Polymesh

Executive Summary

Security tokens have the ability to alter the financial landscape, unlocking trillions of dollars in asset value

and investment, programmably automating operations, and driving new paths to liquidity. For Polymath, the

Ethereum blockchain has been an excellent starting point for security tokens, but is missing foundational

elements that issuers and investors need, and that institutions and regulators require. After having enabled

the creation of 150+ tokens, our research and experience has shown that institutions need a blockchain

built from the ground up with the specific requirements of securities regulations in mind.

Polymath addresses this need with Polymesh, an enterprise-grade blockchain built for security tokens.

The foundations of Polymesh are focused on the most crucial regulatory elements, addressed by four

key design principles meant to meet the demands of regulators and institutions, while unlocking the true

potential of security tokens:

1. Confidentiality - protecting information and ownership privacy while providing a mechanism for

accurate reporting and auditing.

2. Identity - ensuring that no individual or entity can create, acquire, or sell security tokens without a

validated identity. Securities regulation requires issuers, in certain instances (i.e. issuances under

exemptions), to know the identity or confirm the profile of their investors prior to investment, and

continuously monitor their suitability throughout their investment. Additionally, all Validators must

be known, regulated entities.

3. Governance - providing an operating and governance structure for how Polymesh is managed that

allows for curation, and protects assets from contentious forks during network upgrades. This includes

providing an established method for addressing and actioning proposals.

4. Compliance - providing financial primitives and smart extensions to manage security tokens across

one or more jurisdictions and enforce appropriate rules for creating, issuing, and trading security tokens

while also providing the capacity to manage necessary complex restrictions and distributions on-chain.

Polymesh will use the Nominated Proof-of-Stake consensus mechanism with the finality gadget GRANDPA,

and be supported by POLYX, the native protocol token. With Polymesh, Validators stake POLYX on the

network and run authoring nodes, Nominators stake POLYX on Validators, and both are rewarded or fined

by the network based on blocks being added to the chain and fulfillment of their roles. All POLY tokens

currently existing on Ethereum will be able to be upgraded to POLYX at a 1:1 ratio.

Structured in this way, we believe Polymesh will fill the gap between security token technology and the needs

of issuers, investors, institutions, and regulators.

Disclaimer

This document is for informational purposes only and does not create any obligations whatsoever on Polymath.

This document is a summary of certain Polymath product development plans and the information contained

herein is selective and forward-looking subject to update, expansion, revision, or amendment. Due to various

risks and uncertainties, including but not limited to, technological developments and industry conditions, the

actual performance and development of items described herein may differ materially from those reflected

or contemplated herein. Polymath does not accept any obligation to provide recipients with any additional

information, or to update, expand, revise or amend the information herein, or to correct any inaccuracies which

may become apparent. Although all information and views expressed herein were obtained from good faith

estimates and assumptions made by Polymath management, no representation or warranty, express or implied,

is made as to the accuracy or completeness of the information herein, and no assurance is provided that actual

results will be consistent with the descriptions and projections herein.

This document does not constitute an offer to sell, or a solicitation of an offer to buy, POLY or POLYX, nor

does it amount to a commitment by Polymath to make such an offer or solicitation at present or an indication

of Polymath’s willingness to make such an offer or solicitation in the future. This document is not a prospectus

and does not constitute or form any part of any offer or invitation to subscribe for, underwrite or purchase

POLY or POLYX, nor shall it or any part of it form the basis of, or be relied upon, in any way, in connection

with any decision relating to POLY or POLYX. This document is not, and should not be construed as, legal

or financial advice. Recipients should conduct their own investigation and analysis of the information

contained herein and are advised to seek professional advice relating to the legal, financial, taxation,

technological, and other implications of matters herein.

Polymath disclaims any and all liability relating to any information contained in this document.

1.0 Introduction

Security tokens are financial securities created using blockchain technology. Like traditional

securities, they represent ownership interests in assets (equity, debt, real estate, etc.), but

being created digitally (tokenized) allows them to unlock the power of the blockchain with

enhanced features. Security tokens introduce benefits to the market like efficiency through

automated operations, increased global liquidity pools, and the creation of new and unique

financial assets.

The Ethereum blockchain has been the most widely used blockchain to create, issue, and

manage security tokens. Ethereum creates unstoppable applications through smart contracts

that efficiently manage regulatory rules embedded in an issuer’s security token to unlock nontraditional assets and improve liquidity. For Polymath, the choice to utilize and launch our initial

platform on Ethereum was an obvious one—a credible and secure foundational infrastructure

gave us the opportunity to validate the viability of the security token market.

However, our experience on a general-purpose blockchain has helped us understand that

Ethereum lacks key elements which, if not included, would hamper industry and institutional

acceptance of security tokens. For instance:

• Identity is an after-thought, running counter to the core principles of Ethereum: pseudonymity

and decentralization. This creates legal and compliance challenges for issuers and investors,

such as entities in sanctioned countries running nodes to write to the blockchain.

• Confidentiality is not preserved, with positions, trades, and amounts being publicly visible.

• Governance presents significant risk and complexity to issuers due to hard forks during upgrades.

• Compliance is challenged when necessary security token functionality is hindered by

transaction limitations.

With a dedicated, domain-specific blockchain built specifically with security tokens in mind,

these elements can be included from the ground up. This will improve usability and optimize

the consensus mechanism, driving adoption and recognition for the security token industry.

2.0 Architecture

2.1 Financial Primitives

General-purpose blockchains typically have few primitives, that is, features built at the core of the

blockchain. Instead, elements including security tokens and their associated ownership, transfer,

and other restrictions, are implemented as smart contracts on top of the blockchain resulting in

scalability and performance challenges. However with Polymesh, financial primitives are built into

the foundation of the chain. Polymesh financial primitives allow users to operate the blockchain

with low predetermined costs while allowing third-party developers to deploy innovative

decentralized applications (dApps) on top of the chain.

2.1.1 Regulated Assets

Regulated assets are the cornerstone of Polymesh. We use our industry-leading expertise

that drove Polymath’s leadership in the creation of the ERC1400 standard to help balance the

challenges of open, transparent, and accessible global systems with jurisdictional compliance.

2.1.2 Identity

Identity is critical to every action with regulated securities. In order to present a flexible, global

system of identity, we’ve made it core to the functioning of Polymesh; all actions on the chain are

mediated through an identity, rather than through a simple public key like most public blockchains.

Identities are both universal (i.e. 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 owner of the identity. 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 be used to add or remove signing keys

from the identity. Signing keys can be used to execute actions through the identity, and also to

deliver granular roles and permissions for identities and associated functionality within Polymesh.

As a member of the Decentralized Identity Foundation, as well as a participant in various

standardization bodies, our approach to identity reflects these collaborations.

2.1.3 Record Keeping

The Polymesh blockchain captures all primary and secondary transfers of security tokens,

allowing ownership data about those security tokens to be trustlessly captured on-chain while

reducing information asymmetry between the issuer and tokenholders. Polymesh records

exchanges of issued security tokens in a number of forms, from atomic settlement on-chain,

to payment receipts from off-chain, third-party service providers.

2.1.4 Capital Distribution

Many assets have a cash flow associated with them. Polymesh allows issuers to distribute such

cash flows by capturing ownership distribution data at fixed points in time. Issuers can determine

the recipients of the distribution based on their identity or other criteria. They can use Smart

Extensions (see Section 2.3) to perform complex calculations, determine the amounts to be

distributed, distribute on-chain using digital assets such as stablecoins (see Section 2.1.6),

distribute off-chain using payment receipts, or distribute through a combination of on-chain and

off-chain transactions.

2.1.5 Corporate Governance

Corporate Governance on Polymesh allows issuers to leverage the power of the public blockchain

to combine transparency with techniques that allow tokenholders to vote on an issuer’s corporate

actions with privacy, while mitigating incentives to manipulate voting.

2.1.6 Stablecoins

In addition to security tokens, Polymesh supports stablecoins to facilitate activity on-chain such

as cash distributions at a fraction of traditional costs. Stablecoins on Polymesh can be pegged to

any currency and issued by adequately licensed and capitalized third-parties.

2.2 Economics

Polymath extensively researched and consulted with leading economic, game theory, and operational

process experts to establish the token economy for Polymesh with the goal of delivering utility,

security, and sustainability for the chain. The core of this economy is the native protocol token that

fuels Polymesh, POLYX, which both secures and operates the blockchain. Any transaction or use of

smart contracts on Polymesh is paid for in POLYX.

2.2.1 Enabling Economy

The consensus mechanism on Polymesh is Nominated Proof-of-Stake. Validators and

Nominators work together to power Polymesh’s enabling economy by staking within the network

and acting according to the consensus rules. Participants receive rewards for successful validation

of blocks to Polymesh. Validators and Nominators are not responsible for ensuring the compliance

of a transaction, only that the transaction has been properly completed in accordance with

protocol rules.1

Validators run authoring nodes that keep the blockchain secure and operational at all times.

On Polymesh, Validators are permissioned entities, regulated in their respective jurisdictions.

They earn block rewards as blocks are produced and finalized and may be penalized in the form

of fines (slashing) for malicious, dormant, or incorrect activity. Prospective Validators may

submit their application to the Economic Committee for review and approval. (See more on

Governance in Section 5.0).

Nominators select and stake Validators as a signal of trust. Their stake is distributed across

their selected Validators using an algorithm that aims to evenly distribute all staked POLYX.2

Any verified POLYX holder can become a Nominator. If the nominated Validators perform to

protocol rules, the Validator and Nominator receive block rewards. Similarly, Nominators may

be slashed based on a nominated Validator’s improper activity.

Block Rewards are shared equally by all Validators that abide by the protocol rules. Validators

keep a fixed percentage of the rewards with the rest being distributed to their Nominators on a

pro-rata basis per their stake in the Validator.

Bonding Period is the amount of time POLYX is locked following a Validator or Nominator

withdrawal request. Once requested, staked POLYX will unlock after the bonding period lapses.

The bonding period may change through the governance process.

Finality

Nominated Proof-of-Stake offers deterministic finality that can be instantly trusted. Validators

vote on the blocks generated, and once more than two-thirds of Validators have voted in favor

of a block, it is finalized. A shared characteristic of blockchains is that every new block contains

details of all the previous blocks and if a block is finalized, all its previous blocks are finalized as

well. This characteristic allows finalizing a batch of blocks in one vote rather than having to vote

on every block. Batching allows the chain to remain live and scalable with guaranteed finality

within seconds rather than minutes.3

2.2.2 Internal Economy

The internal economy of Polymesh is driven by the objective to provide absolute finality,

incentivize correct production of blocks, and build a sustainable and secure network.

Polymesh’s Network Reserve is funded from three sources: a one-time transfer from Polymath’s

reserve currently held on Ethereum; protocol usage fees (e.g. configuration of security tokens);

and network transaction fees. POLYX is distributed from the Network Reserve based on the

governance process that will likely evolve as Polymesh matures. Requests to disburse funds

from the Network Reserve will be managed initially by the Polymesh Governing Council and may

eventually be governed by POLYX tokenholders depending on the decisions of the Governing

Council. Network Reserve Funds will be used for purposes such as grants and subsidies to

developers and to grow the Polymesh ecosystem.

Polymath’s ERC20 protocol token, POLY, has a total supply of 1 billion tokens. We assume the

majority of POLY will be converted to POLYX. The overall supply of POLYX over time will not be

fixed, nor will it be subject to a predetermined upper limit. The supply of POLYX will increase

in order to fund block rewards. The block reward mechanism will be designed so a sufficient

proportion of POLYX at any point in time will be bonded to support the Proof-of-Stake consensus

mechanism that underpins Polymesh. Block rewards will also be funded through network fees in

addition to minting new POLYX.