Introduction

Since the introduction of Bitcoin, blockchain has been a hot topic of discussion. While opinions on the high volatility and speculative nature of some virtual assets vary, there is a general agreement on the value of blockchain and distributed ledger technologies in the financial sector. As blockchain technology continues to advance, enhancing financial infrastructure, the role of tokenization in increasing liquidity becomes increasingly significant.

In traditional finance, asset securitization has long been used to improve asset liquidity and capital efficiency. This process involves pooling less liquid assets (like real estate, auto loans, and credit card debt) and converting them into securities, which are then sold to investors to raise funds and achieve liquidity. Asset holders benefit by transforming their assets into tradable securities, spreading risk among more investors, and securing funding. Investors, in turn, earn interest or dividends from the cash flows generated by these assets. Typically, specialized institutions or companies handle these asset-backed securities’ aggregation, packaging, and issuance.

Blockchain technology introduces transparency and immutability, paving the way for a new internet economy. Integrating real-world assets (such as real estate, artwork, stocks, and bonds) into the blockchain ecosystem requires effort. Inspired by asset securitization, blockchain platforms for asset tokenization have emerged. Asset tokenization involves converting these valuable real-world assets into security tokens, leveraging blockchain technology for more efficient and convenient trading and liquidity management. This digital approach allows almost any valuable asset to be traded and transferred on the blockchain. Generally, there are two methods for tokenizing assets: directly issuing asset tokens on the blockchain via smart contracts or issuing them through traditional financial systems and mapping them onto the blockchain, which requires compliance measures and regulatory approval.

The advent of asset tokenization enhances liquidity and convenience in the traditional financial system while providing more real-world asset support for blockchain and crypto economies. Polymesh specializes in the tokenization of real-world assets. Its mainnet launched in October 2021, and in June 2022, it acquired Meta Finance, another company focused on security tokenization. This article will explore Polymesh’s business logic, economic model, and current development status.

What is Polymesh?

Polymesh is a Layer 1 blockchain built using the Substrate framework, specifically designed for tokenizing real-world assets (RWA). It is an institutional-grade permissioned blockchain that focuses on solving issues related to governance, identity, confidentiality, and compliance in the realm of securities tokenization. By incorporating the ERC-1400 protocol, Polymesh meets the requirements set by various regulatory bodies and token issuers, while employing zero-knowledge technology to ensure confidentiality. The mainnet of Polymesh was officially launched in October 2021, and a developer incentive program was started in March 2022.

Source: Polymesh Team

The protocol was established in September 2020, led by Polymath Inc., which was founded in 2017 and is headquartered in Toronto, Canada. Polymath focuses on creating secure token technology and providing a range of related services. The team consists of experienced professionals from the finance, blockchain, and legal sectors. In January 2018, Polymath raised $58.7 million through an ICO by issuing POLY tokens. In June 2022, Polymesh acquired Meta Finance, a company also specializing in securities tokenization. In April 2023, Binance announced it would become a network node operator for Polymesh and offer POLYX Token staking services to its users.

Organizational Structure

Polymesh is developed and operated by Polymath. This public blockchain was specifically separated for compliance purposes and built using Polkadot’s modular tool, Substrate. Polymath issued POLY tokens on the Ethereum mainnet, which can be converted into POLYX tokens on the Polymesh mainnet via a cross-chain bridge.

The protocol’s architecture includes several key components. The Polymesh Governing Council, composed of POLYX token holders, is responsible for network upgrades, improving POLYX tokenomics, and overseeing various activities. External Entities are organizations introduced to the network that can earn certain rewards. Developers are smart contract developers who may, in the future, receive a portion of transaction fees generated when users interact with their contracts, incentivizing better development and improvements. Operators are responsible for staking tokens, producing blocks, and earning block rewards.

Source: polymesh.network

Asset Security

Polymesh has introduced the ERC-1400 token protocol to replace ERC-20 in enterprise and governmental applications where ERC-20 is insufficient. While ERC-20 tokens do not restrict any user from sending or receiving tokens, security tokens face many identity, jurisdiction, and asset category restrictions. Furthermore, ERC-20 tokens cannot mandatorily represent ownership. In Polymesh, ERC-1400 is referred to as ST20 security tokens, enabling issuers, investors, KYC providers, wallets, exchanges, regulators, and developers to collaborate within a unified framework. These tokens establish standards for how compliant tokens should interact and operate on the blockchain.

ERC-1400 can meet various regulatory requirements for different types of securities across countries, thanks to its programmable check function. The main functions include:

• Signing irrevocable transactions
• Restricting transfers: Security tokens must adhere to a series of rules, such as those set by policymakers and issuers, and whitelist requirements. In contrast, ERC-20 tokens only need to meet balance requirements for transfers. Therefore, ERC-1400’s check function verifies real-time restrictions.
• Identity registration: An individual’s ability to send and receive securities depends on their identity. For example, many jurisdictions require individuals to complete KYC certification before they can buy and sell specific securities. Additionally, certain citizenships are subject to trading restrictions, and the check function can maintain whitelists to enforce these rules.

Source: polymesh.network

Transaction Confidentiality

Polymesh offers a mechanism called Confidential Security Tokens (CST) to ensure the confidentiality of real asset tokens, either partially or fully. CSTs use Zero Knowledge Proof (ZKP) technology to verify the validity and compliance of transactions without disclosing any sensitive information.

As illustrated in the diagram below, the confidential transaction process combines cryptographic proofs with off-chain security. When a token issuer (or a trusted third party acting on behalf of the issuer) creates a transaction contract on-chain, this contract must meet certain restriction checks. Instead of directly sending a transaction to the contract, users first send it to a Mediator. The Mediator, off-chain, uses ZKP technology to verify whether the transaction meets the necessary restrictions and then provides proof to the transaction contract. If the user confirms that the signed transaction is correct, the Mediator signs it, and the seller also signs it.

Source: assets.polymesh.network

It is evident that Polymesh depends on third parties for transaction verification, which means that exchanges and brokers may still have opportunities for transaction manipulation. During the process of matching buyers and sellers, the final decision lies with the buyer, who must provide the final confirmation signature.

Economic Model

POLYX is the native token of the Polymesh protocol. If most POLY tokens are converted to POLYX, the total supply of POLYX will gradually increase over time, without a fixed cap. The block reward mechanism is thus designed to ensure a sufficient proportion of POLYX is staked at any time to support the proof-of-stake consensus mechanism. Block rewards are funded through network fees and the minting of new POLYX.

Newly minted POLYX used for block rewards can amount to up to 14% of the total supply annually. To prevent runaway inflation, once the supply reaches 1 billion POLYX, the amount of new POLYX minted for rewards will be capped at 140 million per year.

Current data indicates that the total supply of POLYX is 1.053 billion tokens, held across 11,222 addresses. Of these, approximately 522.9 million POLYX are in circulation, representing 49.56%; 447.2 million POLYX are staked, representing 42.43%; and the remaining 7.99% exist as POLY on the mainnet. To maintain network stability, the inflation rate of POLYX is kept around 10%, with the current rate at 9.46%. Future adjustments to the inflation rate will be decided by community governance through voting.

Source: Polymesh Explorer

POLYX is classified as a utility token under Swiss law, following the guidance of the Swiss Financial Market Supervisory Authority (FINMA). Its primary use cases include:

1. Transaction and Protocol Fees: POLYX is used to pay for transaction fees on Polymesh, with fees determined by the size and complexity of the transactions.
2. Governance: POLYX holders can participate in governance by voting on proposals.
3. Staking: Users can stake their POLYX with Polymesh node operators to earn staking rewards.
4. Developer Share: Developers who deploy contracts can earn a portion of the transaction fees from each transaction that uses their contract.

Source: polymesh.network

Development Status

Polymesh has made considerable progress, demonstrating high on-chain activity. The network has validated over 100 million blocks and operates with 62 certified nodes. The platform primarily serves business users, with over 7,000 user accounts and more than 5,000 POLYX holders.

Source: polymesh.network

Conclusion

Polymesh offers a universal solution for regulatory bodies through the ERC-1400 protocol, enabling them and third parties to integrate KYC certification rules into smart contracts. Additionally, it employs zero-knowledge proof technology to verify transactions off-chain and submit proofs on-chain, ensuring transaction confidentiality.