the evolution of the chain.
Compliance – Solutions built on top of general-purpose blockchains struggle with processing the complex logic needed to comply with regulations. Polymesh builds compliance into the chain, enabling faster processing and lower protocol fees that can scale as demand and complexity of regulation grows. Additionally, a modular architecture empowers Polymesh to accommodate frequent changes in regulatory or business requirements.
Conﬁdentiality – Most market participants need their position and trades to remain conﬁdential, but anyone can see holdings on general-purpose blockchains. Polymesh has engineered a secure asset management protocol that enables conﬁdential asset issuance and transfers.

Settlement – Settlement challenges prevent the blockchain from serving as a golden record for asset ownership. By creating assets at the protocol layer, Polymesh can provide a simpliﬁed approach to transfers that provides instant settlement without funding, prevents unwanted airdrops through trade aﬃrmation, and oﬀers deterministic ﬁnality, preventing front running.

Tokenomics Token Utility

POLYX is the native token of the Polymesh network. It has multiple use cases, which makes the token utility strong.

Transaction fees (gas fees) – fees charged for all transactions on Polymesh. Fee payment is split at a 4:1 ratio between the network treasury and the block-creating node operator.
Protocol fees – charged for certain types of native functions (eg. reserving token ticker) set by the Polymesh Governing Council. Fee payment is split at a 4:1 ratio between the network treasury and the block-creating node operator.
Developer fees and grants – charged and set by developers of smart contracts and smart extensions. Developers who provide an answer and solution to a speciﬁc request for proposal (or even address unsolicited solutions) may be provided a grant in the form of POLYX. While these are not yet activated for Polymesh, further details will be determined through the on-chain governance process,
Staking rewards – Stakers back node operators of their choice with POLYX. Both are either rewarded or ﬁned based on the operator’s performance running their node (ie. keeping their node online; writing blocks to the chain per the rules of Polymesh). For each block created, the node operator who made it is rewarded in POLYX along with their stakers.

Governance – Staked POLYX may be simultaneously used to signal support in Polymesh governance.

Token Supply

POLYX on Polymesh will not be created from scratch. With the launch of the chain, the main mechanism to build the supply of POLYX is through an upgraded bridge letting users upgrade their Ethereum-based POLY utility tokens to POLYX on Polymesh. POLY can be upgraded to POLYX at a 1:1 ratio (i.e. 1,000 POLY = 1,000 POLYX).

The total supply of POLYX will be uncapped, unlike POLY, which was capped at 1 billion. The newly minted POLYX will be used for rewards to secure the network, and the inﬂation rate could go as high as 14% if less than 70% of POLYX is staked to incentivize network security. Staking secures the network by aligning the economic incentives of node operators and stakers to the correct operation of the chain through rewards and penalties, denominated in POLYX. It’s an essential aspect of the nominated proof-of-stake consensus mechanism.

Initial token distribution was centralized. The initial supply of POLY was allocated as follows:

Market Sizing

We conducted diﬀerent market sizing exercises to determine the price potential of POLYX. At the current price of $0.69, the market believes it can capture 0.12% of the Ethereum market share. Although Ethereum is not a direct competitor, most ﬁnancial innovation happening within the crypto space resides there. If we assume that the Polymesh network can secure a 0.5% to 1% market share of ETH, the ROI potential is 3X to 7X. This by no means is a radical assumption as Polymesh is going for a $100+ trillion TAM (total addressable market).

If the security token narrative within the crypto market gets reignited (and as Polymesh is the only Layer 1 targeting issuance of security token with ﬁrst-mover advantage), there is a possibility it might end up taking 0.5% to 1% total market share of the crypto industry. If this scenario plays out, the fair value of POLYX could range between $15 to $35, which garners 21.7x to 50.7x ROI potential.

Let’s run a blue sky scenario where global illiquid asset market capitalization is between $90-$95 trillion, and Polymesh network is able to capture 0.20% to 0.40% of this. ROI potential is between 261x to 551x.

Audits Polymath Audit

February 2018

Open Zeppelin audited the POLY token contract

Audit Report for Polymath Token Distribution

January 2018

Solidiﬁed audited the Token Distribution contracts

Audit Report for Polymath USDTieredSTO module

August 2018

Solidiﬁed audited the Polymath USDTieredSTO module and its auxiliary ﬁles

Audit Report for Polymath Core Tore release

July 2018

Solidiﬁed audited the Polymath Core Tore release

Audit Report for Polymath Core 2.0.0 release

October 2018

Solidiﬁed audited the Polymath Core 2.0.0 release

Polymath-Core Audit

September 2019

ConsenSys Diligence conducted a security audit on the Polymath Core smart contracts

Polymesh Baseline Security Audit

September 2021

Atredis Partners conducted the security audit of new features added to the Polymesh network

Polymesh Baseline Security Audit

March 2021

SR lab conducted threat modeling and hacking assessment of the Polymesh network.

Team

The leadership team is well-balanced, with experience ranging from Wall Street to the Beltway. Cumulatively they have 59 employees with a strong blockchain developers team.

We also had the pleasure of having Graeme Moore, Polymath’s head of tokenization, join our podcast — you can watch him in action right here. We were particularly impressed by the CTO, who is an Oxford University graduate with experience working at Morgan Stanley. He also has extensive working experience building out machine learning technology and within the blockchain sector. This gives us conﬁdence — not only is he technically capable of delivering the goods, but he also has cross-discipline knowledge from ﬁnance to implement the business logic side of their technology.

Risks to our Investment Thesis

The sale of POLYX tokens took place before the existence of its token utility. Also, the token supply is centralized. This might mean that in the future; there is a regulatory threat that POLYX might be classiﬁed as a security and not a utility token.
Regulators have kept us in the gray area on tokenization of assets — there is no guidance yet as to whether or not security tokens are legal.
Polymesh could remain undervalued for a long duration unless the narrative regarding security tokens comes into favor.
Limited amount of current utility and usage of the platform.
Network adoption might be limited, as Polymesh is a permissioned blockchain.
Polymesh Network is not a one-stop-shop for security tokens. Their platform can be used to issue security tokens, but P2P exchange and trading of these tokens will not be conducted there, as it’s not a marketplace. Partnership with an exchange or security token marketplace like TZero would be critical for Polymesh to unlock its actual value.

Technical Analysis

POLY is currently trading above its trendline support at $0.63; one could build up a position at this support if the prices dip. Conversely, if one feels that we are still early in the security token theme, one could accumulate at a clear break & close above the neck-line price of $0.73 as there is the potential formation of an inverted head-and-shoulder pattern. Additionally, a breakout from the resistance of $0.95 could also be a viable option to buy POLY, as we are still very early with this theme. A breakout from $0.95 might indicate that the market is catching up to this theme or a positive catalyst has unfolded.

Verdict

Polymesh has solid technology, and they have used a novel approach to target the issuance of security tokens. The code quality of their Github repo commit is exceptional, and the project is well-audited, which makes us excited about the project’s future. Not only that, the sector Polymesh is targeting has tremendous potential. Polymesh has also successfully garnered the support of 14 major regulated ﬁnancial institutions acting as permissioned node operators on its network. We believe that Polymesh is undervalued. However, it might remain undervalued for a while, as the security token theme is not fashionable lately, and regulators have kept us in the dark regarding the legality of security tokens.

Appendix Fundamental Scorecard – (83%)
Low Competition – 9/10	Team – 13.5/15	Use-Case – 19/20
Investors -10.25/15	Distribution – 6/10	Tokenomics – 7/10
Audit – 10/10	Community – 5/5	ROI Potential: 7/10
Technology Scorecard – (82%)

Polymesh Investment Report | Deep Dive