Crypto News

  • Weekly Recap Ending July 29th

    Week In Review Following the MCCN exploit, the THORChain team released a plan to deal with the liability. The THORChain team has released the following statement via Twitter: THORChain has suffered a sophisticated attack on the ETH Router, around $8m. Ethereum Classic block 13,189,133 arrived at 0:00 UTC on Jul. 24, 2021 (8:00 PM ET on Jul. 23, 2021), activating the Magneto hard fork. A proposal to introduce iceCREAM, a new CREAM tokenomics has passed. The first Helium halving event will occur on Aug. 1, 2021. The Keep Network team revealed a new timeline for the tBTC v2 launch on Jul. 28, 2021. Sector Performance Overview The week ending July 29th saw a complete reversal from previous weeks. For the first time since the May crash, sectors experienced two-digit weekly returns, possibly marking the bottom of the recent multi-month decline. The leading sector this week was DeFi finishing the week with a whopping 23% return. Terra (+50.9%), Amp (+76.62%), and THORChain (+58.76%) were among the top-performing assets in the sector. The Currencies sector followed closely, posting a weekly of 22% driven entirely by Bitcoin’s performance (+22.8%). Despite having solid weekly returns, the DEX and Smart Contract Platform sectors were the two underperforming groups of the week. On the DEX side, performance was driven by Uniswap (+9.05%), PancakeSwap (+13.01%), and THORChain (+58.76%), while the Smart Contract Platform sector was boosted by Ethereum (+14.9%), Polkadot (+14.4%), and Solana (+8.2%). Sector Portfolio Methodology The market-weighted “sector portfolios” for this week’s report were created by selecting the top assets (ranked by market capitalization) from each sector covered in this report. The sector portfolio allocations are the following using market capitalization data as of July 29th. Sector Drill Down Performance during the week ending July 29th has been the best in recent months. All sector portfolios had a phenomenal week propelled by a sudden change in market sentiment. For the first time since May, DeFi activity is showing signs of life once again with DEX trading volumes increasing and outstanding loans across major lending platforms reaching new all-time highs. During the week, all sector portfolios followed the pattern every investor is excited to see: up and to the right. In the early days of the week, performance between the portfolios was relatively tight, with DEXs and DeFi leading the way. However, as the week came to a close, portfolio returns began to show higher levels of dispersion. In the end, the Currency portfolio outperformed the rest, finishing with a 23.4% return aided by Bitcoin’s strong weekly performance (+22.8%). The DeFi portfolio came in a close second place. Despite having solid performers like Terra (+50.9%) and THORChain (+58.76%), the DeFi portfolio has a heavy allocation to Uniswap (+9.05%), which didn’t perform as well as other DeFi assets. The Smart Contract Platform and Web3 portfolios were the two laggards of the group ending with weekly returns of 14.6% and 16.8%, respectively. Volatility, measured as the rolling standard deviation of the portfolio’s daily log returns, has seen a few spikes but is on a clear downward trend. Notably, since the May crash, each new peak has been lower than the previous one, showing increased market stability. Compared to levels in mid-May, current portfolio volatility is relatively low. Week-over-week, the correlation between sector portfolios and Bitcoin saw a bit of a decline. In particular, the Smart Contract Platforms, DEX, and DeFi portfolios saw their correlation dropped 4-7% over the week. The Web3 portfolio is the only exception moving relatively flat over the past seven days. Regarding correlation with Ethereum, sector portfolios continue to see their correlation steadily declining over the past several weeks. In particular, the Currency portfolio (which is heavily allocated to Bitcoin) has seen the most significant decline going from 88% to 80% since Mid-July.
    Source: Roberto Talamas — Published: 2021-07-30T13:00:00Z

  • Weekly Recap Ending July 22nd

    Week In Review The Hyperledger Besu team released Besu v21.7.1 on Jul. 15, 2021. On Jul. 15, 2021, THORChain MCCN was exploited and approximately $4.9M were lost. Haven Protocol developers announced that they would issue two hard forks to restart the chain and patch the initial vulnerability. A proposal to establish a liquidity incentives program (Uniswap Liquidity Program, ULP) has been drafted. As part of the Maker foundation dissolution, Rune Christensen, CEO of the Maker Foundation, opted to step down from his role. Following the MCCN exploit, THORChain team released a plan to deal with the liability. Sector Performance Overview The week ending on July 22nd was dominated by the Smart Contract Platform sector posting a weekly return of 2.87%. Within the sector, platforms like Ethereum (+5.31%), Polkadot (+0.93%), and Ethereum Classic (+0.41%) were the main drivers of the sector’s 7D performance. On the opposite side, the Web3 sector didn’t experience the same rebound as the rest of the sectors, finishing the week with a -3.47% loss. Although most assets in the sector had negative-to-muted weekly returns, the vast majority of the sector’s underperformance can be attributed to four assets: Filecoin (-2.30%), The Graph (-7.43%), BitTorrent (-5.70%), Stacks (-15.28%). Sector Portfolio Methodology The market-weighted “sector portfolios” for this week’s report were created by selecting the top assets (ranked by market capitalization) from each sector covered in this report. The sector portfolio allocations are the following using market capitalization data as of July 22nd. Sector Drill Down Performance during the week ending on July 22nd was a bit of a rollercoaster. All sector portfolios started the week with disappointing performance with some reaching lows of -10% to -20% in the first five days of the week. However, performance across the board improved starting on July 20th gaining back some of the previous day’s losses. On July 21st, the overall market was boosted by comments from Elon Musk saying that his companies (Tesla and SpaceX) hold Bitcoin, while his personal holdings include a good amount of Ethereum and (of course) Dogecoin. The Smart Contract sector portfolio ended the week with the least losses across all sector portfolios. Despite Ethereum’s positive benefit, the sector portfolio’s overall performance was dragged down by assets like Cardano and Solana. The runner-up was the Top Assets portfolio which ended the week with a -1.7% mostly driven by Bitcoin’s performance over the week. The Web3 portfolio suffered the most losses ending the week with a -8% return. The biggest losers within the sector include Arweave (-15.5%), Storj (-15.8%), and LivePeer (-18.2%). Volatility, defined as the rolling standard deviation of daily log returns, had been on a steady decline since the beginning of July. However, in the past two days, there was a small uptick as a consequence of the recent rally. Compared to levels in mid-May, volatility is relatively low. The DEX and DeFi portfolios are currently the ones with the highest risk both running 10-day rolling volatility of ~7%. The volatility of the Top Asset and Currency portfolios has been moving in the 4-6% due to their higher allocation to Bitcoin which has been one of the least volatile assets relative to the rest of the tokens covered in the report. The correlation between sector portfolios and Bitcoin saw a sudden jump over the week as a result of the market upswing. Aside from the portfolios that are heavily allocated to Bitcoin (Top Assets and Currency portfolios), all sector portfolios have a correlation with Bitcoin greater than 80%. On the contrary, the correlation with Ethereum has been on a steady decline. Particularly, the Web3 portfolio went from having a correlation of over 95% in the early days of June to ~85% currently. DEXs and DeFi also saw a decline of roughly 7% over the same period.
    Source: Roberto Talamas — Published: 2021-07-23T13:30:00Z

  • The Nature of Venture

    The nature of venture capital is changing. While the venture capital industry has origins dating back to the 19th century, the concept exploded in the 1960s after the successful backing of semiconductor startup, Fairchild Semiconductor. While capital – the ability to source millions of dollars – was initially the primary source of value, access to capital has become increasingly commoditized. The maturation of the internet and the advent of crypto only further accelerated the commoditization of capital with the ability to easily distribute information and transfer value, respectively. As the crypto industry matures, the venture industry is finding its footing unbalanced as venture capitalists experience the rug being pulled out from underneath them. These are the warning signs of venture’s next evolution. The Canary Looking back, PoolTogether – the no-loss lottery protocol – acted as the proverbial canary in the coal mine for what was to come in future crypto funding rounds. PoolTogether Improvement Proposal 11 aimed to raise $7 million for the PoolTogether protocol in exchange for 5.38% of the total POOL supply. The strategic round would include a few venture funds receiving tokens at a 35% discount with a one-year lock up, followed by one-year weekly vesting (effectively two years until fully distributed). The community was upset. In May the market was still frothy (ETH trading at ~$3,000) but POOL was trading rather sideways and the PoolTogether community felt as if they were getting a raw deal, with most of the community members unable to participate. Since the strategic round was relatively small and there were only four venture funds included in the round, the community and VCs were able to come to an amicable agreement, in large part because of PoolTogether founder Leighton Cusack who was able to liaison a better deal (PIPT-13) for the community. The new deal reduced the deal size to ~$6 million with a 30% discount, brought in Maven Capital, a European-based VC who committed to depositing working capital into PoolTogether’s protocol. In the end, the PoolTogether community spent 76% of the token allocation from the first deal (24% savings rate) while receiving 85% of original capital (a loss of only 15%). The PoolTogether community’s ability to push back and force VCs to the negotiation table demonstrates the shifting power dynamics of open, liquid cryptonetworks. But, alas, the warning signs only grow. The First Tremor SushiSwap, a decentralized Exchange with nearly $3 billion more capital locked in its protocol than PoolTogether has elevated PoolTogether’s experience in funding, community backlash, and entertainment. For context, Sushiswap is similarly conducting a strategic round from its treasury to a group of venture investors. Source: Messari You can read the whole thread if you want, but you’ve been warned. The deal terms: Deal size: $60m (25% of Developer Treasury) with up to 10m allocated to community members. Vesting: 6-month cliff followed by 18-month linear vesting Discount of 20-30% SushiSwap’s round was to be co-led by Pantera and Lightspeed Venture Partners, the latter of which placed one of the best VC bets of all time. Even with a portion of the round allocated to the community, individuals were still upset. In the over 268 comments left, many are from community members sharing how the discount is unfair, the round too large, the vesting schedule too short, and the value proposition vague. Many of the venture funds including both co-leads responded to the criticism explaining the reason for the discounts and the value that venture funds can bring to fishy DEX. (Lightspeed initial response, Pantera). Generally speaking the top reasons for why venture funds can provide value include: Get working or growth capital Use the VC's connections and relationships Signaling (brands help) Other advice, support, guidance Encourage other portfolio companies to partner with the protocol Secure other long term partners, including partners in the traditional financial realm Generally speaking, in both the PoolTogether and Sushi strategic rounds, venture funds advocate that discounts are fair because of the capital lockup and the value these funds can provide to the protocols. However, even as funds in the Sushi forum explained how the capital lock-up deserved the discount and aligned long-term incentives, members of the Sushi remained unconvinced that all 20 funds would equally provide the same value or that the short lock-up would equate to long-term players. The Sushi community’s intuition that not all funds would be long-term players was somewhat accurate. Defiance Capital immediately started selling (you know, in order to be better long-term investors and all) which was quickly noticed by Twitter. Notably, DeFiance responded, stating that they have a fiduciary responsibility to sell tokens and that their actions don’t need to be explained to the public. Still, I wholeheartedly believe that venture funds can provide value when interests are long-term aligned. FutureFund spent a few million on the “sushi.com” domain for SushiSwap. SBF and Alameda have been long supporters of Sushi from the beginning. Other VCs are great at recruiting, sourcing deals, and connections are more important than people realize. But this value is often “soft” – interpersonal – rather than “hard” – actual technical development work – and as such is hard to communicate. The Sushi Community is understandably upset, a bunch of VCs swoop in for a sweet 30% discount with a 15-month lockup. Most Sushi community members would probably take that deal! Thankfully, the venture investors heard the outrage and responded accordingly. SBF posed good solutions including 2x lockup which justifies the discount and long-term incentives. Amy Wu from Lightspeed agreed to remove the discount and extend the lockup. All seemed calm and headed towards a resolution, until Jeff Dorman entered the chat. Jeff’s investment management firm, Arca, is long fish coin. It holds 7.5% of the xSUSHI supply, all purchased on the open market. Arca countered the strategic round proposal with an offer to purchase up to $10 million SUSHI at a 30% premium to the current price on July 16th. The firm claims that SUSHI trades below its fair market value and as such shouldn’t be selling a large percentage of the treasury. Additionally, the counter offer proposed that SushiSwap wasn’t in need of $60 million and instead, that $10 million should be more than enough to use for operations or deploy as stablecoins into the protocol. There hasn’t been an update on the new proposal or any insights into whether both proposals will be equally considered (given that large individual token holders will likely determine the outcome). Still this situation is unprecedented and has sent shockwaves throughout Crypto Twitter resulting in a story with as many twists and turns and financial absurdity as a Money Stuff newsletter (here's your next subject, Matt Levine!) How the SushiSwap strategic round unfolds is still up in the air and regardless of what happens to SushiSwap, the takeaway is that the game is changing. The Future of Venture It's a testament to the power of crypto networks that world-renowned VCs like Lightspeed now have to approach the community for a fundraising round. The community has negotiated on behalf of their protocol, and it appears as if the strategic round will now increase the lockup while reducing the 30% discount. That’s value add from the Sushi community. Ultimately the right decision – on whether to take venture funding and respective deal terms – changes with each protocol. Some protocols can more effectively use capital which means that raising more stablecoins will be useful. Other teams might want to pair with venture funds they know will deliver value like Paradigm or favor funds that will only back one horse in the race. Venture can provide mercenary capital or value, and reputation will be a competitive advantage for venture funds. Some funds will nuke their reputations over single deals (after all, there’s still money to be made) while long term players will thrive with the additional publicity that comes from blockchains. VCs will increasingly face pressure from communities when they get cushy deals that don't come with significant lockups or funds will have to prove the value they bring is worth the discount. The warning signs of the venture capital industry’s natural evolution are becoming more frequent. The deals are less private. The funding rounds are more competitive. The people are more powerful. Ultimately, venture funds aren't going away, however, the nature of venture is changing.
    Source: Mason Nystrom — Published: 2021-07-20T13:02:00Z

  • Messari Fund Analysis H1'21: Examining Liquid Portfolios of Crypto Funds

    Of the thousands of cryptoassets, a few hundred tokens have circulating market capitalizations over $50 million. At least one hundred tokens have market caps over $500 million and a few dozen are unicorns. The smart money investors – venture capital funds, hedge funds, mercenary liquidity providers – are making bets across various sectors DeFi, NFTs, Web3, The Metaverse – at various stages of growth (all the way from sub $50 million to well over $1 billion). We’ve tracked down many of the top venture capital (VC) firms and hedge funds in crypto and recorded their liquid portfolios (assets that trade on the market). This of course could miss equity investments or investments in networks that are not yet live. In total, our analysis shows that combined, forty-four funds hold 225 unique assets across various sectors including smart contracts, DeFi, Web3, Scaling, Interoperability, and NFTs. (Messari Pro comes with access to our full list of community screeners, including VC portfolio screeners for Multicoin, Pantera, Paradigm, ParaFi, Three Arrows Capital, and more). To find the list of portfolio screeners go to Messari.io/screener and for screeners by Messari Research in community section: A16z Alameda Research Arrington XRP Capital Binance Labs Dragonfly Capital Electric Capital Fabric Ventures Framework Ventures Fenbushi Capital Galaxy Digital Kenetic Capital LedgerPrime Capital The public nature of these portfolios and the availability of most cryptoassets ensures that both institutional and everyday investors can get in on the action (and lose together too). Messari Fund Analysis The April Messari Screener Analysis Messari conducted this same analysis back in April with only 35 funds and the top 5 held assets were: Polkadot Keep Network Uniswap Compound Filecoin Maker Nervos Network. The July Messari Screener Analysis: Bigger and Bag Heavier After analyzing all the portfolios, we found the top asset invested across the forty-four funds we’ve tracked is Polkadot (DOT). In fact 19 of the 44 funds own DOT, meaning 44% of our tracked funds have a vested interest in Polkadot’s success (remember this when you see a bunch of people shilling Parachains on Twitter). Note, we assume most of these funds hold Ethereum and Bitcoin and therefore omitted them from our analysis. The second most popular asset across the portfolios that we track is Terra (LUNA) – an algorithmically-governed, seigniorage share style stablecoin platform. Terra users locked over $2.2 billion worth of assets in its two applications, Mirror Protocol and Anchor Protocol, by the end of Q2. Anchor Protocol, unsurprisingly is also on the top 35 list amidst its recent growth. Tied for third most invested were smart contract platforms Near Protocol (NEAR) and Oasis Network (ROSE). Both are smart contract platforms but to date have less adoption than competitors like Solana, Ethereum, and Avalanche. An equal-weighted portfolio of the above list would have posted returns of +77% YTD with Solana and Terra being the best performers of the portfolio at 1,569% and 958% respectively. Diamonds in the VC Funded Rough We have also created a Messari screener displaying these assets (ordered by market capitalization). Of the 35 assets with over six unique venture or hedge fund investors, Radicle, Lido DAO, Oasis, DODO, and Balancer maintain the lowest circulating market capitalization. Interestingly, Lido DAO is one of three assets in the derivatives sector (also PERP and SNX) within the top-funded asset list while Radicle is one of the only Web3 projects reflected within the most funded list, besides The Graph and Orchid. Still, it’s important to note that circulating market cap can sometimes be misleading and it’s important to consider the fully diluted value of these assets. Tokens with high fully diluted valuations need to be able to grow into their valuations. One trend worth noting is that venture investors clearly see large total addressable markets within the smart contract space and DEX landscape as they are the most frequently invested sectors within the top-funded assets. Additionally, it appears that most funds appear to be under-exposed to Web3, NFTs, and more emergent sectors like the metaverse. This gap in exposure presents a potential opportunity as more investments could flow into these sectors in the coming 6-12 months. It’s also possible that these funds are already invested in these sectors and that those positions are illiquid or in projects that have yet to launch tokens and thereby not reflected in this analysis. Final Thoughts on Investing Like a Crypto Fund Investing like a crypto fund – venture or hedge – has never been easier. An average investor can quite literally copy-trade these portfolios and mirror any of their favorite funds. But, while copy-trading a prominent VC might appear at face value to be a good strategy, it’s important to remember that non-accredited or professional investors still don’t have equal access. Most of these funds typically receive private placements at far cheaper valuations, and the short-term focused funds are waiting to liquidate a portion of their tokens once vested to record profits for their investors. Further, during a bull market liquid assets – especially newer projects – often trade at a premium due to the expectation of a greater future valuation. While there are still barriers for individuals to invest in early-stage crypto projects, the opportunities are 10x better than the legacy financial world. The age of the everyday investor is dawning and crypto will be the primary avenue for growth. As of Jul 1: Messari Fund Screener Spreadsheet
    Source: Mason Nystrom — Published: 2021-07-15T12:44:00Z

  • Q2'21 Layer-1 Review: A Peek at the Largest Ecosystems by TVL

    Q1 2021 marked the beginning of the long-awaited ecosystem wars. With crypto markets continuing to attract mainstream attention, newfound retail entrants pushed Ethereum’s fees to all-time highs. The surge in demand was a net positive for the industry but rendered Ethereum unusable for most retail users, prompting them to look for alternative options since the beginning of the year. In conjunction with the deployment of scaling solutions and the growth of the application ecosystems on adjacent Layer-1s like Binance Smart Chain (BSC), this exodus has become an important factor affecting Ethereum’s dominance in the space. Q2 2021 picked up where the previous quarter left off. The TVL flows over the last three months prove that Ethereum is still the belle of the ball, but it may not be the only party worth attending. TVL to the Moon In a relatively short period of time, total value locked (TVL) in smart contracts went parabolic. Since October 2020, a mere seven months ago, assets flowing in different smart contract platforms increased tenfold from $10 billion (almost all locked in Ethereum) to over $100 billion across several scaling solutions and Layer-1s. The growth is nothing short of extraordinary. While TVL growth is a strong indication of increasing user confidence and activity in DeFi protocols, it needs to be taken with a grain of salt. The metric is computed based on the USD denominated value of the tokens locked in smart contracts, so in many cases, an increase in TVL doesn’t necessarily mean more tokens are being deposited. An appreciation in token price is also a determining factor. Despite this shortcoming, TVL can be a useful statistic to compare the growth and adoption of different smart contract platforms since it provides a simple apples-to-apples comparison. The Dawn of the “Ethereum Killer” Although the growth of the Layer-1 and Layer-2 sectors could ultimately benefit Ethereum, its dominance in the space is beginning to shrink. Of the $110 billion dollars in TVL, Ethereum controls roughly 77%, a drop of more than 20% when compared to its dominance five months ago. Despite the recent decline, Ethereum remains home to the most vibrant DeFi and NFT ecosystems. Since October of last year, TVL has ballooned from $11 billion to $85 billion (a 631% increase) as the yield-farming craze infected the crypto markets. The movement, catalyzed by Compound, acted as a propellant for the space as crypto users put more and more assets to work in various DeFi applications. As a result, Ethereum’s DeFi sector has been the dominant destination for user funds. As of July 5th, roughly 47% of TVL is in six major DeFi protocols: Curve, Aave, MarkerDAO, Compound, Yearn, Uniswap, and SushiSwap. The other 53% is distributed across the remaining 169 applications tracked by DeFi Llama. Back in October 2020, TVL was mostly concentrated in Uniswap and MakerDAO, which accounted for approximately 43% of the value locked in Ethereum. However, the explosion of new financial primitives that began during DeFi Summer 2020 has whittled away at their dominance as investors moved assets searching for the next hot farming opportunity. This trend has continued throughout 2021, with long-tail applications now housing almost half of all TVL. The Binance Smart Chain Rollercoaster In the end, Ethereum’s success also became its burden. The effects of Ethereum’s rising transaction fees started appearing in the first few months of 2021. Ethereum’s dominance began to decline as developers and users began to look for cheaper alternatives outside of the most popular blockchain. The first Ethereum challenger that began to experience meaningful traction as a result of Ethereum’s fee environment was Binance Smart Chain (BSC). Propelled by a $100 million support fund and backed by the largest exchange in the world, BSC began to quickly expand its DeFi ecosystem, which featured direct copies of successful Ethereum-based applications. BSC’s proximity to Ethereum in terms of building tools made it easy for developers to quickly iterate and deploy applications. On the user side, BSC’s compatibility with MetaMask lowered the barrier to entry for many Ethereum-native users creating a seamless transition between the two chains. These two catalysts in conjunction with extremely high token incentives led to a large influx of new users who sought cheap yield farming. By the beginning of May 2021, BSC managed to capture $15 billion in total assets or approximately 13% of Ethereum’s TVL. PancakeSwap (DEX) and Venus (lending platform) are currently the two most successful applications and the ones that captured the highest amount of assets in the early days of 2021. BSC’s TVL has been quite the rollercoaster ride in Q2 2021. Soon after crossing the $15 billion mark, its TVL more than doubled to $35 billion in the span of ten days due to a wild price upswing for BNB and its spawn (like CAKE and XVS). But the euphoria generated by the new all-time highs quickly vanished as a series of negative catalysts hit the market in mid-May, including a liquidation incident on Venus that lost $200 million and a flash loan attack on Pancake Bunny worth $45 million. The rise in exploits drained user confidence and sent token prices and TVL tumbling. Although TVL across all smart contract platforms contracted, BSC’s was particularly hurt given most of the value locked in its applications was mercenary capital and consisted of assets that had little use outside of incentivizing users. Unlike Ethereum's TVL, which has a healthy dose of stablecoins in the mix, the composition of BSC’s TVL was heavily skewed towards the higher end of the risk spectrum, making it extremely sensitive to market swings. As mentioned above, in the early days of Binance Smart Chain, TVL was concentrated in two of its most successful applications: PancakeSwap and Venus. In October 2020, PancakeSwap was the leading application accounting for 60-70% of all the money flowing in the platform. The dynamic quickly changed when Venus entered the market in December 2020. The lending platform rapidly captured a significant portion of TVL cementing itself as the second-largest DeFi protocol in the BSC ecosystem. From December 2020 to April 2021, both protocols controlled around 90% of all the assets in the platform. In mid-April, as newer protocols launched, TVL began to spread out to other protocols like MDEX, Ellipsis Finance, and Wault. However, as of July 5th, PancakeSwap and Venus regained their dominant positions within the BSC ecosystem, controlling over 65% of the funds locked in smart contracts. Polygon’s Rise to Fame The second platform that started chipping away at Ethereum’s TVL in April of 2021 was Layer-2 solution Polygon. Like BSC, Polygon took advantage of Ethereum’s high fee environment to bootstrap its application ecosystem by offering lower fees and faster transaction times. Polygon’s biggest advantage to date has been its compatibility with Ethereum, which lowered the learning curve for both users and developers. It is currently the third-largest chain in terms of TVL, handling 5% of all assets locked across all platforms. Polygon’s TVL went from less than $50 million to over $5 billion in Q2. This explosive growth was the result of two distinct factors. The first was the deployment of DeFi majors Aave, SushiSwap, and Curve. The protocols began exploring the scalability capabilities of Polygon at the beginning of Q2 2021 in an attempt to work around Ethereum’s congestion. Given their popularity and strong communities, it’s no surprise that the migration led to an uptick in user acquisition. The second reason for the nearly exponential growth was the launch of Polygon’s DeFiforAll Fund. The team committed up to 2% of MATIC’s total supply to continuously support the growth of its DeFi ecosystem over the next two to three years in the form of liquidity mining rewards across different applications. Unsurprisingly, the lion’s share of the rewards is currently going to users of the top DeFi applications in the ecosystem including Aave, Curve, and SushiSwap. As a result, these three protocols account for nearly 65% of all value locked in Polygon. In particular, Aave’s market share of TVL exploded, going from less than 10% to 70% almost instantly due to its liquidity mining program. Token-incentivized user growth has become one of the most popular strategies used by protocols to bootstrap a community. This strategy, while efficient in the short term, can sometimes prove detrimental if it is not managed carefully. In many cases, the higher yields end up attracting mercenary capital from users who are looking to make a quick buck but have no vested interest in the long-term success of the project. In this kind of scenario, protocols are able to garner millions of dollars only to see it vanish when token incentives stop. While it might be too early to tell, this kind of user behavior is manifesting in Polygon’s largest applications. The three DeFi giants that account for more than $3 billion dollars of TVL are starting to see capital migrate back to Ethereum. In the case of Aave, which is the protocol offering the highest amount of liquidity mining incentives, it reached a point where TVL between Ethereum and Polygon was split 70% and 30% respectively. However, over the past two weeks, roughly 10% of Aave’s total TVL has made its way back to Ethereum. SushiSwap followed a similar pattern. TVL in Polygon began to grow at a rapid pace starting in May when the token incentives were announced. Consequently, SushiSwap’s TVL split between Ethereum and Polygon immediately went from 95% and 5% to 75% and 25%. Similar to Aave, the narrative changed over the past two weeks as Ethereum’s portion of TVL started to climb up. Lastly, among the three protocols, Curve is the one that saw the least amount of funds flowing to its Polygon branch. Roughly 15% of Ethereum’s TVL migrated to Polygon over the course of six weeks right after the liquidity mining rewards were announced. In the same fashion as the previous two, Ethereum’s TVL started increasing in June as users flocked away from the side chain. After the recent relocation, Polygon’s share of Curve’s aggregate TVL shrunk from 15% to 7% in one month. There are few potential reasons driving this kind of behavior. As mentioned earlier, the first one could be the result of users locking funds for a short period of time to take advantage of the exorbitant yields offered across the entire ecosystem. One piece of evidence supporting this point is the relationship between the number of incentives and the amount of TVL captured by Polygon. To illustrate, Aave’s liquidity mining program was broken down into Phase 1 and Phase 2. During Phase 1, 1% of MATIC’s total supply (roughly $40 million at the time of writing) was allocated to Aave’s liquidity mining program. About 2 months later, Phase 2 was rolled out, extending the incentives program until January 17th, 2022, and increasing the rewards from $40 million to $85 million (assuming a MATIC price of $1.7 USD). As a result, and without much of a surprise, Aave experienced the most substantial inflow of assets among the three DeFi protocols. On the contrary, Curve’s liquidity mining program was a speck of Aave’s amount. The program, which launched on April 22nd, allocated a mere $6 million to match CRV rewards over a 16-week window. Consequently, the amount of value that moved from Ethereum to Polygon in the case of Curve was relatively small. Another reason for the retreat could be due to the asset composition of the two chains. Similar to BSC, if the assets locked in Polygon’s applications are riskier compared to the ones locked in Ethereum, then during market drawdowns the dollar value locked in Polygon will shrink relative to Ethereum. While this might be a possibility, it’s worth highlighting that most of the value fleeing to Ethereum through Polygon’s bridge is in USDC. Lastly, a third potential reason for Polygon’s ephemeral TVL could be due to Ethereum’s improving fee environment. The average gas fee per transaction has dropped down to December 2020 levels from levels as high as $30 dollars per transaction in mid-May. The drop can be attributed in part to the increased activity in adjacent smart contract platforms like Polygon and BSC. Although this could be one of the drivers behind the retreat, it’s hard to believe that users would simply go back to Ethereum due to lower fees. At the moment, Polygon’s liquidity mining programs are still active, meaning users can enjoy low-fee transactions while getting a boatload of rewards. From a utility maximization perspective, low fees in Ethereum shouldn’t be enough incentive to leave “free money” behind unless the market’s overall perception of Polygon has deteriorated in recent weeks. A Field of Dreams BSC and Polygon aren’t alone in this new multi-chain world. They’ve captured most of the attention outside of Ethereum so far by mimicking Ethereum’s development environment and end-user tooling, a growth hack that almost negates any switching costs. But the likes of Solana and Cosmos have gained traction despite their radically different designs. Solana Ecosystem Solana has optimized for speed over Ethereum compatibility. It uses a different virtual machine and several new approaches for managing transactions and state changes to achieve best-in-class transaction times. Solana’s speed enables it to support a new class of crypto use cases, such as the on-chain matching engine sported by Serum. But shoehorning Ethereum compatibility into Solana’s new environment has proven to be tricky and could be detrimental to performance. In response, the project has forgone the EVM route and relied on hackathons and funds like Alameda to incentivize developers to build on Solana in its current state. These efforts have led to some early signs of success. Solana’s DeFi sector now has just under $1 billion in TVL, up around 4x since the start of Q2. This total is only a fraction of the assets locked in Ethereum, BSC, or Polygon due to the relatively small size of Solana’s current DeFi ecosystem (DeFi Llama tracks eight projects). But the network has an extensive pipeline of new financial products set to launch on or migrate to it over the coming months. If Solana can continue to grow its developer base and application pipeline, its uniqueness may become a strength. Projects won’t be able to port their contracts and liquidity to secondary networks easily. With a burgeoning economy, an inherent developer lock-in, and plenty of funds to spare, Solana could become a popular platform for DeFi users to park their assets in the not-too-distant future. Cosmos Ecosystem Cosmos’ multichain DeFi ecosystem is gradually coming to life. Terra users locked over $2.2 billion worth of assets in its two applications, Mirror Protocol and Anchor Protocol, by the end of Q2. THORChain reached almost $140 million in liquidity in its first three months despite rolling out in a guarded launch. Kava also quietly accumulated $250 million in TVL (flat growth in Q2) across its lending protocol called HARD Protocol and built-in crypto-collateralized stablecoin system. Even upstart AMM platform Osmosis attracted almost $80 million in TVL within a few weeks of its mainnet launch. Aside from Osmosis, these chains have operated independently of one another. A few have established bridges or on-ramps to external networks (Terra’s Shuttle Bridge to Ethereum and THORChain’s Bifrost gateways to several Layer-1s), but none have implemented IBC, the Cosmos ecosystem’s defining interoperability feature that allows these otherwise sovereign chains to communicate. Terra, Kava, and THORChain will likely change their IBC status before the end of 2021. But the question remains if the Cosmos Hub will be able to capture any of their asset flows by facilitating cross-chain transactions. The only real case study for IBC transaction flows is Osmosis. It leveraged various IBC connections (and incentives) to bootstrap liquidity and trading quickly. While its launch led to an immediate spike in IBC activity across the Cosmos ecosystem, the ultimate beneficiary was Osmosis, not the Hub. If Cosmos’ more prolific zones create connections with each other instead of routing through the Hub, the Cosmos Hub may miss out on cementing itself as a central component of its self-titled ecosystem. Attracting capital flow is precisely why the recently released Gravity DEX will be critical to the Cosmos Hub’s long-term strategy. The exchange gives users a reason to deploy capital to the Hub or use it as a pit stop before moving to the next zone. It could also tie the Hub’s value to the ecosystem’s growth. If Gravity becomes the primary trading venue with the deepest liquidity pools within Cosmos, it could solidify the Hub as the center of the ecosystem’s economy, capturing fee revenue from each passerby. Closing Thoughts One year ago, the concept of a multi-chain world was simply an abstract idea. Back then, the data available pointed at a single truth: Ethereum was the sole destination for DeFi applications. In the span of only six months, that truth has drastically changed. We now live in a world where several blockchains outside of Ethereum have significant traction and a substantial amount of developer activity. While Ethereum may remain the focal point, it’s become undeniable that the cryptoeconomy will not reside in one single chain but will equal the aggregate economic activity taking place across many Layer-1s and scaling solutions. While attracting capital is a mandatory first step, these newer Layer-1s and scaling solutions must figure out how to retain new users. As indicated by the shift in dominance from BSC to Polygon in May, incentivized liquidity pools attract mercenary capital that will quickly exit when the hot ball of money finds a new home. Retaining capital will require networks to offer differentiated use cases and ancillary services that complement (and don’t cannibalize) existing applications.
    Source: Roberto Talamas — Published: 2021-07-14T13:00:00Z

  • Q2'21 DeFi Review

    A little over a year ago Compound launched its COMP liquidity mining program and changed DeFi forever. With a new mechanism for bootstrapping liquidity in DeFi protocols, the sector has grown orders of magnitude across nearly every metric since. In the process it has not only captured the attention of investors, users, and regulators alike, but also demonstrated to the world clear signs of product market fit. Q2 2021 was a continuation of this momentum with most metrics reaching new all-time highs mid-way through the quarter. However, as broader crypto markets turned, DeFi was not immune. In many cases DeFi protocols saw activity decrease in the second half of the quarter as speculation in markets died down. But is that all there is to the story? In this report, we walk you through sector by sector, diving into key performance indicators, market developments, and key things to look out for in the quarters ahead. It was yet again a jam-packed quarter in the world of DeFi, and while asset prices may be depressed, DeFi fundamentals march on, providing the seeds of DeFi’s next leg of growth. "DeFi is Mankind's Tower of Babel. We have rebuilt money as a language... a computer language that all cultures across all lands can speak. And now that all of our brilliance, greed, and ideals can be unified into one system, the system's growth will be unparalleled. The next 1-2 years will reverberate for decades and possibly centuries'' - Redphonecrypto Decentralized Exchanges Decentralized Exchange Landscape DEX volumes continued their explosive growth in Q2 reaching $405 billion in the quarter – good for a 117x increase year-over-year and 83% increase since Q1. May alone accounted for over half the volume in the quarter, which unsurprisingly also marked the local top of the market. Since May, DEX volumes have halved, with June volumes falling to $95 billion. Still despite the decrease, the month was still the third highest all-time. Zooming in on how the competitive landscape evolved throughout the quarter we see a pretty dramatic shift in PancakeSwap’s standing. While for a brief moment in April the breakfast themed DEX flipped Uniswap in volumes, since then its market share has plummeted due to the rise of Uniswap V3 and the fizzling out of the Binance Smart Chain Ecosystem following the May crash. By the end of the quarter Uniswap reached a 54% share of weekly volume, its highest level since November 2020. The rise of Polygon also played a significant role in eating away Binance Smart Chain’s (BSC) share of decentralized exchange volumes. As the party shifted towards Polygon, with its new set of tokens to speculate on and farms to harvest, BSC was squeezed out of the picture. The activity provided a great glimpse into the developing liquidity wars between blockchains, showing that when token incentives are the primary reason why capital enters a blockchain ecosystem, it will also be the primary reason capital leaves when incentives fall or incentives are more attractive elsewhere. Finally, zooming out on the larger picture for DEXs, volumes as a percentage of centralized exchange (CEX) volumes surpassed 10% for the first time since October 2020. The data continues to show DEXs eating their centralized counterparts as time passes. Q2 Developments Uniswap V3 Becomes the Top DEX In May Uniswap finally launched its highly anticipated Uniswap V3 protocol, with its crown feature of concentrated liquidity - the ability for liquidity providers (LPs) to make markets within customized price ranges, creating individual price curves in the process. The design promised to increase capital efficiency for LPs by as much as 4,000x by enabling LPs to provide the same liquidity depth as V2 within specified price ranges while leaving far less capital sitting idly. Within just weeks it became the top DEX in the industry and in June it facilitated nearly $28 billion in volume. Uniswap V3 now accounts for more than 40% of all DEX volume and continues to eat the DEX market, showing no signs of slowing down. THORChain Launches Multichain Chaosnet After more than two years of development and multiple delays, the cross-chain liquidity protocol THORChain finally went live in the first week of Q2. It is currently rolling out in a guarded launch, with the community progressively raising caps on liquidity pools as the network grows, proves out its security, and works through bugs. It currently supports five blockchains including Bitcoin, Etherum, Binance Chain, Bitcoin Cash, and Litecoin, with plans to connect with many more in the coming months. While volume so far has been muted due to the self-imposed caps on its pools, liquidity has grown in lockstep with cap raises showing clear market demand to provide cross-chain liquidity. With it increasingly becoming clear that we’re heading into a multi-chain future blockains like THORChain provide the much needed infrastructure to move value between blockchains without trusted third parties. PancakeSwap Fizzles Out The BSC ecosystem was hit the worst following the May market crash with TVL falling more than 50% from its peak in a matter of days. Although TVL across all smart contract platforms contracted, BSC’s was particularly hurt given most of the value locked in its applications was mercenary capital and consisted of assets that had little use outside of incentivizing user speculation. Unlike Ethereum’s TVL, which has a healthy dose of stablecoins in the mix, the composition of BSC’s TVL was heavily skewed towards the higher end of the risk spectrum making it extremely sensitive to market swings. Combined with a series of hacks and exploits on BSC leading to hundreds of millions of dollars in losses, BSC saw speculation dry up dramatically in June leading to PancakeSwap volumes diving 69% in June. Its market share also plummeted in lockstep. Looking Forward Rolling Up A common theme for all DeFi sectors moving forward will be the launch of layer-2 scaling solutions on Ethereum that promise to scale DeFi by orders of magnitude without compromising on security. The most anticipated launches of these solutions are optimistic rollups which allow thousands of transactions to be bundled into a single rollup block. The leading solutions are Arbitrum and Optimism which are set to launch in Q3. DEXs in particular will benefit from scaling by no longer having to operate in a severely compute constrained environment, allowing them to focus more on capital efficiency. Uniswap V3 is the best example of this design philosophy. Although still an AMM, it has begun to approximate more of an order book in pursuit of capital efficiency. With Uniswap V3’s early success, there will be many potential activities unlocked through this scalability, and the recent uptick in activity on Polygon provides a glimpse of the emerging future for layer-2s adoption. Cross-Chain Liquidity One of the outstanding questions surrounding Ethereum’s rollup-centric future is around the battle between L2 L1 and L2 L2 liquidity. As it stands today, users face long withdrawal periods when withdrawing liquidity from rollups to Ethereum, and have no way to move liquidity between rollups without first withdrawing to Ethereum. There are a number of proposed solutions including MakerDAO’s Optimism Dai Bridge which will allow users to lock up L1 DAI to mint L2 oDAI. Once fast withdrawals are enabled later this year, oDAI may be burned in exchange for near-instant access to L1 DAI allowing users to escape the one week lockup period associated with Optimism. Source: MakerDAO Blog As for more generalized solutions, Connext and Hop Protocol offer users the ability to move value between various L2s using a network of nodes to front liquidity to users on their destination chains. They promise to allow users to cheaply and quickly move value between L2s without sacrificing on security as well as allowing users to forgo long and expensive L1 transactions. While these protocols are very much in their early stages, they will no doubt play a key role in Ethereum’s rollup-centric future. Lending Platforms Lending Landscape After a booming Q1, the lending sector found itself cooling off during Q2. The first half of the quarter, however, was a continuation of the momentum from the previous quarter. From March up until the May crash lending deposits ballooned from $25 billion to a peak of $45 billion (an 81% jump in just six weeks) as investors sought to capture the exorbitant lending yields available across all lending protocols. However, the party came to a sudden halt as the market turned belly up. Motivated by the mounting market turbulence, investors flocked to safer assets triggering a collapse in lending deposits which completely erased the previous week’s growth. In the end, the total amount of assets locked across the major lending platforms increased a mere 15% quarter-over-quarter. Unsurprisingly, the number of outstanding loans followed a similar pattern. During the first six weeks of Q2, the total amount of outstanding loans increased 62%. However, unlike lending deposits, the decline following the market crash was not as drastic. In total, the collapse amounted only to $4 billion, or 21% from the top, in the following ten days. By the end of the quarter, the aggregate amount of outstanding loans increased approximately 44% over the quarter. Additionally, supply yields across all lending platforms collapsed as investor’s borrowing demand dwindled. In the span of three months, lending rates for stablecoins, in particular USDC, dropped nearly 85% from an average rate of 9.6% to 1.4%. Source: LoanScan Q2 Developments Aave Joins The Multi-Chain World Towards the end of the first quarter of 2021, Aave announced the launch of its Polygon branch in an effort to escape Ethereum’s high fee environment. Following the announcement, Polygon and Aave teamed up to offer early users liquidity mining incentives to incentivize usage as part of Polygon’s DeFiForAll campaign. The program turned out to be a resounding success causing Aave’s TVL to double from $6 billion to $12 billion within two weeks of the announcement. Propelled by the Polygon launch and the heavy token incentives, Aave’s market share of total outstanding loans spiked in April giving Compound a run for its money. By the end of May, Aave dethroned Compound to become the leading lending platform capturing over 37% of DeFi’s aggregate lending market. Bridging the Gap Between Crypto and Traditional Banking - Compound Treasury At the end of the quarter, Compound Labs announced the launch of Compound Treasury, a product designed for non-crypto businesses and financial institutions that wish to tap into crypto’s interest rate markets. The company partnered with Fireblocks and Circle to create a product that allows organizations to access the USDC interest rates available on Compound without needing to worry about crypto-related intricacies such as private key management and crypto-to-fiat conversions. The product guarantees a fixed interest rate of 4% per year on deposits - an astronomical amount compared to the average U.S. saving account. Looking Forward Laying the Lending Foundation For The Multi-Chain World - Compound Gateway As a multi-chain future becomes increasingly apparent, incumbent lending protocols have begun to explore solutions to adapt to this new way of operating. Compound’s approach revolves around the release of a stand-alone blockchain called Compound Gateway as a way to embrace this emerging paradigm. Gateway is a Substrate based blockchain intending to serve as the infrastructure for cross-chain interest rate markets. Similar to THORChain’s THORFi lending feature (set to launch later this year), Gateway’s goal is to provide users with the ability to borrow assets native to one chain (i.e Ethereum) with collateral from a different chain (i.e Solana). In a nutshell, Gateway enables blockchain interoperability by using a type of connector contract called Startport as the core mechanism to connect and transfer value between different chains. Starports exist as contracts on peer ledgers (such as an Ethereum smart contract) and have the ability to lock assets until they are released by a Gateway validator node. Source: Compound As of March 1st, Gateway is running as a testnet, connected to Ethereum’s Ropsten testnet. DeFi’s New Frontier - Fixed Income Markets While the fixed income space is still a nascent niche in DeFi, it is an enormous market in the traditional world. In this context, a fixed income product refers to any instrument that generates a steady and predictable stream of cash flows such as corporate bonds, treasury bills, and fixed-income mutual funds. The concept of fixed rates is a relatively new and unexplored field in DeFi where variable interest rates offered by protocols like Aave and Compound are the norm. As of today, the fixed income landscape can be broadly defined in three different categories: Securitization and Tranching Fixed-Rate Lending and Borrowing Interest Rate Swaps Securitization and Tranching protocols were the first ones to hit the market. At a high level, applications such as Saffron Finance and BarnBridge aggregate variable yields from distinct lending protocols to create separate risk tranches each one with a different risk/return profile allowing users to customize their exposure to yields. Before risk-tranching protocols were around, users faced an all-or-nothing scenario. They either incurred 100% of the risk of lending/providing liquidity or none by staying out of the game. With risk-tranching protocols, DeFi users now have a spectrum of risk options available instead of a simple binary option. The second wave of fixed income protocols that entered the space were fixed rate lending and borrowing applications. Unlike Aave and Compound, which primarily offer variable interest rates, protocols like Yield and Notional enable users to borrow and lend at fixed rates over a predetermined time horizon. These protocols don’t expose users to interest rate volatility making it easy to plan ahead and properly hedge risk when lending and borrowing. The third and most recent kind of fixed income applications in DeFi are interest rate swap protocols. At their core, these protocols take interest-bearing tokens (like aTokens and cTokens) and separate them into a principal component and a yield component. Given the variable nature of interest-bearing tokens, the value of the yield component fluctuates over time while the value of the principal component stays the same. The result is the creation of interest rate markets that allow users to speculate on the future state of yields. Protocols such as Pendle, Element, and Swivel are at the forefront of the interest-rate derivatives space. Stablecoins The stablecoins story continues to rhyme each subsequent quarter – climbing up and to the right. Q2 was no different. In Q2 2021 the stablecoin monetary base reached over $107 billion, up 70% since Q1 and 803% year-over-year. Stablecoins continue to be adopted for a number of reasons: They’re easy to accept as payments given that all you need is an address on a public blockchain They run on global public infrastructure that operates 24/7/365 which makes them incredibly available and reliable They offer users stronger autonomy, privacy, and interoperability qualities than existing payments solutions which require KYC and often restrict access They’re programmable which allows for developers to trivially build with them and deploy applications with global distribution and instant access to capital In this quarter stablecoins facilitated an impressive $1.7 trillion in transaction volume, up 1,090% year-over-year and 59% since Q1. The biggest winners this quarter were USDC, BUSD, and DAI which grew their share to 23%, 9%, and 5%, respectively. Although USDT is still king, its dominance is gradually fading as time passes. Finally, zooming into the subsector of decentralized stablecoins, we see continued progress as decentralized stablecoins continue to win share from centralized stablecoins. In the beginning of Q2 decentralized stablecoins reached an all-time high ~10% of the total stablecoin supply. Though DAI’s market share sank in Q1 in large part due to the rise of Terra’s UST, it remains the market leader by a wide margin with a 61% share of the market. In Q2 it recovered some share as it continued to grow while Terra stalled out. Q2 Developments USDC Rises and Becomes DeFi’s Preferred Stablecoin Perhaps no stablecoin had a better quarter than Circle’s USDC. Not only does Circle continue to execute on an impressive turnaround recently announcing a $440 million raise as well as plans to go public in a $4.5 billion SPAC deal, but it also continues to make strides in Ethereum’s booming DeFi ecosystem. It will soon overtake USDT as the dominant stablecoin on Ethereum. Over 50% of the USDC supply now sits in smart contracts - equivalent to ~$12.5 billion. Although this percentage is not as high as DAI, USDC leads by a wide margin in dollar terms. DAI Continues Incredible Growth While Centralization Risk Increases MakerDAO had another incredible quarter growing the DAI supply 76% and earnings 136% over the quarter. The DAI supply reached an impressive $5 billion by quarter ending, while MakerDAO produced $43 million in earnings in the quarter. However, the flip side of this growth was the increased reliance on USDC via its Peg Stability Module (PSM) which played a significant role in allowing DAI to scale better. The PSM operates similarly to a regular vault type with a zero stability fee and a liquidation ratio of 100% and allows users to swap USDC for DAI with zero slippage and with a small spread. This has allowed DAI to be better arbitraged around its peg, but also meant that as the DAI supply grew the collateral backing it increasingly consisted of USDC. Currently 55% of the DAI supply was generated by USDC via the PSM. This is important because while the majority of DAI is still backed by ETH, vaults only have liabilities against the DAI they created, meaning that not all the ETH that is backing DAI in aggregate necessarily backs each DAI liability. Source: DaiStats Terra Growth Stalls After May Crash In Q1 Terra’s UST stablecoin quickly became the second largest decentralized stablecoin in the industry after building a bridge to Ethereum and launching liquidity mining for its new synthetic asset protocol, Mirror. It now has an exciting DeFi ecosystem of its own providing many ways to earn yield on its stablecoins. However, in the months following the May crash, growth has stalled out with the UST supply down slightly. The most likely culprit for this pause in growth is the decreased liquidity mining incentives for all the protocols UST was being used in due to deflated token prices. Terra also faced its first big test during the May crash as LUNA, the seigniorage token backing it, plummeted 75% over the course of five days, putting serious pressure on the UST peg. However, since then UST has stabilized and confidence in the peg has been restored. Looking Forward The Rise of Non Pegged Stablecoins When Bitcoin was born it captured people’s imagination on the potential for non-sovereign digital currencies. But as Bitcoin began trading it soon became clear that it would not be stable enough to be used as currency anytime soon. The promise was that sometime in the distant future it would eventually stabilize once it became a large enough asset and built up enough liquidity. However, even that is uncertain considering Bitcoin is a fixed supply asset and unable to adjust its supply relative to demand, which may deem it to forever be volatile just like Gold is. To bridge the gap between now and this promised future the industry created dollar pegged stablecoins which solved the volatility bug and catalyzed adoption for many blockchain applications beyond holding. However, the problem these dollar pegged stablecoins cause is that they dollarized Ethereum. With the dollar ultimately being controlled by the Federal Reserve, this limits Ethereum’s monetary system from becoming sovereign. It also subjects Ethereum to regulatory risk that borders systemic due its reliance on gray market dollar pegged stablecoins (though this risk is decreasing with USDC gaining market share vs USDT). Fortunately the industry has taken notice and a new wave of projects have recently launched aiming to create stablecoins that are not pegged to fiat currencies at all. Called “non pegged stablecoins,” these projects offer a radical opportunity for Ethereum’s monetary system to achieve stability while eliminating dependence on fiat currencies. In the process they would not only free Ethereum’s monetary system from the influence of the nation state controlled central banks, but also introduce truly trust-minimized stablecoins fit for use across Ethereum’s economy. For now non pegged stablecoins may seem like a far-out experiment without a clear use case, but they may also be the best bet this industry has on creating non-sovereign stable cryptocurrencies. Asset Management Unsurprisingly as liquidity in DeFi protocols soared over the quarter, yield aggregators, which funnel liquidity into DeFi, saw their total value locked soar as well. Similarly when the market turned many saw their TVL fall in lockstep (with some exceptions like Yearn). After a strong Q1 that saw assets under management rise 272%, assets under management ended Q2 down 2% after having peaked at $9.5 billion mid-quarter. As for the yield aggregator market, the story of the quarter was the comeback and rise of Yearn which saw its market share rocket from 29% to 69% in the quarter (more on this below). Q2 Developments Yearn’s Growing Dominance As mentioned in the previous section, the biggest story in the asset management sector for Q2 was Yearn’s resurgence and growing dominance. With Yearn’s incentive alignment issue having been addressed in Q1 clearing concerns over Yearn’s funding, focus then shifted to Yearn’s new V2 vaults. Yearn V2 has become a resounding success, leading Yearn’s assets under management from just $540 million at the beginning of the year to $4.1 billion by the end of Q2. Perhaps the most impressive feat Yearn achieved this quarter, however, was it continuing to grow AUM throughout the May crash, even reaching a new all-time high of over $5 billion by the end of May. It now controls just under 70% of the yield aggregator market. Like MakerDAO (mentioned above) which also had an incredible quarter, Yearn grew its revenue in lockstep with AUM as well, producing $18.5 million in revenue for Q2, up 236% from Q1. Between new protocols building on top of Yearn such as Alchemix which created a MakerDAO like credit system using Yearn’s vaults as infrastructure, revenue sharing agreements with protocols that drive assets to Yearn vaults such as Badger, and a handful of new vaults for volatile assets such as Synthetix, it's becoming increasingly apparent that Yearn is an essential yield primitive for the DeFi ecosystem. The Theory of Yearn continues to hold water. Expanding the Reach of On-Chain Asset Management - Enzyme V2 At the beginning of the year, on-chain asset management protocol Melon went through a rebranding process to a more DeFi-flavored theme called Enzyme Finance. In addition to changing the logo and name to create a more vibrant image, the protocol greatly expanded the investable asset universe available to portfolio managers. The protocol now supports nearly 150+ different assets, a significant amount considering the previous version had less than twenty assets to choose from. Additionally, asset managers now have the ability to engage in more sophisticated investment activities including lending, liquidity provisioning, and shorting through synthetic assets. Recently, Enzyme has been scaling up its business through a number of DeFi partnerships. Last week, the protocol announced a collaboration with Yearn Finance to enhance its product suite. Through the partnership, Yearn vaults will be directly available on Enzyme allowing asset managers to include advanced yield farming strategies as part of their overall portfolio. Another recent collaboration took place last month between Enzyme and Unslashed Finance. In this joint effort, Unslashed Finance invested 4,000 Ether into a yield strategy on Enzyme in order to “buffer up their capital base for insurance”. As a result, Enzyme’s TVL more than doubled in June going from $16 million to $50 billion, according to DeFi Llama. Looking Forward A New Paradigm in Liquidity Provision As a consequence of Uniswap V3’s concentrated liquidity model, liquidity management is no longer a passive game. The famous “set and forget” strategy that once dominated liquidity provisioning has become antiquated and suboptimal. In this new world, the highest returns will flow to those who research, develop and successfully implement active management strategies by constantly updating liquidity ranges to capture the highest amount of trading fees. Uniswap’s new functionality has led to the creation of a new breed of market participants called “Liquidity Managers”. In the same way, professional asset managers are paid to effectively navigate the uncertain waters of financial markets, Liquidity Managers seek to fill the same need in the increasingly complicated realm of liquidity management. There are early entrants to the arena such as Visor, Lixir, Charm, Popsicle, and Gelato Network, as well as the elephant in the room Yearn which is also developing Uniswap V3 strategies. Derivatives Derivatives Landscape Decentralized derivative volumes continued their massive growth in the second quarter of 2021. Although still a fraction of decentralized spot trading volumes (see DEX section), perpetual swap trading volumes reached nearly $20 billion in the quarter, more than a 3,000% increase from Q4 2020 and a 155% jump from the previous quarter. Despite the current scaling hurdles (more on this below), decentralized derivative protocols are starting to see strong signs of adoption among DeFi users. Following the market crash, trading volumes in June unsurprisingly declined as investors’ appetite for risky assets and leverage vanished in the face of increasing market uncertainty. However, when compared to levels at the beginning of 2021, trading volumes remain on a steady upward trend. Q2 Developments Dominating the Decentralized Perpetual Swap Market - Perpetual Protocol The most important development in the second quarter of 2021 was the dominant rise of Perpetual Protocol. Despite its late arrival relative to incumbent players like dYdX, Perpetual Protocols currently offers investors the most trading options available in the perpetual swaps market and controls the vast majority of the decentralized futures trading volume. In a matter of six months, Perpetual Protocol became the dominant perpetual swaps exchange by a wide margin. At the beginning of 2021, the protocol controlled less than 30% of all the trading volume in decentralized futures markets. After five months, its dominance tripled, now controlling over 90% of the perpetual swap market. Looking Forward In Honor of Marie Curie - Perpetual Protocol V2 Perpetual Protocol announced the release of the second version of the protocol called “Curie'', in honor of the famous physicist Marie Curie. The upgrade is set to launch on Arbitrum in order to improve user experience, increasing transaction speeds, and lower trading costs. Additionally, the upgrade will launch with cross-margin collateral management allowing traders to use the same pool of collateral to open multiple positions. One of the most important features of V2 is the combination of Perpetual Protocol’s vAMM with Uniswap V3 as the protocol’s trading settlement layer. The merger will allow Perpetual Protocol to leverage Uniswap’s concentrated liquidity feature, improving the capital efficiency of the entire protocol. Moving forward, all trades will be executed on Uniswap, using v-tokens, while keeping the trader experience the same as before. Another interesting aspect of using Uniswap as the trading layer for the system is the emergence of a whole new way of liquidity provisioning. In addition to earning protocol fees, liquidity providers (called makers) will be able to apply leverage when providing liquidity to the protocol. In the same way that traders use the protocol to lever their long/short positions, makers will be able to deposit USDC on Perpetual Protocol and have the option to instruct the clearinghouse - the smart contract in charge of minting v-tokens - to mint vUSDC with up to 10x leverage. The vUSDC can then be deployed in a Uniswap V3 pool essentially creating a leverage liquidity position. Source: Perpetual Protocol In addition to the trading mechanism enchantments, Curie will also allow permissionless market creation. The protocol will support Uniswap V3 TWAP and Chainlink oracles to determine the index price of any asset including non-crypto assets like stock and commodities. Rollups To the Rescue As mentioned earlier, decentralized derivative protocols currently face a number of hurdles that have hampered the growth of the space. Today, there are three main reasons why the decentralized futures market hasn't reached widespread adoption. The first relates to token compossibility. At the moment, derivative products can’t be used in activities like liquidity provisioning, yield farming, staking, or governance making them inferior to physical tokens in terms of utility. The second reason is market depth. Due to the nascency of the sector, most exchanges have limited liquidity to trade against and also lack hefty insurance funds to backstop unexpected losses arising from leverage trading. Lastly, the third reason, and likely the most important one, is Ethereuem’s high fee environment. By nature, derivative products are much more sophisticated financial instruments compared to physical tokens. Therefore, trading derivative instruments in a decentralized manner tends to be more complex than spot trading. As a consequence, derivatives trading volume, in particular perpetual swaps, is hindered by higher transaction costs which are either incurred by the derivatives exchange or passed on to the trader. However, derivatives applications are on the cusp of reaching a wider market as protocols take advantage of the scaling capabilities offered by Layer-2 solutions like Arbitrum and Optimism. As the Layer-2 race heats up, derivative protocols are starting to pick their respective horses. For the most part, perpetual swap exchanges like MCDEX, Futureswap, and Perpetual Protocol are choosing Arbitrum as their scaling solution (MCDEX went live on mainnet last month and the remaining two will launch in testnet in the coming months). In late 2020, dYdX announced a partnership with StarkWare, and after eight months of work, the team successfully ported its perpetual trading platform to StarkEx, StarkWare’s Layer-2 scalability engine. Lastly, earlier this year Synthetix staking contract went live on Optimism Ethereum, making the first Ethereum-native DeFi application to cross the chasm to the Layer-2 world. The Seeds of DeFi’s Next Leg While it's clear in many cases that DeFi activity has been negatively impacted by declining market sentiment and depressed asset prices, the sector remains multiples larger than it was even just to start the year. In the coming months in quarters ahead it is likely DeFi has its growing up moment as scaling solutions arrive, institutions begin to dip their toes into DeFi protocols, and ecosystems continue to mature, providing increased safety for users. It's not yet clear when market sentiment will turn around for the sector. It not only took one of the biggest hits post May crash, but also underperformed ETH as a whole year-to-date. In any case DeFi will continue to march on, with each step making progress towards a radically new open, global financial system governed by code but built for people.
    Source: Ryan Watkins — Published: 2021-07-13T13:00:00Z

  • Web3 & NFT Q2'21 Report

    If someone walked up to me and said at the beginning of the year, NFTs will easily surpass $1 billion in sales, GaryVee will launch an NFT project, and Axie Infinity becomes one of the top five NFT marketplaces, I would have replied, “I’ll believe one of three”. But, the past quarter (Q2’21’) witnessed over $750 million across the top five collectibles, Axie’s Marketplace generated $7.7 million in fees, and GaryVee has already earned over one million in royalties from his NFT project. Let’s break it down. NFT Bubbles It’s Bubble The media narrative that the NFT market is dead or that the bubble has popped is objectively mistaken. The media largely focused on crypto art and collectibles (e.g. NBA Top Shot), but the broad NFT ecosystem continues to grow. In fact, OpenSea recorded its best month ever in June in terms of NFT sales volume. Rarible’s poor performance (relative to OpenSea) can largely be attributed to the marketplace not providing access to some NFT categories that boomed over the past few months including NFT avatars, Art Blocks, sports collectibles, and virtual worlds. OpenSea is telling a canary in the coalmine for NFT growth. In June, OpenSea facilitated over 211,000 NFT sales across nearly 40,000 active traders. Overall, June marked OpenSea’s best month ever for NFT volume, a record number of NFT sales, and its second-best month of active traders. While OpenSea remains the overall marketplace leader, Axie Infinity surged throughout the quarter becoming the four largest NFT marketplace. Notably, Atomic Market – the go-to marketplace for NFTs on WAX – now ranks 8th in NFT marketplaces. Axie Infinity’s growth followed the Phase 2 migration of Ronin, its Ethereum-linked sidechain which provides reduced gas fees and a more seamless user experience. While Axie’s can be exchanged on other platforms, 97% of Axie volume occurs on the Axie Marketplace which passes fees (in AXS and ETH) to the Axie Treasury. The Axie Treasury is now valued at over $21 million, with 85% of it having been ($18 million) accrued in the past quarter through breeding and marketplace fees. Axie Infinity has set itself apart from the rest of the pack – crypto games – and continues to rise. The next major milestone will be the launch of AXS staking in Q3, and the alpha of its virtual world, Lunacia in Q4. Avatars: Not The Last NFTs Perhaps one of the most significant trends throughout the past quarter was the continuation of NFT avatar projects. NFT Avatars – collectibles specifically designed for individuals to represent themselves across the internet (e.g. CryptoPunks) – continued to grow in popularity as the emerging sector generated nearly $350 million in secondary sales throughout Q2’21 and nearly $600 million in the first half of 2021. The Magic Number: 10,000ish Just as DeFi’s summer witnessed a food-based fork of every successful DeFi protocol, NFT blue-chip projects like CryptoPunks are undergoing a similar fork-apalooza. Most of these new projects launched with CryptoPunk-esque traits include a limited number of around 10,000 NFTs, unique attributes across each NFT with different rarity levels, and a community focused on advocacy regarding the future value of its avatar project. Some of the launches include: Meebits – 20,000 unique 3D characters by Larva Labs (creators of CryptoPunks) designed to be avatars for virtual worlds. Existing CryptoPunks and Autoglyphs owners were also able to claim a free Meebit. Bored Ape Yacht Club – Bored Ape Yacht Club (BAYC) is a collection of 10,000 unique Bored Ape NFTs with access to the “Swap Club”, a Bored Ape members only group. Bored Ape Kennel Club – Man’s Ape’s best friend. Similar to Meebits, every BAYC was offered a free dog for “adoption”, because every ape needs a dog, I guess. Wicked Craniums – A collection of 10,762 NFTs where each Cranium is your ticket to “The Cradle”, a Cranium members-only group. Bulls on The Block – early community members of BAYC that wanted to create a wallet for secondary sales to accrue for the community. There are 10,000 unique bulls similar to BAYC. My Fking Pickle – 10,000 self fking explanatory pickles Slumdog Billionaires – because every facet of crypto needs 10,000 more doge dogs. The Larva Labs team was quite intentional with their Meebits project. Since Meebits were claimable by Punks or Glyph holders, Meebits provided added value to the existing Larva Labs community. This creates the perception of Meebits as connected to CryptoPunks – and the punk value narrative – as opposed to the perception of devaluing their existing collectible from a newer, unrelated NFT. Moreover, Bored Apes have notably generated over $60 million in sales in Q2’21 and currently rank 3rd on the NFT avatars list by volume (behind Punks and Meebits). However, most of these NFT avatar projects might be relegated to the same fate of Hashmasks, a once-prominent NFT project that has since lulled since its February launch, only generating $2 million in secondary sales over the past quarter. A larger point with NFT avatars is that most of these communities are relatively small and owned by a small number of individuals. Meebits have the largest owner base, although they do have twice as many NFTs (20,000 vs ~10,000) compared to most of the other NFT avatar projects. Still, there is a strong concentration in all of these projects, with wealthier individuals like Gary Vaynerchuk who revealed that he owns 52 Punks and 54 Meebits. Ultimately the concentrated ownership helps drive the scarcity narrative, but reduces the growth of the community unless individuals sell. Similar to the luxury goods industry, there’s a limited number of buyers. Additionally, as other types of intellectual property launch NFT avatars (think Batman NFTs) then the demand for crypto native avatars may decrease. Genies – avatar NFTs on Flow – recently raised a $65 million Series B in May and has established partnerships with various celebrities including Rihanna, Shawn Mendes, and Cardi B. It’s likely that these types of NFTs will draw significant attention as the respective stars sell their NFTs to their loyal fans. Avatar NFTs are an emerging sector that will ultimately face power law distributions, some will be worthwhile while most will be worth much less. Among crypto native avatar projects, CryptoPunks are established and will likely remain the standard for NFT blue-chips within crypto while other crypto-native avatar projects find themselves struggling to grow adoption due to an influx of celebrity and IP style avatar projects. Web3 Adoption Hits Tipping Point The proliferation of Web3 has been long awaited, but failed to manifest fully because of a need for infrastructure across computation, indexing, data management, hosting, storage, and other vital services. However, after many years of building and continued growth, many Web3 protocols are starting to hit their stride. Middleware layers that have been continuously building for years are now experiencing the on-set of product-market fit. Livepeer a marketplace for video infrastructure providers and streaming applications is processing millions of videos per week and generating several thousands in protocol fee revenue. The Graph officially migrated to its mainnet where it has deployed subgraphs of several protocols and is now generating several thousand dollars per week in fees. Source: Web3Index Ocean Protocol’s data marketplace – which lets individuals issue data sets as balancer liquidity pools – possesses a TVL of over $3.3 million across 419 data set pools. File and data storage networks also continue to gain adoption: Data stored on Arweave grew another 1.8 terabytes (1,800 gigabytes) Storage capacity utilized on Sia has reached an all-time high of 1.09 PB (1 petabyte = 1,000 terabytes) with a capacity of 3.25 PB. The total data stored on Filecoin now exceeds 23 petabytes. Elsewhere, Web3 protocols like Handshake are experiencing increased usage with nearly 1.5 million registered Namebase domains and over 100,000 Handshake domains in use today. Helium’s network adds thousands of nodes per week, resulting in 147 billion data credits spent (equivalent to ~3,500 GBs) for total net revenue of just over $1.4 million (mostly used to add new hotspots). Still, while many individual components of Web3 are poised for their breakout moments, the full stack has yet to find a way to interoperate with DeFi, NFTs, or other Web3 protocols. Web3 is no longer a star in the distant future. The stack is coming together and the stars are quickly aligning. Celebrity, Influencer, and Brand NFTs Dread it. Run from it. Destiny arrives all the same. As celebrities like GaryVee dive deeper into the water of crypto, the risk of entry for other celebrities and influencers decreases. Gary Vaynerchuk – more commonly referred to as GaryVee – is now entering the crypto industry with his new NFT project – VeeFriends. Since its early May launch, the dual NFT project and brand monetization experiment has been quite successful generating over $11 million in secondary sales in the quarter. Moreover, renowned artists like Jay-Z are entering crypto, using a CryptoPunk as his Twitter avatar image. More importantly, the Rap Mogul conducted a Sotheby’s auction of “Heir to the Throne”, an NFT collection based on his debut album which ultimately fetched $139,000. Musicians which have historically had trouble monetizing their work (except through concerts) have become first movers in NFT experimentation. Yellow Heart – an NFT ticketing marketplace – has already developed and issued NFT collections with Maroon 5 and The Kings of Leon which come with additional perks like front row seats, access to a listening party, portraits that accompany the albums, and more. And if individuals are capitalizing on brand monetization via NFTs, large established brands aren’t going to lag for long. Twitter recently launched the “Twitter 140 collection” on Rarible, a set of NFTs that encompass Twitter’s history and pop culture. Closing Out Q2 Sometimes a quarter passes by mostly unnoticed. Other times, a quarter experiences breakout trends. For Web3 the quarter fell somewhere in the middle. The Web3 sector experienced some jolts growth and reached some milestones, but overall trended steadily upwards. Among NFTs the quarter was quieter from a mass consumer perspective, but not from an analytical reference. Art sales declined, but NFT speculators moved to greener pastures (as all speculators do). Still, the NFT landscape continues to expand, branching out into various new fields that have yet to be explored, albeit even if that means we have to let celebrities through the OpenSea gates. What next quarter holds is anyone’s guess, but if these trends continue the second half of the year is setting up to be spectacular for those who care about Web3 and NFT adoption.
    Source: Mason Nystrom — Published: 2021-07-08T12:35:00Z

  • 2Q'21 Currency Sector Recap

    The 2Q’21 was a tale of two halves in one of the most eventful quarters of the Currency sector’s history. The first half of the quarter was full of jubilations as Coinbase (COIN) employees popped champagne during the company's direct listing on April 14, 2021. Bitcoin reached all time highs (ATHs) of over $60,000, and there were more eyes on crypto than ever before. Institutional investors and banks moved to announce their involvement in the digital assets sphere, pouring equity capital and launching new initiatives to get their clients onboard. Even State Street, the second oldest bank in the US with $3.1 trillion in assets under management, announced it will be building a crypto trading platform. We also saw speculative mania of DOGE reaching $0.74 on the back of Elon posing as the Dogefather on Saturday Night Live (SNL). ASS, SHIBA and CUMMIES also saw the limelight, though meme coins rarely warrant mainstream media attention. Mark Zuckerberg even announced the names of his two goats, Max and Bitcoin, perhaps hinting to the world that he’s a Bitcoin maximalist. Bitcoin 2Q’21 While Bitcoin’s price rallied +10% in the first part of April, its price ended the month down by -9%. The sudden drop in value should’ve raised a few red flags but markets ignored warning signs of a major reversal or market fatigue since Bitcoin had seen six consecutive positive months, a first since 2012. In retrospect, there were indeed signs of market fatigue. The COIN direct listing saw the price collapse by -20% in the first days of trading, and Tesla also announced it had sold 10% of their Bitcoin position for treasury management reasons. Nevertheless, all indications still pointed to a bull run as the remainder of the crypto market diverged from Bitcoin’s price performance. In April, ETH was up +44%, DOGE continued its winning streak up +463%, and even late-cycle ETC was up 146%. In mid-May, Bitcoin’s price began to reverse seeing the largest reversal as its third-worst performing month in history, down -38%. This finally ended narratives that this rally was just like the 2017 bull market. It wasn’t even like the 2013 bull market either, as investors found themselves in uncharted waters. Never before had a four-year cyclical top been so tame and never before had a mid-bull run reversal been so severe. The month of May also brought an onslaught of sequential negative news events in a FUD (fear, uncertainty, and doubt) bath. Market participants began to wonder if this attack on Bitcoin was coordinated. Negative news included Tesla ceasing to accept Bitcoin for purchases, citing Environmental, Social and Corporate Governance (ESG) concerns. This resulted in mainstream media frequently reporting on Bitcoin’s coal usage and impact on global warming. Even the Pope commented on the detriments of technology based on “highly polluting fossil fuels”. Most importantly, Tesla’s announcement sparked Elon Musk’s damaging verbal diarrhea on Bitcoin, even after agreeing that Bitcoin incentivizes renewable energy. Source: Travis Kling Many valid ESG rebuttals (here, here, here, and here) were provided but were largely ignored by mainstream media. Michael Saylor even championed a North American Bitcoin Mining Council to collect renewable usage data. As soon as it seemed that Bitcoin was heading in the right direction with ESG, the public outcry ceased by mid-June, as quickly as it started. The Bitcoin ESG FUD would be shelved for another day. For Q2’21, the Bitcoin Mining Council reported that the Bitcoin Mining energy usage only amounted to 0.12% of the World’s total energy consumption. Source: Bitcoin Mining Council In the US, the sector also saw one of the busiest months of regulatory headwinds. The US Senate Banking Committee urged the new Office of the Comptroller of the Currency (OCC) Head to review past favorable crypto rulings and the OCC, FDIC and the Fed was reportedly in talks about an interagency crypto policy team. The FDIC, in its capacity as a federal banking regulator, was issuing requests for information from banks on crypto usage. The IRS was reportedly cracking down on crypto tax evasion. The IRS was also, along with the US Justice Department, investigating the world’s largest exchange, Binance. Additionally, New York State introduced a Senate Bill to halt Bitcoin mining for three years while it assessed the environmental impact. The Treasury called for crypto transfers above $10,000 to be reported to the IRS. Secretary of the Treasury Janet Yellen called the US crypto regulatory framework inadequate and pushed for a new framework and SEC Chair Gary Gensler stated greater investor protection is needed on crypto exchanges. Most damaging of all could have been the slew of fake news and unsubstantiated claims. Separately, growing institutional adoption of Bitcoin could have meant that macroeconomics played a role in this selldown. On May 12 2021, the Consumer Price Index (CPI) printed +4.2%,the highest inflation print since September 2008. In light of signs of overheating in the market, though mitigated by bad jobs numbers, the Fed’s meeting minutes hinted that they were beginning to think about, thinking about tapering. This led to a knee jerk reaction of US real yields rising +9bps though traditional financial markets remained relatively calm. Markets already knew that inflation numbers were high due to a low base effect from COVID-19. However, Bitcoin, at the extreme end of the risk curve for traditional institutional investors, saw a major selldown. The month after, the CPI print of 5% was even higher but it didn’t warrant a market reaction. As expected, the Fed will patiently wait for economic data to decide if they will bring forth tapering from the expected Q1’22E. Concerns of tapering subsided, but Bitcoin’s price failed to recover. In China, the Vice Premier Liu announced a crackdown specifically on crypto mining and trading. It was nothing new -- China had banned securities companies from engaging in Bitcoin since 2013, and also banned trading in 2017. However, never before had the announcement come from someone so senior in the China Communist Party, the chair of the State Council’s Financial Stability and Development Committee. And never before had Bitcoin mining and trading been specifically stated. The government newspaper, Xinhua, also published articles citing a series of crypto-related scams, with 1,100 people arrested for money laundering through crypto. Reasons cited by the public focus on social stability, especially important before the Communist Party’s 100th anniversary on July 1. This resulted in Chinese search engine Baidu removing Binance, Huobi and OKEx. Weibo, a prominent social media platform, blocked major exchanges and key opinion leaders. BTC market data was also removed from security trading platforms like Tencent-backed Futu and Tiger Securities. Additionally, companies highlighted that their plans to launch crypto trading services would target non-China domiciled clients. Major crypto exchanges Huobi and OKEx scaled back on leveraged trading, from a maximum of 125x to less than 5x. Furthermore, new clients wouldn’t have access to the leverage trading function. Source: WuBlockchain On the mining front, the Inner Mongolia region was the first to comply, followed by more important regions such as Xinjian, the most important mining region during the dry season. As miners packed up, the total hash rate, an indicator of the computing power in the network, halved from mid May to the end of the quarter. While Bitcoin’s hash rate has not recovered yet from the largest sustained percentage decline, perhaps the worst is already behind us in terms of the impact of China’s crackdown on Bitcoin mining. We expect hash rate to recover over the course of the year, as miners find other venues of electricity and restart their operations. Many of the miners from Inner Mongolia, Xinjiang, Qinghai, Sichuan are reportedly moving to various locations including Kazakhstan, Texas and Norway. Just as suddenly as the noise around environmental concerns rapidly died off towards the end of June -- so did concerns of China’s mining shutdown. Overall, these are net long-term positives for Bitcoin as what doesn’t kill it only makes it stronger. Indeed, as the world becomes more environmentally friendly and no institutional investors want to run afoul of the ESG movement, Bitcoin will need to pivot towards renewable energy to gain global adoption. Also, false narratives that Bitcoin is a “Chinese financial weapon” or that Bitcoin is a threat to US national security -- the code is literally open sourced -- can finally be put to bed as mining hashpower will more evenly be distributed throughout the world. Towards the end of the quarter, El Salvador became the first country in the world to adopt Bitcoin as legal tender in an effort to de-dollarize and reduce the cost of remittances. The government also announced a $30 airdrop for all adults through its own digital wallet. While Bitcoin’s global penetration is ~2%, El Salvador’s Chamber of Commerce’s data indicates that 21-25% of the population would use BTC. While there was no meaningful impact on Bitcoin’s price, it was a global step towards wider adoption. Furthermore, it could be the first of several countries to adopt Bitcoin as Paraguay also announced a bill that would make Bitcoin legal tender. Source: Steve Hanke Bitcoin Markets In terms of markets, derivatives were punished this quarter. Markets started strong, with ETH touching $3,000 on May 3 only to have $246 million of open interest in the ETH call $5,000 strike the day after. However, by the end of the quarter, given the waterfall of liquidations, Bitcoin Futures open interest reset to levels seen at the start of the year. From the peak of April 14, open interest declined -56%. The first large liquidation happened April 18, with $9.3 billion of longs liquidated (mostly from Binance) but the market recovered after. Despite the April wipe out, on May 19, liquidiations reached $7.6 billion (mostly from Huobi, Bybit and OKEx), crashing the market further as leveraged hands were forced to sell. Despite the aggressive liquidations, and subsequent spot selling, large holders (100 to 1,000 BTC) actually accumulated during the selldown: Source: Woonomic, Glassnode It also seemed as if traders in the US time zone were more bearish than those in Asia, a reversal of the 90-day period prior to mid-May. Currency Sector: 2Q’21 Outperformers Dogecoin (+325%), Ethereum Classic (+268%), XRP (+12%) and Ethereum (+3%) had a positive quarter. DOGE benefited from its primary champion, Elon Musk, with no less than 13 tweets mentioning “Doge”. To his 57 million followers, Musk also tweeted that he’s “working with Doge devs to improve system transaction efficiency” which baffled most crypto investors who noticed there had been no development for the past several years. However, the social media prowess of DOGE is strong and the price rallied to an ATH of $0.74 on May 8, the time that SNL’s Dogefather aired. From the beginning of the month, DOGE’s price had multiplied by 12x at that time, before ending the quarter at ‘just’ 5x. Separately, Coinbase also listed DOGE on June 3 (in addition to an Ethereum-based dog coin SHIBA on June 15). However, even before the SNL run-up, DOGE rallied 500% over a week in mid-April, nearly flipping Binance Coin (BNB). Ahead of the Coinbase listing, Reddit’s wallstreetbets moderator reversed their ban on crypto -- allowing the discussion of BTC, ETH and DOGE. In less than 24 hours, they regretted the decision and reiterated its crypto ban on the subreddit. The DOGE pump that ensued was a demonstration of the power-of-the-people. While the price dropped -66% from its ATHs by quarter-end, DOGE’s outperformance over the quarter showed its meme sway remained strong. Ethereum Classic (ETC) also saw a strong run up in the quarter. (ETC) is the legacy chain that split from Ethereum following a contentious hard fork, known as The DAO fork, in Jul. 2017. On May 7ths, ETC saw a $55 billion 24h volume while its market cap was just $17 billion. Messari’s clean volume of vetted exchanges just showed $414 million in volumes, indicating that there could have been a lot of fake volumes on ETC. Nevertheless, ETC had several status updates this quarter, publishing a roadmap and 2021 budget and introducing new software releases and network upgrades. XRP continued to outperform (+12%), following its Q1’21 +164% rally. This was on the back of easing concerns after a -30% selldown following the SEC's enforcement action in Dec-2020. Their General Counsel maintains that regulatory uncertainty is deliberately maintained by the SEC and that XRP is unjustly singled out as a security, while BTC and ETH roam free. Last but not least, ETH ended the quarter up +13%. Ethereum had a strong first half of the first quarter, with talks of a supercycle and flippening. Deribit, an options platform, saw $5,000 calls with a notional value of $331 million by May 11. Crypto loves a good narrative and Ethereum had many. Layer 2 scaling solutions were just kicking off, with Polygon taking the lead. Ethereum implemented the Berlin upgrade on April 15 and the upcoming EIP-1559 was also going to solve some of the pain of the high transaction fees. Furthermore, ETH’s supply was about to become deflationary in supply. ETH was also unscathed from ESG critics of Bitcoin mining as it was moving towards ETH 2.0 with a Proof of Stake consensus mechanism. Furthermore, decentralized finance (DeFi) was reaching new highs for on-chain activity. However, in a Bitcoin selldown, gravity takes over and every token is correlated and this time was no different. ETH has still outperformed Bitcoin overall, after diverging around mid-April but gave back 16% of the performance in June. Ethereum’s market share is still minor but climbing. Though DOGE, ETC and XRP’s market share in the currencies sector is still small. Bitcoin dominance in the Currencies sector fell from 79% to 65% this quarter: Currency Sector: 2Q’21 Underperformers Other than Bitcoin (-39%), Dash (-44%), Stellar (-31%) and Bitcoin SV (-30%) were key underperformers. Dash was initially released as a fork of Bitcoin, but had a strong marketing narrative as it was focused on the payments use case. They released a couple of software and on-chain upgrades this quarter, that will cumulate to their July 15 hard fork. Their underperformance this quarter could be attributed to its strong run up of +109% in Feb-2021. Stellar (XLM), a fork of the Ripple protocol, made two major network upgrades. While XRP and XLM were correlated last quarter, XLM underperformed this round. It could be a testament to the importance of the size of the community during a selldown. Bitcoin SV (BSV) is a Bitcoin Cash (BCH) hard fork prioritizing what the creators consider strict adherence to Satoshi Nakamo's original Bitcoin client. It continued to underperform after just rallying +28% in 1Q’21. There have been no major announcements or upgrades from BSV this quarter. However, its primary founder has chosen to take further legal action in April on bitcoin.org to remove the Bitcoin whitepaper from its website. The website did not launch a defense, in order to protect its founder’s anonymity. Bitcoin Dominance Bitcoin’s overall cryptocurrency dominance dropped to 40% on May 18th, the day of the $7.6 billion liquidation, reaching levels unseen since July 2018. While Bitcoin’s price peaked on April 14th at $64,654, the altcoin total market cap peaked a month later on May 11th. This was similar to the pattern seen in Dec-2017 where BTC peaked a month before other currencies. Currency Sector: Regulations April Stablecoin issuer Paxos gets a federal trust charter through the OCC, becoming the third federally regulated crypto bank. The company also raised $300 million at a $2.4 billion valuation Canada approves three Ethereum ETFs The European Union’s investment arm hired Goldman Sachs, Banco Santander and Societe Generale to sell EUR100 million bonds, registered on the Ethereum network. Santander and Societe Generale have issued bonds on the public Ethereum blockchain but this marks the first time for Goldman Appointments: Gary Gensler, who had a blockchain class at MIT, is confirmed as the Chair of the SEC. The former OCC Head Brian Brooks was hired as the CEO of Binance US and the former CFTC Chair Chris Giancarlo is appointed to BlockFi’s board May China reiterates a crackdown on Bitcoin mining and crypto trading, leading to an exodus of miners and a resulting drop in hash rate June The Basel committee, a global banking regulator, urges the toughest capital rules for crypto. This is no different from DeFi protocols that require at least full collateralization on loans. Regulatory clarity should help institutional adoption in the longer term Brazil lists the first Bitcoin ETF in Latin America. QR Capital’s ETF had received approval earlier this year in March 2021 Currency Sector: Institutional and Social Adoption April State Street, the second oldest bank in the US with $3 trillion in assets under management (AUM) announces its starting a trading platform and may also trade on it Germany’s Fund Location Act, was proposed in April and approved by parliament, permitting special funds to invest up to 20% of their portfolios in crypto. The addressable market is up to $415 billion and the law is enforced July 1 2021 Venmo launches crypto purchases, but not withdrawals Morgan Stanley files to give private wealth clients access to Bitcoin CI Global Asset Management, with an AUM of $230 billion, launches North America’s first Bitcoin mutual fund New York Digital Investment Group (NYDIG) raised $100 million primarily from insurance companies like Liberty Mutual Insurance and Starr Insurance among others. This is a top up after raising $200 million the month prior. NYDIG is a Bitcoin platform, a subsidiary of Stone Ridge, a $10 billion alternative asset manager. Wealthfront, US Bank, Goldman Sachs announces they will be offering crypto products in the future Coinbase lists on NASDAQ Thodex, a Turkish exchange, was charged with fraud, freezing $2 billion in client money. Just a week prior, Turkey’s central bank had banned crypto as a means of payment. In March 2021, Turkey printed an inflation rate of 16%, though economists say the true number is higher May Ray Dalio said he owns Bitcoin, after saying “I like the diversification of this kind of asset. It should be party of any portfolio. It’s got merit” just the month prior. Famed activist trader, Carl Icahn, said he wants to get into crypto in a big way. Citibank, Millennium and Point 72 announced they would be entering the space MoneyGram plans to allow Bitcoin purchase at 12,000 US retail locations while NYDIG partners with the FIS to enable banks to offer Bitcoin trading directly in bank accounts, using their license. This could have a reach of 24 million customers Framework Ventures raises a $100 million crypto venture capital fund Galaxy Digital acquires custodian BitGo for $1.2 billion, after talks of a PayPal acquisition fell through last December Tether revealed a breakdown of their reserves, claiming to hold 76% of their reserves in cash and cash equivalents PayPal and Venmo plan to allow crypto withdrawals to third-party venues The “laser eye” movement to $100,000 takes Twitter by storm, including Paris Hilton, Tom Brady and US Senator Cynthia Lummis June Standard Chartered Bank, together with crypto-native platform OSL, announces a crypto exchange called Zodia. This comes after SCB announced a custody solution with one of the world’s largest custodians, Northern Trust, last December BC Group (OSL’s parent) raised $70 million from GIC, Singapore’s sovereign wealth fund with a AUM of $488 billion. This comes after a $90 million fundraising in January, done by Morgan Stanley El Salvador makes Bitcoin legal tender and Paraguay also announced a bill to follow suit. El Salvador is reportedly in talks with the IMF for a nearly $1 billion financing agreement, and has reassured the IMF that it’s not abandoning the USD. Andreessen Horowitz raises a $2.2 billion crypto venture fund. Blockchain Capital’s venture fund raised $300 million, notably from Visa and PayPal TP ICAP, the world’ largest interdealer broker, plans to launch a crypto trading platform with Fidelity and Zodia, the JV between Standard Chartered Bank and OSL Interactive Brokers plans to offer crypto trading by the end of summer 2021 Compound Finance and Coinbase offer 4% interest rate product on US dollars Citigroup launches crypto unit to offer digital assets to private wealth clients Currency Sector: Notable Trades April Gaming giant, Nexon, bought $100 million of Bitcoin on its balance sheet. They also own Korbit, a Korean crypto exchange Tesla sells $272 million of Bitcoin, or 10% of their balance sheet holdings Microstrategy purchase $15 million worth of Bitcoin May Globant IT firm ($9 billion market cap) discloses it had purchased $500,000 worth of BTC in Q1’21 MicroStrategy purchases $25 million worth of BTC June MicroStrategy raised $500 million in secured debt and purchases $489 million of Bitcoin Soros Fund Management begins trading Bitcoin Final Thoughts Since BTC metrics are still fairly mid-cycle, this quarter’s dramatic selldown caught many investors by surprise. If markets don’t recover from here, expectations are of a mild bear market since the rally was rather mild -- a 3.2x from the prior Bitcoin ATH instead of a 20x return. Furthermore, during the 2018 bear market, investors were still bullish and hopeful in the first half of 2018. However, this time around, sentiment instantly flipped bearish -- perhaps an indication that investors were hoping to front run any risk of a bear turn. Many investors have been traumatized by the 2017 and 2013 blow-off tops and subsequent deep and prolonged bear markets, so they could have been quick to pull the sell trigger. What we can conclude is that -- this rally, perhaps due to the wider institutional adoption of Bitcoin, is like no other in the past. Bitcoin, and the crypto sector, had also never before seen an onslaught of attacks from all corners before. The neverending China ‘ban’ and ESG concerns reared its head at the same time, though these narratives have been long-standing sources of FUD for Bitcoin. However, the two largest headwinds for BTC in 2Q’21 were two of the largest tailwinds for ETH -- as Proof-of-Stake makes it harder to geographically locate and censor miners, and no institutional investor wants to seem irreverent to the ESG narrative. While these FUD narratives have been addressed and even falsified, Bitcoin and the crypto community will be stronger in continuing to take measures to evolve the ecosystem.
    Source: Mira Christanto — Published: 2021-07-06T12:45:00Z

  • Weekly Recap Ending July 1st

    Week In Review The current Granada proposal for Tezos has passed the Exploration Phase, which ended on Jun. 23, 2021. The Helium blockchain began to successfully elect new Consensus Groups after a ten-hour delay Voting on a proposal to create an Aragon Association Venture Capital Fund has started and will end on Jul. 2, 2021. 1 million UNI will now be allocated to a nonprofit entity based in the United States to provide grants for political, educational, and legal engagement. Algorand shared a pre-release version of v2.7.1 of its mainnet client on Jun. 29, 2021. Perpetual Protocol team introduced Perpetual Protocol V2, called Curie. Sector Performance Overview The week ending on July 1st was a mixed one for cryptocurrency markets. Following Messari’s sector convention, three out of the five sectors covered in the report ended the week in positive territory while two suffered some minor losses. The week was led by the Smart Contract Platform sector which ended with a positive return of 6% driven by assets such as Ethereum (5.12%), Solana (6.70%), Ethereum Classic (22.85%), and Internet Computer (32.30%). The DeFi sector followed closely in second place finishing the week with a return of 4.8%. Assets such as Compound (29.67%), Aave (11.95%), MakerDAO (13.36%), and Terra (6.42%) were among the best-performing assets of the sector. On the contrary, the Currency sector was the worst-performing one of the week as a sudden appetite for riskier assets hit the markets. The biggest detractor of the sector was Bitcoin which had a 7-day return of -3.74% as investors moved to higher beta tokens in search of higher returns. Sector Portfolio Weights The sector portfolio weights for this week’s report are as follows. The portfolio allocations are constructed following the market capitalization methodology using data as of July 1st. Sector Drill Down Performance during the week ending on July 1st was a bit bumpy but positive overall. Asset prices experienced a small rally during the first day of the week followed by a sharp decline which sent returns to the red zone. However, the story quickly changed as the weekend came to an end. On Monday, UK regulators banned Binance from having ongoing operations in the U.K., in the latest sign of the growing crackdown on crypto markets around the world. Despite the bearish news, crypto markets shrugged off the bad press as asset prices rallied, setting a positive tone for the rest of the week. The DeFi and Smart Contract Platform portfolios outperformed the rest of the sector portfolios during the week. Within the DeFi portfolio, Compound was the top-performing asset finishing the week with a 29.67% return. The portfolio also benefited from the weekly performance of Aave (11.95%), MakerDAO (13.36%), and Terra (6.42%). Similarly, Ethereum (5.12%), Solana (6.70%), and Cosmos (24%) were the main drivers of performance for the Smart Contract Platform portfolio. Compound outperformed as the protocol announced it will give a fixed 4% APR on US dollars, with daily liquidity, targeted at financial institutions. During the week, Bitcoin’s dominance dipped roughly 4% as investors dialed up risk, rotating away from lower volatility assets into higher-risk assets. Conversely, Ethereum’s dominance spiked 3% during the week in a sign of a rotation to higher volatility tokens. Last week, volatility, defined as the rolling standard deviation of daily log returns, suddenly spiked across the board as markets tumbled down on the back of China’s crackdown on Bitcoin mining. However, during this week volatility stabilized and is now ranging from 5% to 7% across all sector portfolios. Similarly, the correlation between the sector portfolios and Bitcoin stabilized around the 85% mark after seeing a decline over the past two weeks. Following a similar pattern, the correlation between the sector portfolios and Ethereum also stabilized after experiencing a small dip. Interestingly, the correlation of the DeFi and DEX portfolios remains elevated hovering around the 95% levels. On the contrary, the Web 3 and Currency portfolios are continuing to see a decline in their correlation with Ethereum.
    Source: Roberto Talamas — Published: 2021-07-02T13:30:00Z

  • VeeFriends: A Ticket to The Vee Land

    As NFTs continue to gain adoption, influencers and celebrities are beginning to experiment with how they can be utilized. Enters the Chat: Gary, F*cking, Vee Gary Vaynerchuk – more commonly referred to as GaryVee – is now entering the crypto industry with his new NFT project – VeeFriends. Gary is the chairman of VaynerX, a media and communications holding company, but is more popularly known for his motivational speaking with his often blunt, explicative rich, but candid style of engagement. Notably, not everyone is a fan of GaryVee’s you-won’t-be-successful-unless-you-work-nights-and-weekends-in-your-20s style of advice. GaryVee – also infamous for his long-desired goal to become an owner of the New York Jets football team – was an early adopter of the internet, creating one of the first e-commerce sites for wine at the time. Since his early success with his family’s e-commerce wine businesses, Vaynerchuk has been an early investor in Coinbase, Facebook, Twitter, and other startups. VeeFriends: Celebrity-Branded NFTs VeeFriends are an experiment with brand monetization and NFTs launched on May 5, 2021, and have already surpassed $11 million in secondary sales volume. There are 10,255 VeeFriend NFTs consisting of 9,400 admission tokens, 555 gift goats, and 300 access tokens; including many one-of-ones). More specifically, many of the tokens can be categorized based on the annual perks they offer including: GiftGoat – a minimum of six physical gifts per year Sorcerer - NFT given to individuals part of the GaryVee Mentorship program which comes with one-on-one time with GaryVee One-on-One - A five minute video with GaryVee, ability to have Gary come on your podcast, backstage passes to all Gary speeches, etc. Group Access - sixty minute virtual hangouts with GaryVee or meals with Gary and other group token holders. Competition - Pickup sports, cards, or video games with GaryVee and his surprise guests Each VeeFriend can be redeemed for its’ respective perks each year for the next three years or sold at any point in time at the market rate. While each Veefriend shares its unique benefits, all are redeemable for a ticket to the promised land. VeeFriends: Your Ticket to The Vee Land All VeeFriends NFTs come with 3-year admission to VeeCon, an annual exclusive conference for VeeFriends holders. VeeCon will be a multi-day “superconference” in which GaryVee will likely bring together various celebrities and influencers to perform keynote speeches, talk on panels, provide entertainment, and organize other events for VeeFriends owners. To date, VeeFriends have performed very well, likely a direct result of the star power of GaryVee and his extremely dedicated fan base. The success of the secondary market might be speculative or the market may be figuring out the value for specific VeeFriend NFTs. Either way, VeeFriends receives a 9% royalty from all secondary sales while 1% will be reserved for a charity of Vaynerchuk’s choice. The two-month volume of Veefriends has already generated over $1 million in revenue for VeeFriends and $100,000 for charity. The VeeFriends NFTs are issued using Nameless, an NFT issuance platform – built by NFT42 – that uses a custom, no-code interface. The Nameless protocol's NFT are issued as their own smart contract, can be across various blockchains, and provide the original issuer the ability to alter or edit the NFT in the future. The Future of Influencer and Celebrity NFTs As other influencers of Gary’s stature watch VeeFriends' initial success, they will be drawn to launch their own NFTs that produce passive income via royalties. Additionally, while Vaynerchuk’s model of providing NFTs with access is an interesting model, it’s hard to scale as Gary’s time is naturally limited. With that said, more experiments inspired by VeeFriends will occur over the coming years and potentially finalize on a standard NFT model for influencer-fan engagement. Celebrity-fan engagement has become increasingly monetizable over the past few years. Cameo – an app that lets customers purchase video messages from influencers or celebrities – sold over $100 million in celebrity videos. The company which takes 25% of each purchase, brought in over $25 million in 2020 and claims that more than 150 celebrities were earning at least $100,000 on the platform last year. NFTs are the natural evolution of Cameo, allowing celebrities with a large enough following to earn royalties and further monetize their star power. Additionally, one can easily imagine an NFT version of Cameo where each NFT is sold and can be redeemed for a video of a certain length. The benefit of having NFTs of Cameo-style videos is that there could be a secondary market for buying and selling these videos where similarly to VeeFriends the influencer retains a royalty on future sales. In this way, influencers could benefit from issuing NFTs, gain upside as they grow more popular, and an entire industry of star speculation may emerge.
    Source: Mason Nystrom — Published: 2021-06-30T12:36:00Z

  • Weekly Recap Ending June 24th

    Week In Review The NEAR Foundation submitted a proposal on Jun. 16, 2021, to establish an Ecosystem Treasury DAO. The Harmony team has updated the release notes for v4.1.8 of its mainnet client. The proposal to approve Mirror V2 has passed. The current Granada proposal has passed the Exploration Phase, which ended on Jun. 23, 2021. Sector Performance Overview Last week was a bloodbath in crypto markets. According to Messari’s sector convention, all sectors ended the week with double-digit losses. The least affected sector was Currencies which ended the week with a 12% loss aided by Bitcoin’s resilience to the continued market drop as a result of investors moving down the risk curve to less volatile assets. High beta sectors such as Decentralized Exchange and DeFi suffered the most during the week. The DeFi sector was hurt by the weekly performance of Uniswap (-20.9%), Aave (-30.16%), and MakerDAO (-24.15%). Similarly, the DEX sector was dragged down by Uniswap, PancakeSwap (-15.93%), THORChain (-30.52%), and SushiSwap (-17.99%). Sector Portfolio Weights The sector portfolio weights for this week’s report are as follows. The portfolio allocations are constructed following the market capitalization methodology using data as of June 24th. Sector Drill Down Performance during the week ending on June 24th was brutal across cryptocurrency markets. China’s expanding crackdown on Bitcoin mining was the main catalyst for this week’s crash. On Monday, China summoned several major banks and payment companies to impose tougher actions over the trading of cryptocurrencies. Institutions were told not to provide products or services that include trading, clearing, or settlement of cryptocurrency transactions which ultimately led to a widespread bearish sentiment across the broader market. As a result, all sectors experienced heavy losses early on in the week with Bitcoin dipping below $30,000 for the first time in more than five months. The market shock was more drastic for risker tokens (primarily in the DeFi, DEX, and Web3 sectors). Losses across high beta tokens ranged from 20-30% over the past 7 days. Similar to the sector performance, the Currency portfolio suffered the least losses during the week. The portfolio’s relatively high allocation to Bitcoin, which finished the week with only a 10% loss, was the reason for the outperformance of the Currency portfolio relative to other sector portfolios potentially signaling that appetite for risk is nowhere to be found. The rotation from a risk-on to a risk-off environment can be better visualized by the recent bump in Bitcoin’s dominance. Since the market top in mid-May, Bitcoin’s dominance increased approximately 10% as investors pivot towards low volatility assets. Following the same pattern as last week, the DEX and DeFi portfolio suffered the most losses ending the week with a -23% return. In both cases, Uniswap was the main driver of performance given its high allocation in the portfolios. Over the past two weeks, volatility, defined as the rolling standard deviation of daily log returns, reverted back to normal levels after experiencing a massive spike due to the market turbulence in May. However, portfolio volatility is starting to creep up once again as uncertainty about market conditions continues to mount. Similar to last week, the DEX, DeFi, and Web3 portfolios experienced the highest increase in volatility during the week going from 5-6% to 10-11% in the span of three days. The Bitcoin-heavy portfolios (Top Assets and Currency portfolios) only saw a 2% bump over the same period of time. In terms of correlation with Bitcoin, sector portfolios continue to see a decline week-over-week. As mentioned earlier, this behavior is due to Bitcoin’s outperformance relative to the broader market. Similarly, the correlation with Ethereum is also seeing a slight decline this week but not as noticeable as with Bitcoin. Notably, the Currency portfolio (which has an allocation of 88% to Bitcoin) has seen the biggest decline as the correlation between Ethereum and Bitcoin trends lower.
    Source: Roberto Talamas — Published: 2021-06-25T13:00:00Z

  • Weekly Recap Ending June 17th

    Week In Review Notable Messari Updates Curve v2 is now live and available on Ethereum and Polygon. A proposal to lower the UNI proposal submission threshold from 10M UNI to 2.5M UNI, i.e. from 1% to 0.25%, has passed Taproot has been locked in, reaching the signaling threshold of 90% of all blocks mined in the current difficult period signaling in support, and will be activated in November 2021. With the T Token Proposal officially approved by both the Keep and NuCypher communities, team developers are working on the KEANU staking contract and the associated adapters to grandfather in existing NU and KEEP stakes Cosmos Hub development teams released an updated project roadmap (dubbed Roadmap 2.0) on Jun. 15, 2021, detailing the Hub's future upgrades. The Geth team released v1.10.4 (Voyager Cluster) on Jun. 17, 2021. Sector Performance Overview The week ending on June 17th was a mixed one for crypto markets. Following Messari’s sector convention, the Currency sector outperformed the rest ending the week with a 4.7% return. The sector benefited from Bitcoin’s 7-day performance (4.5% weekly return) which was one of the top-performing assets from the group of tokens covered in this report. DeFi and Web3 also ended the week with positive returns. On the positive side, Venus (XVS), 1inch (1INCH), and BarnBridge (BOND) pushed the DeFi sector up while Alchemix (ALCX), Enzyme (MLN), and Rari (RGT) detracted from performance. The Web3 sector was propelled by Aragon (ANT) which ended the week with a 134% return. However, the sector’s returns were offset by the negative performance of the remaining assets in the sector. Decentralized Exchanges and Smart Contract Platforms were the lagging sectors of the week. The DEX sector was primarily hurt by the weekly performance of SushiSwap (SUSHI), Balancer (BAL), and Curve (CRV). Similarly, the Smart Contract Platform sector was dragged down by the performance of Kusama (KSM), Internet Computer (ICP), and Celo (CELO). Sector Portfolio Methodology Following the same approach as previous weeks, this week’s report focuses on comparing the performance, risk, and correlation structure between different sectors. To achieve this, we constructed market-weighted “sector portfolios” by selecting the top assets (ranked by market capitalization) from each sector covered in this report. The sector portfolio allocations are the following using market capitalization data as of June 17th. Sector Drill Down Performance during the week ending on June 17th was a bit chaotic. All sector portfolios started the week with disappointing performance with some reaching lows of -15% to -20% in the first few days of the week. However, performance across the board improved starting on June 14th gaining back some of the weekend’s losses. In the latter part of the week, asset prices tumbled once again sending three out of the five sector portfolios to negative territory. The Currency sector portfolio was the clear winner of the week finishing up with a 3.1% weekly return. The performance was mainly driven by Bitcoin’s weekly performance which accounts for roughly 60% of the Currency portfolio. The runner-up was the Top Assets portfolio which also benefited from Bitcoin’s performance but was ultimately dragged down by Dogecoin (DOGE) and Uniswap (UNI) which ended the week with -8% and -10% respectively. The DEX and DeFi portfolio suffered the most losses ending the week with a -9% return. In both cases, Uniswap was the main driver of performance given its relatively high allocation in the portfolios. Volatility, defined as the rolling standard deviation of daily log returns, remains elevated across all sector portfolios relative to levels before the market crash in mid-May. However, given the market has been moving sideways without a clear direction since the crash, volatility has stabilized. The DEX and DeFi portfolios are currently the ones with the highest risk both running 30-day rolling volatility of 13%. The volatility of the Top Asset and Currency portfolios has been moving in the 6-8% range due to their higher allocation to Bitcoin which has been one of the least volatile assets relative to the rest of the tokens in this report. All asset correlations continue to trend higher. The animation below highlights this trend over the past four weeks. As seen below, all correlations between sector portfolios are greater than 85% with certain pairs reaching levels as high as 95%. Interestingly, the correlation between sector portfolios and Bitcoin is steadily decreasing. Aside from the portfolios that are heavily allocated to Bitcoin (Top Assets and Currency portfolios), all other sector portfolios have experienced some decline since reaching an all-time high last week. On the contrary, the correlation with Ethereum is at an all-time high across the board. Aside from the Currency portfolio, all sector portfolios have a correlation with Ethereum higher than 95%. Normally both statistics move in the same direction; however, this is the first time this kind of dislocation takes place. The reason is that most assets have recently underperformed Bitcoin as investors move down the risk curve to lower volatility assets. As a result, Bitcoin’s market-cap dominance is on the rise increasing roughly 6% over the past 10 days.
    Source: Roberto Talamas — Published: 2021-06-18T13:00:00Z

  • Weekly Recap Ending June 3rd

    Week In Review Notable Messari Updates Helium team released a post mortem of the May 29, 2021 blockchain outage. A proposal to allocate 1M UNI from the Community Treasury to fund a political defense organization to defend the protocol and DeFi from legal and regulatory threats and help ensure the promise of DeFi has passed the temperature check and is now up for a consensus check vote (the last step before an official DAO vote). The Public Network Protocol 17 Upgrade vote will begin as scheduled on Jun. 1, 2021, at 15:00 UTC. The Gnosis team, the development team behind the OpenEthereum client, announced that they would no longer be maintaining the client's codebase after the London upgrade scheduled for mid-July. Sector Performance Overview The week ending on June 3rd was the first positive week since the market crash of mid-May. Following Messari’s sector convention, all five sectors covered in this report ended the week with positive weekly returns. The smart contract platform sector led the way posting a 7-day return of 3.11% propelled by the performance of assets such as Kusama (KSM), Nervos Network (CKB), Polkadot (DOT), Solana (SOL), and Cosmos (ATOM). The DeFi and DEX sectors followed closely, ending the week with a 2.7% return. Web3 finished with a 0.12% return making it the worst-performing sector of the group. Sector Portfolio Methodology Similar to last week, this week’s report focuses on comparing the performance, risk, and correlation structure between different sectors. To achieve this, we constructed market-weighted “sector portfolios” by selecting the top assets (ranked by market capitalization) from each sector covered in this report. The sector portfolio allocations are the following using market capitalization data as of June 3rd. Sector Drill Down Performance during the week ending on June 3rd was a bit bumpy. All sector portfolios had a small rally starting on May 27th which quickly reverted as the week continued. Asset prices across the board tumbled by mid-week resulting in losses of 10-25%. Starting on May 30th, portfolio returns found some footing as prices bounced back regaining some of the performance from earlier in the week. Sector portfolios moved in tandem over the past 7-days following a nicely laid out V-shaped pattern. Although sector performance was relatively tight across all portfolios during most of the week, by the end of the week, the Web3 and DeFi portfolio began to lag the rest finishing the week with losses of -5.5% and -3.7% respectively. The losses of the Web3 portfolio were driven mostly by its relatively high allocation to Chainlink (LINK) which ended the week with a -6% return. Uniswap (UNI) and Aave (AAVE), which posted negative returns of -3.6% and -4.7%, drove most of the performance of the DeFi portfolio. Volatility, defined as the standard deviation of daily returns, remains elevated across all sector portfolios following the spike that was triggered by the market crash in mid-May. Before the crash, volatility across sectors was roughly the same, ranging from 3-6%. After the crash, sector volatility has become widely dispersed. The DEX and DeFi portfolios are currently the ones with the highest risk both running 30-day rolling volatility of 13%, a 2x increase compared to levels before the mid-May market crash. In contrast, the Top Asset and Currency portfolios have experienced the least increase in volatility moving roughly 3-4% higher compared to previous levels due to their higher allocation to Bitcoin. Following the market crash, all asset correlations continue to move higher. The animation below highlights this trend over the past four weeks. The correlation matrices shown below are computed on a weekly basis using a 30-day lookback to capture the evolution of the correlation structure between sectors. As seen below, correlations between sectors are well above 85% with certain pairs reaching levels as high as 95%. In markets like this where all assets move in unison, investors can get direct directional exposure by simply owning any crypto asset, the only difference is the amount of risk they are willing to take on. The correlation between the sector portfolios and Bitcoin continues to steadily increase. The upward trend started in the beginning of May as the markets entered turbulent waters. As of June 3rd, all sector portfolios have a correlation to Bitcoin higher than 80%. The increase is most noticeable for the DeFi and DEX portfolios which saw a jump of more than 45% in the past 30 days. The Web3 and Smart Contract Platforms portfolios followed a similar pattern increasing roughly 20% over the same period. The correlation between Ethereum and all sector portfolios is now equal to or above 90%. Aside from the portfolios that have a hefty allocation to Ethereum (Smart Contract Platforms and Top Assets), the DeFi and DEX portfolios are the ones with the highest correlation coefficients standing at 94% and 93% respectively.
    Source: Roberto Talamas — Published: 2021-06-04T14:00:00Z

  • Weekly Recap Ending May 27th

    Week In Review Notable Messari Updates The Sushiswap team announced that the native token launchpad, called MISO (Minimal Initial SushiSwap Offering) will be launched on May 20, 2021 The Zilliqa team shared that they completed the mainnet recovery, and the network has started to process transactions similar to before. Voting on a proposal to determine how Rari Capital should reimburse users who lost their ETH during the last exploit has started and will end on May 22, 2021. Polkadot chain faced some issues with block production early in the week. Kyber DMM protocol will now get added as a new liquidity protocol on Kyber’s liquidity hub, with a portion of fees going to the KyberDAO and 42M KNC (~20% of the total KNC supply) will be minted and managed by KyberDAO as part of a 12-month Kyber Ecosystem Growth Fund. A subset of Polygon validators experienced sync inconsistencies on Heimdall (Polygon's PoS chain consensus layer) on May 26, 2021, which also cause problems on Bor (the chains block production layer). Sector Performance Overview The week ending on May 27th saw a quick reversal to last week’s market crash. While most assets remain well below their ATH, the market found some footing on Monday 24th possibly marking the end of the market decline. Following Messari’s sector convention, three out of the five sectors covered in this report had negative 7-day returns but nothing as extreme compared to last week’s performance. On the positive side, Web3 and DEXs were the two sectors with positive performance for the week. On the contrary, Currencies and DeFi were the underperforming sectors of the week with a negative return of -3.5% and -3.9%. Sector Portfolio Methodology This week’s report revolves around comparing the performance, risk, and correlation structure between different sectors. In order to achieve this, we selected the top assets (ranked by market capitalization) from each of the sectors covered in this report and constructed a market-weighted portfolio that acts as a proxy for the overall sector. The sector portfolio allocations are the following using market capitalization data as of May 27th. The following analytics are derived using this set of portfolios in order to get an estimated comparison of their relative performance with each other. Sector Portfolio Deep Dive Performance across the market continued to deteriorate well into the March 20th to March 27th week. Starting March 20th, all sectors rebounded experiencing a sudden bounce in prices with some reaching a 15-25% performance in one single day. However, the pump was short-lived across all sectors as the market continued to decline in the coming days. Starting on Monday 24th, the market found some relief as asset prices began to turn around signaling the potential end to the sudden market crashed triggered last week. Sector portfolios moved in tandem over the past 7-days following a nicely laid out V-shaped pattern. Cumulative performance starting on May 20th across sectors sunk as much as 30% by mid-week but quickly bounced back capturing back some of the early gains of the week. Although sector performance was relatively tight across all portfolios during most of the week, by the end of the week Web3 and DEXs began to outpace the rest of the groups. Both portfolios finished the week with a 28% return followed by the smart contract platform portfolio which ended the week with a 23% return. The currencies portfolio underperforming the rest posting a weekly return of 8%. From a volatility perspective, defined as the standard deviation of daily returns, all sector portfolios saw a similar spike starting in mid-May as the market began its drastic decline. Before the crash, volatility across sectors ranged from 3-6%. After the crash, sector volatility is ranging from a low of 6% to a high of 12%. The DEX portfolio, composed primarily of Uniswap, PancakeSwap, and THORChain, experience the highest increase in volatility moving from 6% to an all-time high of 12.5% over the past two weeks. The top asset and currency portfolios are the least volatile primarily due to their higher allocation to Bitcoin and Ethereum. As of consequence of the market crash, all asset correlations reached new all-time highs. The animation below highlights this tendency towards higher correlation over the past four weeks. The correlation matrices shown below are computed on a weekly basis using a 30-day lookback to accurately depict the evolution of the correlation structure between the sector portfolios. As seen below, correlations between sectors are well above 80% with certain pairs reaching levels as high as 95%. One caveat worth highlight is that some sector portfolios share the same underlying assets which directly results in higher correlation coefficients between some pairs. The correlation between the sector portfolios and Bitcoin has been increasing since the beginning of May. The trend accelerated in mid-May as the market went belly up. The acceleration is most noticeable in the DeFi and DEX portfolios which saw a jump of roughly 20% in the past two weeks and approximately 40% since the beginning of the month. The Web3 and smart contract platform portfolio have seen a more gradual increase in their correlation coefficients going from 70% at the beginning of May to 85-87% by the end of the month. Unsurprisingly, the top assets and currency portfolios have a correlation greater than 95% as a result of Bitcoin’s dominance in the portfolios. As of May 27th, the correlation coefficient across all sector portfolios is greater than 80%. The correlation between Ethereum and all sector portfolios is also well above 80%. Aside from the portfolios that have a hefty allocation to Ethreuem (smart contract platforms and top assets), the DeFi and DEX portfolios are the ones with the highest correlation coefficients standing at 91% and 89% as of yesterday. This is roughly 10% higher when compared to the correlation of both portfolios with Bitcoin potentially signaling that DeFi assets are beginning to decouple from Bitcoin. As of yesterday, the correlation coefficient of all sector portfolios is greater than 85%.
    Source: Roberto Talamas — Published: 2021-05-28T13:00:00Z

  • Weekly Recap Ending May 20th

    Week In Review Notable Messari Enterprise Updates Zilliqa team released v8.0.3 of its mainnet client. Voting on a proposal to add Kyber DMM to KyberDAO CGP-28 passed its referendum period which ended on May 13, 2021, and its proposed code changes were executed on May 18, 2021. Sushiswap team announced that the native token launchpad, called MISO (Minimal Initial SushiSwap Offering) will be launched on May 20, 2021. Sector Performance Overview The week ending May 20th saw one of the biggest drawdowns in recent months. The market as a whole tumbled more than 40% from its peak with riskier tokens suffering even higher losses. Volatility reared its ugly head reminding everyone that crypto markets are not for the faint of heart. As performance during the week deteriorated, market volatility increased across the board. Additionally, asset correlations saw a massive spike across all sectors covered in this report driven by the market correction. Over the week the currency sector suffered the least compared to other sectors. The sector – composed of Bitcoin, Doge, etc – ended the week with a -16% loss closely followed by DeFi which posted a negative return of -19%. Decentralized exchanges and Web3 suffered most severely with total weekly losses of -22% and -26% respectively. There was no single catalyst that can explain the past week’s movements. The selldown began on the back of Elon’s tweets that Tesla was no longer accepting Bitcoin as a form of payment due to environmental concerns. Macroeconomic concerns also contributed, mainly from the higher than expected inflation print of 4.2% year-on-year sparking fears of tapering. Early in the week, newsflow of Binance facing regulatory scrutiny and reiterations from 2017 that China doesn’t accept crypto as a form of payment also exacerbated the issue. The main culprit has been increased leverage. Binance, the world’s largest exchange, has seen positive funding rates for the past months: ETH investors also saw climbing open interest, indicating that demand was not based on spot buying in recent weeks. Towards the end of the week, funding rates were erratic, with some exchanges printing positive rates and others printing negative rates (see chart below). This showed that markets were still disorderly. Predicted funding rates also kept spiking at each dip, as long traders bought the dip. However, as prices moved down, traders increasingly bought until they triggered the next liquidation cascade, causing prices to dive further. An example is FTX (where there is more intra-day granular data) -- rates were still climbing on the week until it capitulated on May 20. The activity was exacerbated on Wednesday as many centralized exchanges were congested, delaying clients from trading. The Ethereum network also saw heavy use, anecdotally printing $1,600 in gas fees for transactions, even to avoid liquidation. As a result of the trading friction, prices were slow to find footing. Sector Drill Down - Risk and Performance Review Top Assets In the early days of the week, performance in the top ten assets (by market cap) fluctuated around zero with some assets performing well while others lagged. By mid-week, performance took a nasty turn, shifting a positive week into a bloodbath. By the end of the week, all top assets finished the session with double-digit losses. Cardano (ADA) and Dogecoin (DOGE) were the least affected in the group ending the week with returns of -13% and -26%. Ethereum (ETH), Chainlink (LINK), Uniswap (UNI), Litecoin (LTC), and Binance coin (BNB) suffered the most, losing over 40% over the week. Unsurprisingly, volatility across the top ten experienced a sudden spike. On a 30-day rolling basis, volatility increased roughly 5% for most assets over the week. In previous weeks, volatility ranged between 5% and 9% however, volatility across the group is now above 10%. Bitcoin is the only exception with rolling volatility of 6%. As the market came crashing down, correlations in the group went through the roof. As of yesterday, 30-day correlations among top assets are well above 50%. Correlation with Bitcoin also increased dramatically over the week. Dogecoin’s (DOGE) correlation increased over 60% during the week while Uniswap (UNI) saw a jump of roughly 30%. All assets now have a correlation greater than 60% with some reaching highs of 80%. DeFi Following the same pace as the rest of the market, DeFi assets dumped heavily during the week. For the majority of the week, assets moved sideways without tilting towards any specific direction. On Tuesday, SushiSwap (SUSHI), Synthetic (SNX), and Aave (AAVE) had a nice rally which turned out to be short-lived. Similar to the top ten, DeFi assets ended the week with two-digit losses ranging from -23% to -51%. Uniswap (UNI) and PancakeSwap (CAKE) experienced the largest losses ending the week with negative returns of -45% and -52%. Arguably, they were also most held tokens as leaders in the decentralized exchange (DEX) segment. Notably, total value locked (TVL) in the Binance Smart Chain (BSC) and Ethereum ecosystems were impacted. From the peak, BSC and ETH lost -62% and -27% of TVL in USD terms. This indicates that tokens in Ethereum DeFi largely were not withdrawn from protocols. BSC saw an exploit on BUNNY, perhaps worsening the performance of their overall TVL. Volatility within DeFi increased past its 3-month high reaching levels above 10% across all assets. Notably, ThorChain’s (RUNE) Rune’s volatility doubled going from 7% to 14% in the span of three days. Within the group, SushiSwap (SUSHI) is the riskiest asset with rolling volatility of 16%. As of May 20th, volatility is ranging between 10% and 16%. Correlation in the sector also reached new all-time highs. On average, the correlation between DeFi assets ranged from 10% to 50% in previous weeks. After the market drop, correlation in the group skyrocketed now ranging from 50% to as high as 89%. Similarly, the correlation between DeFi assets and Ethereum is close to its all-time high. Previously, the sector’s correlation was relatively high but a bit dispersed. Now, correlations are concentrated on the high end of the spectrum ranging from 70% to 80%. Currencies Although currencies performed the best amidst the bloodbath, the sector still experienced a turbulent week. All of the currencies covered in the report saw losses of more than 20% during the week. Dogecoin (DOGE) and Ripple (XRP) withheld downward pressure better than most of the sector finishing the week with a -26% return. On the other hand, Monero (XMR) and Dash (DASH) ended the week with losses of more than 50%, totally wiping their gains from previous weeks. Volatility in the sector increased to levels higher than 10% for most currencies. Interestingly, on a rolling basis, Dogecoin’s (DOGE) volatility decreased considerably since its wild price movement in late April and early May. DOGE’s volatility remains one of the highest in the group right behind Bitcoin Cash (BCH) which has been consistently increasing since May reaching a new high of 17%. The rest of the volatilities range from 6% to 14% with Bitcoin being the least volatile asset in the sector. Correlations between currencies were already relatively high over the past few months. The one notable change over the week is Dogecoin (DOGE). The token’s correlation with the rest of the group increased approximately 50% week-on-week. Likewise, the correlation between currencies and Bitcoin has been trending up since mid April. Correlations in the group are now concentrated between 80% and 86%. Dogecoin’s (DOGE) correlation increased from 6% to 62% in the past two weeks. Smart Contract Platforms Smart contract platforms suffered the same faith as all the assets in this report. The week seemed to be good for Cardano (ADA) and Polkadot (DOT) which by mid-week were clearly outperforming the rest of the group. By the end of the week, all assets tumbled down in unison. Cardano (ADA) and Solana (SOL) had the smallest losses in the sector ending the week with negative returns of -13.7% and -23.3% respectively. EOS and Binance Coin (BNB) ended the week at the bottom of the pack with returns of -48.9% and -49.7% respectively. Volatility in the sector increased roughly 4% to 5% across most assets. Solana’s (SOL) volatility saw the biggest jump in the sector going from 5% to 13% over the week. EOS’s volatility reached a new all-time high of 21% making it the riskiest asset in the smart contract platform sector. In previous weeks, correlations in the sector were relatively low when compared to the rest of the sectors in the report. Solana (SOL) was consistently uncorrelated with the rest of the assets in the group. However, as the whole market crashed down correlations inevitably increased. In Solana’s case, correlation increased roughly 60% with the rest of the assets week-over-week. Correlations in the sector are now ranging from 40% to as high as 96%. Correlation with Bitcoin had been constantly increasing since mid April. After this week, the trend accelerated pushing correlations close to all-time highs reaching levels above 75% for the majority of the assets in the sector. Solana’s (SOL) correlation went from negative to positive during the week experiencing a jump of approximately 60%. Decentralized Exchanges Decentralized exchanges were one of the worst-performing sectors of the week. The sector was down 21% in the past seven days. Similar to the rest, DEX’s performance went south starting Wednesday, tumbling down to double-digit losses. SushiSwap (SUSHI) had the least amount of losses of the group ending with a -23% loss. The rest of the DEXs suffered losses greater than 30% with PancakSwap (CAKE) and Curve (CRV) losing more than -50% over the week. Volatility in the sector moved from a 4-9% range to an 8-15% range. On the lower end are Bancor (BNT) and Uniswap (UNI) with rolling volatility of 8.8% and 9.3%. On the high end is SushiSwap (SUSHI) with a volatility of 16%. Apart from an overall increase in correlations driven by the market correction, the only notable change week-over-week happened with Uniswap (UNI), PancakeSwap (CAKE), and ThorChain (RUNE). All three assets had been on the low positive end of the correlation spectrum but after last week’s market moves, their correlation with the rest of the group reached a new all-time high. As of yesterday, correlations in the sector are all greater than 60%. DEX’s correlation with Bitcoin didn’t see a massive jump over the week. Uniswap (UNI), PancakeSwap (CAKE), and ThorChain (RUNE) are the exceptions seeing an increase in their correlations with Bitcoin of approximately 30%. Web3 During the week, Web3 was the worst-performing sector across all sectors covered in this report. The group ended the week with an average loss of -25.7%. Compared to other sectors, Web3 assets moved very close to each other throughout the week. All assets began to experience losses Sunday, May 16 with only Helium (HNT) recovering slightly in the following days. The whole sector went south with the rest of the market on Wednesday suffering heavy losses ranging from -27% to 51%. HNT came out on top of the group, losing -27% during the week. Siacoin (SIA) and Stacks (STX) were underperformers standing at -49% and -51%. Web3 assets saw similar jumps in volatility as the rest of the sectors. On average, volatility increased roughly 4% across the group. Volatility in the sector now ranged from a low of 9% to a high of 12%. Correlations in the group increased as a consequence of the market crash. Notably, Livepeer (LPT) and Arweave (AR) went from having negative-to-muted correlations to positive correlations over the week. Following the same pattern as the rest of the sectors, Web3 assets experienced an uptick in correlation to Bitcoin. While most are in the 70% to 85%, Livepeer (LPT) and Arweave (AR) have lower correlations both hovering at 44%.
    Source: Roberto Talamas — Published: 2021-05-21T13:45:00Z

  • Weekly Risk and Performance Recap Ending May 13th

    Week In Review Notable Messari Updates Rari Capital CEO Jai Bhavnani has shared the way they plan to reimburse exploited users. 2,809 AAVE ($1.25 million) has been transferred from the Ecosystem Reserve to the grants DAO multi-sig. The Teku development team released v21.5.0 of its Eth2 client on May 11, 2021. Near Protocol launched its EVM-compatible execution layer, Aurora, on May 12, 2021. Near’s new layer also comes with the Aurora Bridge (based on the Rainbow Bridge technology) to facilitate ETH and ERC-20 token transfers between Ethereum and Aurora. The Injective team announced the launch of the first of three phases of the Injective mainnet launch. Sector Performance Overview Crypto markets had it rough last week. Despite the bloodbath, smart contract platforms showed incredible resilience to the market turbulence being the only sector that ended the week with a positive return of 4.6%. On the negative side, Currencies and Web3 lagged the rest of the sectors finishing the week with double-digit losses of -12% and -15% respective Sector Drill Down - Risk and Performance Review Top Assets After a phenomenal week, the top assets had a bit of a bumpy ride this week. All assets started the week with negative returns setting the tone for the following days. All assets in the top ten tumbled sharply Wednesday night following the rest of the market. By the end of the week, only Ethereum (ETH) and Cardano (ADA) ended the week with positive returns of 10% and 6%. The rest of the assets in the top ten ended in negative territory. Notably, Dogecoin (DOGE), last week’s outperformer, suffered a loss of 40% whipping out about half of last week’s performance. Despite the turbulent week, volatilities in the top ten remain relatively stable. As of yesterday, asset volatility remained below 10% with the exception of Dogecoin (DOGE) which continues to be elevated at 24%. As a result of the recent sell-off, correlations among the top ten assets increased over the week. In particular, Dogecoin (DOGE) is slowly becoming more correlated with the rest of the group. Correlation with Bitcoin saw an uptick during the week across most top assets. Notably, the correlation between Bitcoin and Uniswap (UNI) increased approximately 20% from 14% to 34% over the week. DeFi DeFi assets also had a crazy week. Most started the week with negative returns then hovered around the zero line for the remaining of the week. Early in the week, SushiSwap (SUSHI) was the decisive winner reaching a return as high as 22% in two days. Yearn (YFI) was by far the most interesting token in the DeFi space in terms of performance. The token saw a huge upswing starting on Tuesday reaching a return as high as 63% by Thursday, May 12th which was followed by a 40% drop the next day. Despite the drop, Yearn (YFI) was the clear outperformer of the week ending with a strong 27% return. Aave ended the week in second place with a total weekly return of 14%. On the negative side, Terra (LUNA) and PancakeSwap (CAKE) lagged the rest of the group ending the week with a return of -12% and -22% respectively. Volatility in the DeFi sector remains in the 5% to 10% range for most assets. Week-over-week, Yearn (YFI) is the only asset with a noticeable change in volatility given its recent moves. The token’s volatility increased 6% to 9.8% making it the second most volatile asset in the group. Across the top DeFi asset, MakerDAO (MKR) continues to be the riskiest asset with rolling volatility of 10.6%. Correlations didn't change drastically over the week. In previous weeks, Terra (LUNA) was one of the most uncorrelated assets within the group. However, recently LUNA has become more correlated with most DeFi assets with the exception of Rune. Correlation between Rune and LUNA is declining week-over-week reaching an all-time low of -17%. Correlation with Ethereum across DeFi assets has been a bit mixed during the week. On the positive side, Uniswap (UNI), PancakeSwap (CAKE), and MakerDAO (MKR) saw their correlation with Ethereum spike over the week. On the contrary, Aave (AAVE) and Yearn (YFI) experience a slight decline week-on-week. As of May 13th, correlation in the group range from a low of 27% to a high of 64%. Currencies The currency sector had a rough week. Despite some assets starting the week with strong performance, Wednesday’s sell-off pushed the whole sector to negative territory. The assets that were least affected by the market drop were Monero (XMR) and Dash (DASH) which ended the week with negative returns of 4% and 7% respectively. The most affected were Ripple (XRP), Bitcoin SV (BSV), and Dogecoin (DOGE) suffering losses of -27%, -28%, and -40%. Volatility in the sector increased slightly over the week. Most assets saw a small jump of 1-2% as a consequence of the turbulent week. Correlations in the group remain skewed towards the upper end of the spectrum. Currencies is the most correlated sector compared to the rest covered in this report with most asset correlations being above 40%. Following a similar pattern, correlation with Bitcoin continues to rise week-over-week. Now, the correlation with Bitcoin is greater than 60% across the sector. Dogecoin (DOGE) is the exception standing at 14% but has recently been steadily increasing over the past few weeks. Smart Contract Platforms Similar to the rest of the sectors, smart contracts platforms also experience a high volatility week. Most hovered around the zero line during the first part of the week while others had strong upswings. Similar to Yearn, EOS’s price skyrocketed reaching a return of 60% by the middle of the week but quickly gave back some of the performance as the week came to a close. Despite the bump in volatility, EOS remained the leader in the group finishing the week with a 16%. Ethereum (ETH) and Cardano (ADA) followed closely with total weekly returns of 10% and 7%. The rest of the assets in the sector ended the week in the red with Neo (NEO) and VeChain (VET) being the underperformers of the group. Most smart contract platforms are seeing an upward trend in their volatility. Most notable is EOS’s volatility which increased drastically over the week as a result of its sudden price action. The token’s volatility increased from 9% to 16% in the span of three days. Neo (NEO), EOS, and Cardano (ADA) also experienced an increase in volatility in the 1-3% range. Week-over-week correlation among smart contract platforms slightly decreased. Solana (SOL) remains the only negatively correlated asset in the sector. Correlation with Bitcoin continues to rise week-on-week. Now, correlations with Bitcoin are above 50% with Solana (SOL) being the only exception standing at -10%. However, the token has seen a drastic change in recent weeks making it increasingly more correlated with Bitcoin. Decentralized Exchanges The decentralized exchanges sector followed a similar pattern as the rest of the sectors during the week. The first few days were a little mixed between good and bad; some DEXs had strong positive performance while others lagged. However, the whole sector declined in unison at the beginning of the week sending all assets to negative territory. In the following days, most assets rebounded sharply with Loopring (LRC) leading the pack reaching a return of approximately 50% by Wednesday. As is the case with the rest of the sectors, DEX’s experienced heavy losses in the middle of the week pushing most to end the week with negative returns. Curve (CRV) was the outperforming of the group ending the week with a 17% return while PancakeSwap (CAKE) suffered the most finishing with a -23% return. Volatility across most decentralized exchanges was stable during the week. Exceptions include Uniswap (UNI) and Loopring (LRC). Over the week Uniswap’s volatility decreased 2% while Loopring’s increased by the same percentage. As of yesterday, volatility in the sector ranges from 5% to 10%. Correlation between DEXs continues on the same pattern as previous weeks. Uniswap (UNI), PancakeSwap (CAKE), and Rune are the most uncorrelated assets in the sectors. However, over the week their correlation with the rest of the assets slightly increased. Correlations with Bitcoin are starting to trend up. Correlations in the sector are above 40% for most DEXs. Uniswap (UNI) and PancakeSwap (CAKE) saw jumps of 20% and 30% over the week. Web3 Web3 was the worst-performing sector of the week ending with a -14.7% loss. Despite the bloodbath in the sector, Livepeer (LPT) and Arweave (AR) managed to end the week in the positive with total weekly returns of 16% and 6%. The rest of the assets in the sector suffered significant losses ranging from -10% to -27%. Despite the crazy week, volatility remained relatively stable. Livepeer (LPT) is the only exception which saw a 3% increase in volatility over the week. Correlation among the assets in the sector increased over the week driven by the market decline. Week-on-week, Arweave (AR) has become increasingly correlated with the sector while Livepeer (LPT) is becoming less correlated with the rest of the assets in the group. Correlation with Bitcoin across most Web3 assets has been consistently increasing over the past weeks. Most assets have a correlation greater than 50%. Livepeer’s (LPT) correlation declined dramatically during the week tumbling from 50% to 29%. Arweave (AR) correlation is at 28% making it the only other Web3 asset with a correlation of less than 50% in the group.
    Source: Roberto Talamas — Published: 2021-05-14T14:01:00Z

  • An Introduction to Dfinity and the Internet Computer

    This report has been unlocked for all Messari users. Sign up for our industry-leading data, tools, and research with Messari Pro or upgrade to our most powerful tools including monitoring of more than 150 networks with Messari Enterprise. Dfinity is one of the most tenured and well-funded smart contract platforms in crypto. Yet it is also one of the least understood. Most of Dfinity’s obscurity is due to its technical complexity and abstract vision. The launch of their token and finally open sourcing their code will create more interest and understanding in the project. We’ve seen blockchain technology, such as Ethereum’s “world computer” aspirations, applied to tackle traditional finance and analog collectibles. However, Dfinity is trying to tackle the issues related to traditional internet. Most content, functionality, and user data exist in proprietary ecosystems controlled by big-tech companies. Dfinity’s answer, the Internet Computer, is a reimagining of the IT stack where developers can build and host software free from the big-tech monopolies that control user data today. Introduction to Dfinity and the Internet Computer Since 2016, Dfinity has been focused on building the “Internet Computer”, a decentralized blockchain network that aims to expand the functionality of the internet. The problem Dfinity is addressing extends beyond just blockchain technology. It aims to build a decentralized, scalable cloud-like platform that can store data, perform computation, and support community-driven governance. It’s addressing the issues plaguing traditional internet, such as relatively low data security and an oligopoly consisting of big tech companies. Crypto natives might immediately think of Ethereum’s “world computer” or Polkadot’s “meta-protocol” when they think about analogies to the Internet Computer. However, Dfinity intends to redefine what a blockchain is supposed to do. While Dfinity’s first iteration looked similar to ETH 2.0, its scope now extends beyond Ethereum’s base capabilities. Dfinity wants the internet itself to support software applications and data, rather than simply providing peer-to-peer connections and relying on proprietary cloud-hosting services to handle the rest. The Internet Computer (IC) is less about building an immutable ledger and more about building an open-access internet. The internet connects billions of people through TCP/IP protocols. The Internet Computer Protocol (ICP) aims to take this concept one step further by offering a public compute platform so that developers, enterprises, and government agencies can deploy software and services directly to the public internet. Like Ethereum, this platform would allow developers to run computing applications on decentralized infrastructure. Unlike Ethereum, the IC intends to offer companies the efficiency to run these applications at scale and the flexibility to build them to fit a particular user base’s specific needs (e.g. privacy). In the current internet landscape, big-tech firms control user-created content and data. The algorithms and systems behind these platforms are proprietary. Big-tech platforms like Twitter and Google have a great deal of control over how users interact with each other and also how they interact with third-party services outside the platform. Founder Dominic Williams cited that the internet has become much more monopolistic and corporate. Tech monoliths such as Facebook or Amazon Web Services (AWS) can change platform parameters and access without prior notice, putting users and companies that rely on these services at a heightened risk. Zygna, a social games company, was disenfranchised when Facebook changed its rules. Fortnite has been delisted from Google and Apple's App Store after refusing to pay the 30% revenue share. Twitter restricted the use of its API in 2012, crippling the development of third-party clients and limiting the possible uses of data from its network among non-partner entities. LinkedIn did the same in 2015. Limiting access to third-party developers could stall innovation as entrepreneurs face a degree of 'platform risk'. In response, the IC hopes to bring a new generation of software and services that is open-sourced. It aims to not only reduce platform risk but also reduce complexity in building and maintaining systems. This would also accelerate the time it takes developers to launch a new product. Executed correctly, Dfinity hopes to offer the first blockchain that runs at web speed and can scale to support any volume of smart contract computations and any amount of data. This new IT stack will have more hardware requirements. The IC will rely more on large data centers and high-end node machines (validators) compared to networks like Ethereum. But its advantages could lead to entirely new, more accessible, and less data extractive use cases. These applications could include interoperability, privacy, security, and openness. Use cases include social media, private messaging, search, storage, and peer-to-peer internet interactions. If the IC succeeds at replacing legacy IT, there would be no need for centralized DNS services, anti-virus, firewalls, database systems, cloud services, and VPNs either. To summarize Dfinity’s new offering for developers who want an alternative, the benefits of starting to build on the internet include: Setup Cost: Developers don’t have to sign up for numerous vendors. Operating Cost: A secure protocol means that the operating cost of maintaining safety and dealing with complexity goes down. Development: Dfinity proposes that the Internet Computer reimagines software itself, simplifying the process of building and maintaining systems. This leaves more time to focus on user experience Openness: The IC introduces an open software that guarantees access to functionality through APIs to other services History of Dfinity Similar to how Polkadot’s network is built by Parity and the Web3 Foundation, the Internet Computer is built by the Dfinity Foundation. The non-profit organization was founded in 2016 by tech entrepreneur Dominic Williams who now serves as Dfinity’s Chief Scientist. The Internet Computer is the culmination of five years of research and development by top cryptographers and experts in distributed systems and programming languages. Dfinity currently has nearly 100,000 academic citations and 200 patents. Dfinity is one of crypto’s most well-funded and publicized projects. Mainnet launches on May 7, 2021 and its token is slated to publicly launch on May 10. The project actually started fundraising before the ICO boom under the ticker $DFN but has since rebranded to $ICP. After Polkadot, Dfinity has raised the most capital. It has also raised the most non-frozen funds at $160 million to date: There have been several conflicting versions of Dfinity’s fundraising rounds in the media. According to Dfinity, they had three main rounds and one airdrop event: Seed Round, Feb-2017: This round was advertised by a tweet and open to the public by downloading a web extension. Dfinity raised CHF3.9 million (US$3.9 million) from 370 participants, at a valuation of $16 million, or a price of $0.03 per token. It held a portion of these funds in ETH and BTC during the 2017 crypto bull run. According to the team, Dfinity at one point turned these earlier ETH and BTC allocations into $40 million worth of fiat. Dfinity had promised these Seed investors that the subsequent round would be a CHF 20 million main fundraising event, similar to an ICO. However, after the 2017 boom, the project realized its valuation target was set too low. Furthermore, Dfinity cited that it didn’t have any immediate funding shortfalls, and running an ICO fundraise could have placed it in a grey legal territory where securities law was concerned. As a tradeoff, to reward early participants, the team promised that the Seed investors would be awarded 24.72% of tokens at genesis. Strategic Round, Jan-2018: Dfinity raised $20.54 million for 7.00% of the initial supply (the number has been revised from the previously cited 6.84%). This allocation will vest monthly over three years starting from mainnet launch (May 2021). Participants include Polychain Capital, Andreessen Horowitz, CoinFund, Multicoin Capital, and Greycroft Partners. This round marks the first token a16z invested in. Polychain and Dfinity later collaborated to create the “DFINITY Ecosystem Venture Fund” of an undisclosed size. The goal is to fund new projects that would grow the IC’s application ecosystem. The media reported that Dfinity raised a much larger amount of $61 million. It’s possible that this enlarged amount has either been revised or included funds for the Ecosystem Venture Fund. Private Sale, Aug-2018: 110 participants contributed $97 million for 4.96% of the initial supply, sold at $4 per ICP token. This number has been revised from 4.75% previously reported. This allocation came with a monthly vesting schedule of one year from mainnet launch. Vesting will begin at the initial token distribution event on May 10, 2021. Participants in this round include Andreessen Horowitz, Polychain Capital, SV Angel, Aspect Ventures, Electric Capital, ZeroEx, Scalar Capital, and Multicoin Capital. AirDrop, May-2018: $35 million worth of ICP tokens (formerly DFN), or 0.80% of the initial supply, was airdropped to early supporters by being part of their mailing list, forums, slack, and community. At this time, valuations reached $1.89 billion. Airdrop participants received the IOU version of their ICP tokens in September 2020. These tokens will become transferable on May 10, 2021. There will be 469,213,710 ICP tokens at genesis and the token supply will be distributed as follows. The table below summarizes the round, which can also be found in our spreadsheet here. 24.72% Seed Investors: those who invested in Feb-2017 for a total of CHF3.9 million (Swiss Francs) 23.9% Dfinity Foundation: The Dfinity Foundation manages the capital raised from the token sales. It also oversees its Foundation Endowment of ICP tokens. These tokens are those held by or already spent by the Foundation to fund R&D, operations, acquire technology, finance community-building programs, and partner incentives. 18.0% Team Members: There are ~200 team members 9.5% Early Contributors: these are the 50 people who helped in the team before the Foundation was set up 7.0% Strategic Investors: from the $20.54 million raise from Polychain Capital, Andreessen Horowitz, CoinFund, Multicoin Capital, and Greycroft Partners 4.96% Private Presale Investors: from the $97 million raised from a16z, Polychain, SV Angel, Aspect Ventures, Electric Capital, ZeroEx, Scalar Capital, and Multicoin Capital Dfinity is growing its network of data centers and developers. At the time of launch, 12 independent data centers run 7 subnets with 68 nodes -- IC “nodes” are similar to ETH2 “validators.” The Foundation expects the number of IC data center and node operators to gradually grow post-launch to support the network’s ecosystem of apps (see below for details). The team targets for the network to reach 123 data centers running 4,300 nodes by the end of 2021. Dfinity hopes to eventually scale to thousands of data centers running millions of nodes in the future. Team Background Dfinity was founded in 2016 by Dominic Williams. The Dfinity Foundation has around 200 people on the core team. Notable contributors mentioned by the team and media include: Dominic Williams, Chief Scientist: Williams was a serial entrepreneur, having created a file storage service and children’s multiplayer online game involving a collection of monsters. Distributed computing was required to store the lists of monster fights and gold nugget rewards, connecting the games together. Williams also wanted to create a game coin and looked at Proof of Stake ideas, though the technology was still nascent. He went into full-time crypto research in 2014. Williams designed Internet Computer’s Threshold Relay. Jan Camenisch, VP of Head of Research & Crypto: Prior to joining Dfinity, Jan was at IBM Research, where he led the Privacy and Cryptography research team and was a member of the IBM Academy of Technology. He has published 130 papers and holds 140 patents. Johan Georg Granström, Director of Engineering: Granström came from Google, where he was a tech lead manager at YouTube. Andreas Rossberg, Researcher and Engineer: Rossberg was formerly at Google and spent time as the JavaScript language team lead at Chrome V8. He is also a co-creator of WebAssembly, a new type of code that can be run in modern web browsers, which is also used at Dfinity. He also created Internet Computer’s programming language Motoko. Benjamin Lynn, Engineer: Lynn is the “L” in BLS Signatures, which was introduced in a report in 2001 and has since become increasingly important in cryptography. One of Dfinity’s technological offerings is a secure randomness beacon, based on a threshold Verifiable Random Function (VRF). This means randomness that can be replicated, if under the same conditions. It’s a pseudo-random function that provides verifiable proof of its output’s correctness. BLS cryptography is used to generate randomness and achieve security, speed, and scale in public networks. Before that, Lynn was at Google and has a Ph.D. in Computer Science from Stanford University Timo Hanke, Principal Researcher: Hanke is a former mathematics and cryptography professor. He then joined CoinTerra in 2014, a manufacturer for Bitcoin mining ASICs and systems, where he served as Head of Research and later as CTO. Hanke has filed several patents on ASIC optimization for Bitcoin mining. He invented a method named AsicBoost that improves the cost and efficiency of Bitcoin mining by 20%. Mahnush Movahedi, Senior Researcher: Movahedi joined from Yale University where she worked on scalable and fault-tolerant distributed algorithms for consensus and secure multi-party computation, secret sharing, and interactive communication over noisy channels Technology The purpose of the Internet Computer is to extend the public internet, so it can also be the world’s compute platform. Dfinity has just publicly released the source code on May 10 2021. Before this, the technical and design information of the ICP and the cryptographic puzzle that makes the Internet Computer function was unknown. However, the public knew that the company and technology have also continued to evolve, with some methods discussed in the past years discarded and changed. Below, we summarize what Dfinity and its community have publicly shared: The Internet Computer is a blockchain computer protocol, constructed from a hierarchy of building blocks. At the bottom of the pyramid are independent data centers around the world. They host ICP-specific node hardware, which communicates to achieve a consensus on what the state of the IC should be. A collection of nodes, which ensures decentralization, is called a subnet. Subnets are likened to blockchains within the IC, the fundamental building blocks of the overall network. They are responsible for hosting a distinct subset of software canisters. A canister is a bundle of code that developers can create from any high-level programming language (like Rust or Dfinity’s own language Motoko) to form programs. Programs can include simple websites, decentralized applications, or even entire enterprise software. For example, an open version of Facebook would be hosted in millions of canisters. The state of these canisters is replicated in all of the nodes. As canisters are computational units that consist of both code and data -- they can be analogous to an advanced Ethereum smart contract or a Windows operating system. For example, an operating system can make certain processes such as manipulating files and communicating with nearby devices. Similarly, the IC provides publicly specified APIs to canisters so that they can interact with each other, make payments, create and manage other canisters, manage permissions and get the system time. However, unlike an operating system, a canister is replicated over all nodes in a subnetwork. For the IC to scale in a secure manner, add new features, or withstand unpredictable events such as natural disasters -- the number of and the composition of subnets can be adjusted. For example, new subnets can be added or split, nodes can be added, terminated, or moved. As a result, the IC needs to be able to decide how to evolve the protocol. To do this, the protocol has a Network Nervous System (NNS). Network Nervous System A subnet is created by the NNS, an open algorithmic governance system that oversees the network. As the name suggests, it’s the nervous system -- controlling all aspects of the network. Among other things, it can split and merge subnets to balance load across the overall network. For example, a subnet could have a dozen canisters and if the NNS splits the subnet, a portion of the canisters would stay with the original subnet while the rest would be hosted under the new subnet. upgrade the protocol and software used by node machines. combine different node machines from discrete data centers. This could be due to several factors, such as the requirements of the network, the desired security level, available capacity at data centers, and unpredictable hardware failures. configure economic parameters that control how much must be paid by users for compute capacity. protect the network from malicious actors. The robustness of the subnets can be improved by adding new nodes to them over time. These nodes collaborate using the ICP blockchain computer protocols to replicate the data and computations pertaining to the software canisters that they host. The protocol can replace faulty or uncommunicative nodes with new ones, and can also revive entire subnets if too many of the nodes within have failed. This allows the ICP to seamlessly fix network bugs and update for new features. The NNS has two important canisters: (1) a registry canister, which stores the configuration of the entire IC for everyone to see, and (2) a governance canister, which stores proposals and neurons, to determine who is allowed to participate in governance. We will cover more about this role under the Governance section below Speed At genesis, the IC will have a block rate of one block per second (bps), then move up to ~1,000bps by this year-end. According to Williams, there is theoretically no upper limit to blocks per second. This is difficult to comprehend from a traditional blockchain perspective but is achieved through Chain Key Technology (CKT). CKT allows the IC to finalize transactions and update data in a couple of seconds. It consists of a set of cryptographic protocols that orchestrate the nodes, enabling the IC to have a single public key. This means any device can rapidly verify the authenticity of data on the IC. Chain Key Technology allows canisters (likened to an advanced smart contract) to all any canister hosted on any subnet (likened to a blockchain). This distributed model doesn’t use a hub, unlike Polkadot’s hub-and-spoke model. The IC hopes to bring service composability. In the open version of the Facebook example, and any other app would have permission to call “Open Facebook” for code or data such as games or photo filters. The IC can host any number of canister smart contracts, meaning that data is fully on-chain. To overcome scaling issues, the ICP executes a potentially large number of canisters simultaneously. This means that the blockchain is sharded by default. However, sharded blockchains don’t communicate with each other in real-time. Canisters can support requests for updates, which are limited by the blockchain’s throughput but should only take a couple of seconds. However, this is distinct from queries, which don’t persist changes and are discarded after they run. A canister can serve hundreds of queries concurrently. These are inexpensive and should complete in a few milliseconds, allowing users to have the user experience they’re familiar with on traditional internet. For example, Dscvr.one is the IC’s version of Reddit. When a user browses the forum, customized views of the content would be delivered in their web browser by query calls, which run in milliseconds on a nearby node. However, if a user wants to write a post or tip an author, it would involve an update call, which takes a couple of seconds. In the future, this delay could be hidden by “optimistic execution” -- which first optimistically assumes the payment is valid and will work, and later can be contested and reversed. Consensus Given the ICP brings together different machines around the world, each machine (or replicas) must reach consensus on which inputs to include and in what sequence. This ensures that the system maintains a coherent state. Every software is executed and replicated by many node machines worldwide and the majority of the nodes together define the true state of the software. This means that outliers, or machines that report a tampered state, will not make a difference to the consensus. Each subnet has a unique and permanent public verification key over its lifetime. The nodes in the subnet will need to be in agreement (by reaching a certain threshold) and collaborate to sign a message, so the subnet can create a signature on behalf of its canisters. While a sufficient number of nodes is required for this threshold to be reached, not all nodes need to agree -- leaving room for hardware malfunctions or malicious nodes. Noninteractive Distributed Key Generation On the IC, the set of nodes that run a subnet will evolve as nodes can join or exit their respective subnets. With nodes in flux, it means the group of threshold signers evolve over time, hindering the ability for nodes to register and distribute new public keys. As a solution, Dfinity introduced the Noninteractive Distributed Key Generation (NI-DKG) -- simplifying key management by always referencing the same subnet by a static public key. NI-DKG provides proactive security. This key resharing protocol is ideal for an asynchronous environment -- enabling fast block times and unlimited scalability. Each of the old signers only need to broadcast a single message to new signers. To ensure security, many concepts are utilized -- including noninteractive zero-knowledge proofs and encryption with forward secrecy. ICP Token Uses & Tokenomics There are actually two native tokens that are involved -- ICP is the native governance token that is used to manage the network and Cycles is a stablecoin used to fuel computation. ICP tokens can do three major functions -- two are inflationary while one is deflationary. Facilitating Network Governance (Inflationary) ICP tokens can be locked inside the NNS, the algorithmic protocol governance system that manages the network, to be used to create neurons, which can vote on proposals. A neuron locks a balance of ICP utility tokens and enables its owner to participate in network governance, thus earning voting rewards. Those rewards are also paid in ICP. Each month, the NNS tracks the proportion of votes a neuron participates in to pay a pro-rata share of the reward. To maximize participation and thus rewards, it’s possible for users to delegate votes to other trusted neurons. Converting out of neurons to withdraw ICP isn’t instantaneous and takes a “dissolving” period. Users can set the duration of the dissolve delay. The longer the dissolve delay, the greater the neuron voting power and the greater the voting rewards. This is similar to Curve Finance, where longer (irreversible) lock-ups up to four years boost voting power to align stakeholders with the long-term success of the network. Dissolve delays can be increased but can’t be decreased. To start the unlock countdown, users can put the neuron into dissolve mode. Currently, to participate in voting, the dissolve delay must be set up between six months and eight years. Another way for neurons to increase voting power and rewards is to grow older, measured by the time elapsed since it was last placed in dissolve mode. The 370 early token investors in the seed round, therefore, have a head start. They can choose to turn up the dial for a longer dissolve period to take advantage of the high pre-existing age, or they can dissolve their neurons to get their ICP tokens. Rewarding Participation (Inflationary) The network mints new ICP tokens to reward key players. Other than voting rewards for those participating in governance, “compute rewards” are given to those operating the node machines hosting the network. The NNS generates new ICP tokens to reward nodes that are run by data centers and neurons. This rewards scheme is inflationary to supply. Production of Cycles for Compute (Deflationary) ICP can be converted into Cycles as fuel for computation by canisters. The exchange rate of ICP-Cycles depends on external markets -- such that burning 1 SDR (an asset created by the IMF containing the USD, EUR, RMB, JPY, and GBP) will always create 1 trillion cycles. Terra also offers a SDR-based stablecoin called TerraSDR but ICP's burn mechanism is a novel stabilizing function. Software canisters must be charged with Cycles, which are burned during the process of computation or memory management. As the amount of computation on the network grows, the demand to burn Cycles increases, and thus more ICP is burned. Unlike Ethereum, users aren’t paying the fees. Developers are pre-charging the canisters with Cycles for a certain amount of compute units. This user experience is similar to how the traditional internet works where developers would be the ones to pay AWS for cloud services. Therefore users don’t need to own ICP tokens to interact with hosted services or even know it’s running on a blockchain. The burning of ICP tokens to convert to Cycles to power computation is deflationary. Essentially, data center and neuron owners exchange ICP tokens with canister owners and managers. Those canister owners and managers convert ICP to Cycles, and those Cycles fuel the canisters to enable them to run. To avoid high gas fees, Cycles is a stablecoin to ensure that the cost of computation doesn’t fluctuate with the value of ICP. Firstly, the conversion mechanism of 1T cycles in exchange for 1 SDR worth of ICP. Secondly, if there’s a surplus of Cycles, users don’t need to convert their ICP and can first purchase the undervalued Cycles on the market, to be burned for fuel as computation. Eventually, when all the surplus Cycles are burned, the value will return to its peg. Only when the equilibrium is re-balanced will users again burn their ICP for Cycles. After iterations of algorithmic stablecoins and collateralized stablecoins, Dfinity offers a new method to produce a stable value. To further keep gas fees low and scale infinitely, CKT is applied. The IC can -- with sufficient security and resilience -- replicate computation and data (that is not governance-related) across as few as seven node machines given they’re from seven independent data centers. Therefore, even though canister memory on the IC might be relatively expensive at $5 per GB per annum, the framework ensures the efficient application of that memory. This is relatively cheap if we compare it to other blockchains. As a comparison, a June 2017 report estimated that if a user tried to indefinitely store and send data on Ethereum, the cost would cost $4.7 million per GB. That said, blockchains like Ethereum are not specifically designed for storing large quantities of data, such as images, videos, and audio. The use of Cycles extends to the application layer. Thus natural buyers for the ICP tokens include those who want to participate in network governance and developers who need to convert ICP into Cycles to pay for computation. Eventually, open internet services will be built from autonomous code that’s managed by open tokenized governance systems, which functions similarly to the NNS. Also, every canister can create its own token if it wishes, hold any amount, and send tokens to other canisters as part of function calls (queries or updates). The intention is that each internet service would have its own governance token, used for voting and potentially receive a distribution of the value created by the autonomous system. Each governance system would have its own decentralized financial exchange with a governance token that can be traded for Cycles. ICP Token Supply When Dfinity Foundation was first formed, 9.5% of tokens were was distributed to early contributors while the rest remained. On May 10, in a final decentralization step, a “Genesis Unlock” proposal will trigger the NNS to release the ICP utility tokens. This means thousands of token holders will create "voting neurons'' that control the NNS and thus the entire network. While the unlocking schedule is publicly known for strategic investors and private sales, the number of tokens unlocked from the Internet Computer Association, team members, advisors, early contributors, and the Foundation is unknown. Due to the governance mechanism and rewards for participation, it’s likely that a majority of tokens will be locked. The amount locked will depend on two factors: Governance and Rewards The ecosystem will find a natural balance of how many rewards are required to achieve an optimum amount of participation. Assuming that Dfinity wants 90% of the token supply to be locked in neurons, rewards should be sufficient to meet this target. For a fixed amount of rewards, fewer participants mean more rewards-per-participant, which should invite more participation (and thus locking of ICP tokens). Initially, rewards will need to be much higher as risks and uncertainty surrounding the network are greater. However, as the network stabilizes, rewards can fall over time to reflect lower risks. Based on estimates of the required returns as a percentage of the current supply, Dfinity will begin by distributing 10% of supply each year, with the amount reducing to 5% in eight years to reflect lower risk and thus required rewards. Curve Finance has a similar mechanism, with a maximum lockup period of four years. As of the time of writing, 49.5% of all circulating CRV is vote-locked for an average of 3.7 years. If ICP were to follow that benchmark, we can expect half of circulating tokens to be vote-locked for nearly eight years. Pre-Payment ICP is required to pre-charge canisters with Cycles to enable them to function for a certain amount of computing. This is similar to Filecoin, where clients lock up sufficient funds to cover the full cost of the storage agreement. Based on the IOU markets at FTX the token price is at $180. At FTX’s ICP-PERP price, the circulating market cap is $22 billion while the fully diluted market cap is $85 billion. This is lower than the prices reached last week on Hoo and MXC in the range of $350 to $530 in the past days. The public’s anticipation of the launch of the IC has pushed IOU prices to all-time highs of up to 30x at the peak so far this year. This would rank ICP at sixth place by fully diluted market cap. Major exchanges are paying attention. On May 4, 2021, Coinbase Pro announced it would list ICP at launch. Huobi, FTX will also be launching ICP. Very likely, all the major exchanges will follow. Going forward, ICP has an undefined supply schedule because there are deflationary and inflationary pressures. Deflationary pressures will depend on the computation being contributed to the platform, which depends on the activity in their ecosystem. Inflationary pressures are based on voting and participation rewards. Furthermore, to participate in the network, tokens are locked in neurons. Therefore, those tokens are not liquid and able to be freely transferred to others. Governance Dfinity intends the Internet Computer to run like a digital government. The NNS governance system is responsible for a variety of things, including managing voting, the tokenomics, and the data centers. It also monitors the node machines, looking for statistical deviations that could indicate faulty behavior. While the NNS is an open governance system, it permits participation in the network. A potential node provider can apply for a Data Center ID to the NNS. Upon approval, the node provider can procure specialized machine nodes, install the ICP protocol and then connect to the IC network. Anyone in the network can lock ICP to create a neuron to submit a proposal to the NNS, which operates like a decentralized autonomous organization (DAO): network participants cast votes, and the final decision is executed automatically by the network itself. Proposals can either be adopted or rejected immediately or after a time delay, depending on how the totality of neurons votes. To avoid users spamming the NNS with proposals, a fee levied on the neuron that submits a rejected proposal. Therefore, the user’s neuron (with ICP tokens locked) will be penalized. Uniquely, the NNS enables participants to set their preferences prior to voting on a proposal, so issuing a vote is no longer a manual process. As mentioned above, votes are then cast by users through "neurons" or can be delegated to other trusted parties. The digital government also has a meta-governance mechanism, where the NNS also has the authority to change the code on subnets -- controlling all the apps supported in the ecosystem. On one hand, this means that subnets aren’t censorship-resistant and will be under the purview of the community. Thus, the community decides what is desirable and what isn’t. This is similar to traditional internet where the App Store can choose to remove a certain app, or a search engine can decide which websites are ranked more relevant than others. The concept of meta-governance is relatively new. What this implies for Dfinity’s ecosystem is uncertain. In the future, if there are different factions, it’s conceivable that the community could appease all sides (to avoid forking) by voting that several discrete ecosystems are possible. For example, in the traditional internet, Youtube has an adult and children’s ecosystem depending on what the desired user experience is. As with other Layer-1s, the risk of forking rewards diminishes as the layer becomes more mature and secure with higher values locked. Application Ecosystem The IC can be used to build a variety of new products. For example, it can build tokenized internet services, DeFi systems, enterprise systems, and websites. The IC is also introducing an “Internet Identity”, in which managers user data without usernames, passwords, or cryptographic keys. The internet ID can be used to log in to apps, under the cryptographic security of Chain Key Technology. This means that users aren’t tracked with Cookies across websites and services, and managing privacy could be easier. Dfinity hopes to see open versions of Whatsapp, TikTok, Facebook, built using less than a thousand lines of code and capable of supporting millions of users. Currently, there are several apps in the IC ecosystem: Infrastructure Fleek: makes it easy to create websites and applications on the open internet. All their products are built on the underlying protocols that power Web3, such as the Internet Computer, IPFS, Filecoin, and Ethereum. It raised $4 million to build a base layer of products mimicking traditional web infrastructure that any app or site would need like hosting, storage, databases, authentication, and serverless functions. It also supports Ethereum Naming Service (ENS) and Handshake’s decentralized domain name service (HNS). Already, 14,000 websites are running on Fleek Dfinity Explorer: is an open-sourced, community-built dashboard for the IC. Decentralized Apps Origyn: is a pan-industry platform for tracking the provenance of luxury goods, starting with luxury watches Decentralized Finance Enso Finance: is a decentralized exchange that has raised $5 million in a private funding round last month in Apr-2021. The round was led by Polychain, Dfinity, Multicoin, Spartan, and several other companies Tacen: is a high-performance, decentralized non-custodial exchange that has raised $2.3 million DfiStarter: is the first IDO platform on ICP, providing fundraising services, public relations, and marketing, in addition to tech support for projects planning to develop on the IC SailFish: is a gateway to open financial services. It’s a decentralized exchange with a social component Social Distrikt: is a decentralized, professional social media network. It is the Open LinkedIn application shown off by DFINITY in Davos at WEF 2020 that is now being taken to market. They raised $500,000 in initial funding. Users can control their self-sovereign identity and govern the community. OpenChat: is the IC’s response to Whatsapp -- an open version of your standard chat app that is not owned by a large tech corporation. It’s a decentralized chat app built on the Internet Computer, with encrypted communication software. CanCan: is a decentralized video-sharing app. It’s essentially an open and tokenized version of TikTok, running on the Internet Computer and accessible through any browser or mobile device. It shows the scalability and power of the Internet Computer Capsule Social: is a decentralized social media platform that is censorship-resistant. The company raised $1.5 million from Polychain Capital’s Beacon Fund, valuing it at $10 million. It also has early backing from Balaji Srinivasan, former CTO of Coinbase Canistore: is a decentralized media service provider supporting video, music, and text. It fashions itself as a next-generation social store, allowing users to create and share content without worrying about platform risks, such as changes in algorithms that affect ratings and followings. Users can earn rewards for being active, earn royalties on content distribution and also participate in governance. Dscvr.one: is the IC’s answer to Reddit, with a custom governance function that manages future developments and content review Valuations The sensitivity of ICP pricing at genesis is below and can be updated in our spreadsheet here. The higher the amount locked, the lower the circulating supply, the more favorable price action is. Since the protocol and its ecosystem is still new, it’s difficult to justify a fair valuation for ICP. Data started as of March 24, 2021, and there are approximately 120,000 messages daily, which is the equivalent of transactions. However, if we were to compare the value of the protocol compared to the value of the ecosystem, we can start by looking at Terra (LUNA) and Polkadot (DOT). Similar to ICP, Terra has non-token projects such as the Chia, MemePay, PayWithTerra, BuzLink and Kash. Polkadot is similar in that the network is live but projects in the ecosystem projects have not launched on top of it and do not have floating prices because parachain auctions have not started. If we look at the Ecosystem Value / Layer Value (see table below), the value of ERC-20 tokens is greater than the value of Ether. At the low-end, we have LUNA where the ecosystem’s value is 14% of LUNA’s circulating market cap. If we assume that ICP’s ecosystem value to layer value is 14% (in-line with LUNA), then we would expect that ICP’s valuation expects that the ecosystem would be worth $3 billion. As a comparison, the known amount of fundraising among ecosystem apps is ~$10 million, implying that ICP is priced above peers. Dfinity would perhaps argue that, because the addressable market is larger, it justifies a higher valuation. ICP is trying to replace legacy IT such as Google, Oracle and AWS. The opportunity in the Cloud market alone could be $1 trillion: Risks Dfinity will immediately be catapulted into the top ten largest assets. The largest risk to price is that the protocol is not battle-hardened. The code was only be open-sourced today and waited to be open to scrutiny until after the launch. In Dfinity’s defense, their code is a trade secret to limit forking and competition. Dfinity’s competition is not only in the crypto-sphere but extends to traditional internet. Their low trading volume pre-listing is another consideration. FTX’s pricing is about half of that seen on Hoo and MXC just days ago. Furthermore, potentially high inflation rate is another consideration. Along with DOT, FIL and CAKE have lower circulating supply, and therefore higher inflation in the next several years, ICP has one of the lowest circulating supplies. This could put pressure on the price, especially if tokenholders aren’t locking ICP in the ecosystem. The vesting schedule of half its tokens -- including those held by the foundation, team members and other partnerships is also not known at time of writing. Lastly, Dfinity has raised $120 million from accredited investors and venture capital firms. Projects that have successfully fundraised get a lot of hype. However, there’s a risk that full valuations leave too little upside for the community. Without a robust, committed community, the project could face headwinds at launch. As an offset, Dfinity’s developer community is one of the fastest-growing. Source: Electric Capital Finally, Dfinity has ambitious plans and its market cap reflects those ambitions. The Foundation released a 20-year roadmap, where they hope, within five years, to achieve widespread knowledge of what ICP is among entrepreneurs and end-users. Within 10 years, it hopes the IC is on a path to overtake big-tech’s closed proprietary ecosystem, where capital will be redirected away from legacy internet companies to ICP and DeFi will match traditional finance technology. Within 20 years, they hope the ICP will overtake closed, proprietary big-tech ecosystems. Given the short duration since mainnet, it is too early to tell if Dfinity has a sufficiently strong community or execution capabilities to reach these goals. Furthermore, it’s coming relatively late to the Layer-1 game and competition is already intense at this stage. Conclusion Dfinity has big goals to remake traditional internet. It even wants to run ETH 2.0 inside a canister on the IC. The vision, while grand, will depend on Dfinity’s ability to execute. Currently, there’s a resemblance with Solana, in terms of how IC’s data centers control nodes that process subnet messages or canisters. There’s also a resemblance with Ethereum 2.0, though Ethereum has lately triangulated on DeFi and high-value transactions. Overall, the competition among programmable Layer 1s is intense. Dfinity is the newcomer, offering the world a new paradigm and technology. Dfinity has launched in the heart of the bull run, perhaps putting wind in their sails. However, successfully creating the ultimate world computer is still at play. --- The contents of this report were created by employees of Messari, Inc. This report reflects the opinions of the authors and does not represent the opinion of Messari, Inc. This report is meant for informational purposes only. This is not investment advice and not an offering document. You should conduct your own research, and consult an independent financial, tax or legal advisor before making any investment decisions. 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    Source: Mira Christanto — Published: 2021-05-10T11:00:00Z

  • Weekly Risk and Performance Recap Ending May 6th

    Week In Review Notable Messari Updates Kadena Kadena released Chainweb Mainnet 2.7 (Kadena's mainnet client) on Apr. 29, 2021. The Taproot signaling period has started. Sector Performance Overview The week ending May 6th was led by the smart contract sector dominating the week with a 30% return. The sector as a whole was boosted by Ethereum which smashed through its all-time high, rising to over $3,600. Web-3 came in second place closely followed by Currencies. On the low end, DeFi and decentralized exchanges ended the week in positive territory but lagged the rest of the sectors. Sector Drill Down - Risk and Performance Review Top Assets The week ending on May 6th was dictated once again by Dogecoin (DOGE). The surge in retail euphoria fueled DOGE’s returns making it the best-performing assets of the week with a total weekly return of 104%. Aside from DOGE’s insane performance, the rest of the assets in the top ten also had great weekly returns. The majority of the top ten ended the week deep in the green zone with double-digit returns. The only exceptions were Bitcoin (BTC) and Uniswap (UNI) which ended with a return of 4% and -2% for the week. Top asset volatilities remained stable over the week. The majority continues to be below the 7% mark with Dogecoin (DOGE) and Ripple (XRP) being the only two exceptions. In XRP’s case, volatility decreased from 14% to 12% week-over-week while DOGE’s continues to increase reaching a new high of 24% making it the riskiest asset in the group. The 30-day correlation between most of the top assets didn’t change much over the week. The only notable change was Uniswap (UNI) which saw a slight decrease in correlation with the rest of the assets in the group. Correlation with Bitcoin is starting to increase across the group. As of the end of the week, eight out of the top ten have a correlation with Bitcoin greater than 40%. Dogecoin (DOGE) has remained stable, hovering around the zero line while Uniswap’s correlation continues to decrease dipping below the 20% mark. DeFi Last week was a bit mixed for DeFi assets. While most decentralized exchanges had muted-to-negative returns, THORChain’s RUNE came out on top of the DeFi sector with a total weekly return of 28%. Lending protocols such as MakerDAO (MKR) and Compound (COMP) closely followed with weekly returns of 25% and 22% respectively. Decentralized exchanges including PanckaSwap (CAKE), SushiSwap (SUSHI), and Uniswap (UNI) came in last with weekly returns of 0.6%, -1.5%, and -2.3% Volatilities across DeFi assets are beginning to pick up. Overall the sector has seen a steady increase in volatility starting in mid-April. Most remain below 10% with the exception of MakerDAO (MKR) and RUNE which have rolling volatility slightly above the 10% level. Correlations between DeFi assets have not changed drastically over the week. Week-over-week, Terra (LUNA) has seen a slight increase in correlation with the rest of the group. In contrast, Uniswap (UNI) is starting to become slightly more uncorrelated with the rest of the sector. In terms of correlation with Bitcoin, all DeFi assets saw a small bounce over the week. The correlation between Uniswap (UNI) and Bitcoin (BTC) continues to decrease, reaching a level below 20%. MakerDAO (MKR) is the only other asset in the group with a correlation to Bitcoin below the 20% mark. Currencies The currency sector as a whole had a phenomenal week. As mentioned previously, the clear outperformer, and outlier, of the group was Dogecoin (DOGE) with a massive weekly return of 104%. Bitcoin’s forks, Bitcoin Cash (BCH), and Bitcoin SV (BSV) were the second and third best-performing assets in the group with returns of 51% and 47% over the week. Dash (DASH), Litcoin (LTC), Stellar (XLM), and Ripple (XRP) also had double-digit weeks with performances ranging between 28% and 38%. Bitcoin (BTC) and Monero (XMR) were the laggards of the group ending the week with returns of 4% and -0.5%. Volatility in the currency sector is starting to pick up. While most remain under 10%, Bitcoin’s forks saw a sudden spike in volatility over the week pushing them above 10%. Notably, Bitcoin Cash’s (BCH) volatility increased from 8% to 12% in one single day. Correlations across currencies remain on the high end of the correlation spectrum. The trend continues as correlations continue to climb across the group week-on-week. As of yesterday, the currency sector is the most correlated across all sectors covered in this report. Unsurprisingly, all currencies are starting to see an increase in their correlation to Bitcoin. Most are now above the 60% correlation level. Notably, Ripple (XRP) and Stellar (XLM) are at an all-time high reaching correlations to Bitcoin of 82% and 87% respectively. Smart Contract Platforms The smart contract platform sector was by far the best performing sector during the week. Overall, the group was up 30% boosted by the excitement around Ethereum’s all-time high week. EOS led the smart contract sector completely outpacing the rest with a whopping 52% weekly return. NEO and Ethereum (ETH) followed closely ending the week with returns of 29% and 27% respectively. Polkadot (DOT), Tron (TRX), Cosmos (ATOM), Binance Coin (BNB), and Cardano (ADA) also had strong weekly performance ranging from a low of 11% to a high of 20%. Interestingly, Solana (SOL) was the only smart contract platform that ended the week in negative territory despite being the top-performing asset last week. As is the case with most assets in this report, volatilities across smart contracts platforms are starting to increase. EOS saw the biggest increase over the week going from 7% to 11% in the span of two days. On the contrary, Tron (TRX) is the only asset with decreasing volatility across the assets in the sector. Correlation in the sector did not change much over the week. Solana (SOL) saw a slight increase in correlation during the week but it’s still the only token that remains negatively correlated to the rest of the assets in the group. Correlation with Bitcoin across smart contract platforms has been on the rise since the beginning of May. NEO, Tron (TRX), and Solana (SOL) are the three notable tokens seeing a rapid increase in correlation. Solana (SOL) continues to be the only asset with a negative correlation to Bitcoin making it a potential diversifier in the event of a sudden Bitcoin drop. Decentralized Exchanges The decentralized exchange sector was the worst-performing sector of the week ending with a 5% return. The group had one of the widest distributions of total returns with some DEXs having a great week while others fell flat. This week, RUNE led the group with a total return of 28%. Other DEXs with two-digit weekly returns include Bancor (BNT), 0x, and 1inch with performance ranging from 10% to 15%. Uniswap (UNI) was the underperformer of the group ending the week with a -2.3% return despite the highly anticipated launch of Uniswap V3. Unlike most other sectors, volatilities across decentralized exchanges have remained relatively stable in the past weeks. Since April, Bancor’s (BNT) volatility has been hovering around 5% making it the least risky asset in the sector. On the contrary, RUNE’s volatility has steadily increased over the past month reaching an all-time high of 10% as of May 6th. In terms of correlations, Uniswap (UNI) and PancakeSwap (CAKE) are the notable tokens of the week. Both are becoming slightly less correlated with the rest of the assets in the sector. Interestingly, the remaining assets experienced the opposite seeing a slight increase in correlation with one another. Correlation between decentralized exchanges and Bitcoin has followed a similar trend over the past months. During last week, most DEXs experienced a slight bump in their correlation to Bitcoin pushing some over the 70% level. Across the sector, Uniswap (UNI) is the only asset that is consistently seeing a decrease in correlation with Bitcoin. Web3 The Web3 sector was the second-best performing sector of the week with an overall return of 16%. Leading oracle provider, Chainlink dominated the Web3 sector ending the week with a 34% return. Performance among the remaining assets hovered around zero. On the positive side, Helium (HNT), Siacoin (SC), and The Graph (GRT) finished the week with low one-digit positive returns. Storj (STORJ) Stacks (STX), and Arweave (AR) were the underperformers of the group ending the week in negative territory. Volatility across the Web3 sector has become more stable over the past week. Livepeer (LPT), Storj (STORJ), and Stacks (STX) had volatilities above 20% in the past month but have seen notable reductions of more than 15% in the last three weeks. As of yesterday, volatilities in the sector have stabilized ranging from 6% to 11%. Correlations in the sector are not concentrated on either side of the spectrum. Over the past 30-days, Web3 has been the most uncorrelated sector compared to the rest covered in this report. One token worth highlighting is Stacks (STX) which has become significantly more correlated with Helium (HNT) and Livepeer (LPT) week-over-week. Correlation with Bitcoin remains highly dispersed in the Web3 sector. However, this past week most assets experience a significant jump pushing all correlations past 30%. Notably, Helium (HNT), Arweave (AR), and Stacks (STX) saw increases of more than 20% over the week.
    Source: Roberto Talamas — Published: 2021-05-07T14:30:00Z

  • Weekly Risk and Performance Recap Ending April 29th

    Week In Review Notable Messari Updates The Celo (CELO) proposal to activate cEUR has passed, and cEUR transfers are now enabled. The Prysmatic Labs team has released a hotfix with two critical fixes. They later shared an incident report summarizing the issues that temporarily prevented Prysm Beacon Nodes from proposing new blocks. Oasis Network validators accepted and executed the Cobalt upgrade, unlocking light client support, and cross-ParaTime token transfers. The Stellar Development Foundation is asking all those who run a Stellar node of any kind to upgrade to Protocol 17 as soon as possible. Sector Performance Overview The week ending April 29th was led by the decentralized exchange sector. Despite the drawdown during the weekend, DEXs rebounded strongly to end the weekend with a 29% return. The broad DeFi sector came in second place posting a weekly return of 24%. Web-3 and currency ended the week in positive territory but lagged the rest of the sectors. Sector Drill Down - Risk and Performance Review Top Assets As is the case with the majority of the charts in this report, all top assets by market capitalization experienced a sharp decline during the weekend. However, most assets quickly rebounded, ending the week in positive territory. Among the top assets Uniswap (UNI), Ethereum (ETH), and Cardano (ADA) ended the week with double-digit returns of 24%, 13%, and 10%, respectively. Bitcoin (BTC) and Ripple (XRP) had muted weekly returns while Polkadot (DOT), Litecoin (LTC), and Chainlink (LINK) finished the week with slightly negative returns. Volatility (measured as the rolling standard deviation of daily returns) across most top assets has been on the decline since the beginning of March 2021. Binance Coin (BNB) had the highest decline towards the end of March with volatility dropping approximately 10%. Starting in April, Dogecoin (DOGE) and Ripple (XRP) saw a spike in volatility reaching levels of 23% and 14% as of April 29th. DOGE is correlated to social media activity while XRP has been correlated to positive newsflow on the SEC lawsuit and rumors that they might even be re-listed on major exchanges. Correlation among the majority of the top assets remains high. The exception is Dogecoin (DOGE) which is the only asset with negative correlations to the rest of the group. This was caused by its rapid run-up in recent weeks and social media as its primary catalyst. DOGE benefited from Elon Musk’s tweet that the Saturday Night Live episode on May 8 would be called the Dogefather Correlations with Bitcoin have been widely dispersed over the past few months. Around mid-February, Uniswap (UNI), Dogecoin (DOGE), and Cardano (ADA) were negatively correlated to Bitcoin for a short period of time. UNI was the first to be negatively correlated as the price rallied on the back of strong growth in trading volumes. ADA followed in a strong price rally due to its strong community. Correlations across all assets have picked up since the beginning of March with the exception of Dogecoin (DOGE) which saw an abrupt decrease in the middle of April as a consequence of its skyrocketing performance due to another Elon Musk tweet. DeFi DeFi was the second-best performing sector of the week showing some resilience to the weekend’s market shock. As of April 29th, the sector ended the week with a total return of 24%. All DeFi assets finished the week in the green with MakerDAO (MKR) being the only exception, coming in at the bottom of the group with a muted return of -0.8%. This was due to its strong price rally of up to a peak of +130% in the month of April. MKR has had a busy month with several proposed parameter changes including completing their debt ceiling increase. Several additions to add tokens for inclusion as an approved collateral type is also under the proposal. This week’s outperformers were led by PancakeSwap (CAKE) with a total weekly return of 42% followed by Aave (AAVE) which ended the week with a 27% return. CAKE saw a migration to V2 while Aave launched its liquidity mining incentives program that ends July 15, 2021. Aave has also benefited from its Polygon (MATIC) integration, providing a Layer 2 scaling solution. Following a similar pattern as the top assets, all DeFi assets have seen a steady decline in volatility. Notably, PancakeSwap (CAKE) and Terra’s (LUNA) volatility decline the most during March moving from a range of 18-20% to a 6%-10% range. Across DeFi assets, MakerDAO (MKR) experienced an uptick in mid-April sending the token’s volatility to 9.8% making it the most volatile asset of the group on a rolling basis. As of April 29th, volatility in the top DeFi assets ranges from 5% to 10%. Over the past 30 days, the correlation structure of the top DeFi assets hasn’t shown strong tendencies towards either side of the correlation spectrum. Correlations in the group currently range from a low of -20% to a high of 84%. One exception is Terra (LUNA) which has become increasingly uncorrelated with the rest of the assets week-over-week. Correlation between DeFi assets and Bitcoin followed a similar pattern over the past months. To various degrees, all DeFi assets saw a decline in February followed by an increase all through March. Starting in April, correlations started to decline once again but recently started to pick up. As of yesterday, MakerDAO (MKR) has the lowest correlation to Bitcoin at 15% and Aave (AAVE) has the highest at 63%. Currencies Currencies had a mixed week of performance. Similar to the rest of the assets in the report, all currencies decline over the weekend with the majority recovering by the end of the week. Unlike DeFi assets, not all currencies ended the week with positive returns much less in the double-digits. Monero (XMR) came in at the top with a total return of 9.5% followed by Dogecoin (DOGE) with a weekly return of 5%. Dash (DASH) and Bitcoin SV (BSV) were the laggards of the group with weekly returns of -5%. Similar to the top asset’s volatility chart, the two notable assets with higher volatility within the currencies group are Dogecoin (DOGE) and Ripple (XRP). The rest of the assets have volatility ranging between 3% and 8%. Unsurprisingly, correlations among currencies are concentrated on the high end of the correlation spectrum. As stated above, this is not the case for Dogecoin (DOGE). Week-on-week the token has become slightly more uncorrelated with the rest of the group. Correlations between currencies and Bitcoin have seen some dispersion in the past few months. Starting April, correlations have been on the rise reaching over 40% across most assets in the group. Again, Dogecoin (DOGE) is the exception seeing a sharp decline in mid-April ending the month with a correlation to Bitcoin of 0.05%. Smart Contract Platforms Similar to the currency sector, smart contract platforms ended the week with mixed results. Solana (SOL) was the clear outperformer of the group ending the week with a strong double-digit performance of 32%. Interestingly, Solana was one of the few assets in this report that showed high resilience to the weekend’s market drop only dipping below the zero line for a few hours. Cosmos (ATOM), Ethereum (ETH), and Cardano (ADA) also ended the week with a two-digit performance of 14%, 13%, and 10% respectively. EOS and VeChain (VET) ended the week in the red with weekly returns of -8.6% and -13%. VET’s price action was on the back of a strong month in April where the price nearly doubled at its peak. Volatility levels in smart contract platforms have been on the rise starting in April. Similar to other charts in the report, there was a steady decline starting in March. However, most smart contract tokens are seeing their volatility increase during April. Most notably is Tron (TRX) which saw an increase in volatility from 6% to 12% over the current month. The rest of the assets have volatility ranging between 4.5% and 11% with Ethereum (ETH) being the least volatile asset of the group. Correlation among smart contract platforms tends to be on the positive side. One particular exception is Solana (SOL). Over the past 30 days, the token has become increasingly uncorrelated with the assets in the rest of the group. On a weekly basis, the correlation continued to decrease reaching levels as low as -45%. The story is the same when looking at the correlation between Bitcoin and Solana (SOL). While most smart contract platforms have a correlation higher than 20%, Solana’s correlation with Bitcoin went negative in mid-April reaching a low of -50% as of April 29th. Decentralized Exchanges The decentralized exchange sector was the best performing during the week. As a whole, DEXs ended the week with a total return of 29%. The top DEX based on performance was PancakeSwap (CAKE) with a total weekly return of 42%. Uniswap (UNI) came in second place with a 24% return. Kyber Network (KNC), Bancor (BNT), and Loopring (LRC) were the losing assets of the group ending the week with negative performance. Volatility in the sector has been relatively stable over the past few months. As mentioned previously, PancakeSwap (CAKE) is the only asset with a notable decrease in volatility among decentralized exchanges. As of yesterday, volatility across the group is below 10%. Correlations within the group aren’t concentrated on either side of the spectrum. One thing to note however is that Uniswap (UNI), PancakeSwap (CAKE), and Rune (RUNE) have seen some decline in their correlation over the past week relative to the other assets in the sector. In terms of correlation with Bitcoin, decentralized exchanges are moving in a similar direction. All correlations are above 30% ranging from a low of 33% to a high of 76%. Web-3 Web 3 assets had the widest dispersion across all sectors. Helium (HNT) and Arweave (AR) had a phenomenal week ending with returns of 36% and 30% respectively. Most assets ended the week with performance ranging from -3% to 7%. Stacks (STX) and Siacoin (SC) ended the week at the bottom of the group with returns of -5% and -8%. Asset volatilities have been quite jumpy among Web-3 assets. During March, Livepeer (LPT) and Storj (STORJ) saw a significant jump in their volatilities reaching levels above 25%. Similarly, Stacks (STX) experienced a similar increase from 5% to 25% volatility. As of April 29th, volatility in the group has stabilized below 11% with the exception of Stacks (STX) which is currently at its highest level since March. Week-over-week correlations among Web-3 have mostly remained stable. The two to note are Stacks (STX) and Arweave (AR) which are becoming increasingly uncorrelated with the rest of the group. Correlations with Bitcoin have been widely different across the Web-3 sector. While all have remained above zero, some assets have reached levels as high as 84% over the past three months which means the sector might not be as uncorrelated as some would like to believe. As of April 29th, correlations in the sector range from a low of 35% to a high of 73%. Since many Web3 projects possess their own blockchains or interoperable protocols it will be interesting to watch and see if they remain correlated to Bitcoin or start to break away as a sector.
    Source: Roberto Talamas — Published: 2021-04-30T14:30:00Z

  • Weekly Performance Recap Ending April 22nd

    Week on Review This past quarter marked the beginning of the long-awaited ecosystem wars. As crypto markets continue to gain mainstream popularity, newfound retail adoption pushed Ethereum’s fees to all-time highs. The surge in demand, while good for the overall industry, rendered Ethereum unusable for most retail users prompting them to look outside for alternatives options. This exodus in conjunction with the growth of the application ecosystems on adjacent Layer-1s such as Binance Smart Chain (BSC), Solana, Cosmos, and Polkadot have become important factors affecting Ethereum’s dominance in the space. In this weekly recap report, we explore assets in these new chains and dive into the weekly performance of the most popular protocols across different Layer-1s. Notable Messari Intel Updates Cardano Node v1.26.2 was released by IOHK over the weekend. The Matic Foundation commenced the final stage of Phase 3 of Matic's mainnet rollout, shutting down Matic Foundation's validator nodes. Uniswap v3 core and periphery contracts have been deployed to all major Ethereum testnets. The Solana Foundation released Mainnet Beta v1.5.19 this week. Ecosystem Performance Review Ethereum As is the case with the majority of the charts in this report, most assets in the Ethereum ecosystem ended the week with negative returns. DeFi blue chips, the ones with longevity on their side, were more resilient during the bumpy market. MakerDAO showed the greatest resilience during the week ending with a 58% return. Compound was the second best-performing asset and the only other token that finished the week in positive territory ending with a 7% return. The remaining assets ended the week in the red with 0x and SushiSwap lagging the rest with returns of -22% and -28%, respectively. Cosmos All assets in the Cosmos ecosystem ended the week in negative territory. Although half of the assets had positive returns at the end of last week, all tokens experienced a sharp decline during the weekend setting the pace for the rest of the week. Among Cosmo’s assets, Mirror and Rune had the highest volatility of the group. Rune was on track to finish last week with close to a 30% return which was quickly erased during the weekend sending the token down to end the week with a -12% return. Mirror suffered the least across the board, newly listed on Binance and Huobi on April 19th. While the token had a boost following the listing performance it slowly eroded to end the week with a -4% return. At the bottom of the pack was the chain’s native token ATOM which ended the week with a -27% return. Polkadot Polkadot’s assets as a whole were the worst-performing during the week. After the widespread decline during the weekend, Polkadot’s assets continue to plummet. By the end of the week, all of them suffered two-digit declines. Sora and Polymath experience the least decline ending the week with -14% and -15% respectively. The rest of the assets ended the week in the -19% to -27% performance range. Darwinia Network was the clear laggard of the group finishing the week with a 30% decline. Binance Assets in the Binance ecosystem had a mixed week. The majority of the asset quickly rebounded following the weekend drawdown. Three of the five assets tracked in the chart below moved into the positive territory starting Tuesday, April 20th. PancakeSwap (CAKE) was the clear leader of the group ending the week with a double-digit return of 17%. Binance Coin (BNB) and Venus (XVS) also rallied following PancakeSwap’s steps but ended the week with muted performance after giving back some of their return late Wednesday, April 21st. Alpha Finance (ALPHA) was among the worst-performing assets of the group losing close to 30% by the middle of the week but quickly rebounded regaining some footing to end the week with a small loss of -2%. Cream (CREAM) had a similar trajectory as Alpha Finance losing more than 30% by mid-week but unlike ALPHA the token wasn’t able to rebound ending at the bottom of the pack with a -26% loss. Solana The Solana ecosystem had the widest dispersion of the returns during the week. Most of the assets moved in a similar fashion from April 15th to April 18th. However, Solana’s native token SOL rebounded sharply after the weekend, ending the week deep in the green with a weekly return of 29%. Hxro (HXRO) was slightly affected by the weekend market shock, never dipping into negative territory throughout the week. The remaining assets in the ecosystem were not able to rebound after the weekend drawdown ending the week with a two-digit loss. Kin and Audius were the clear underperformers of the group, with weekly returns of -26% and -28%, respectively.
    Source: Roberto Talamas — Published: 2021-04-23T14:00:00Z