By Chris Kilbourn | Crescent City Capital Market Analyst Intern

Stablecoins play a valuable role in the world of decentralized finance, though this role is admittedly undercut in situations where they lose their pegs and trend towards $0.00.  Algorithmic stablecoins are at particular risk of de-pegging, yet every ecosystem tries its hand at perfecting the holy grail of a totally uncollateralized cash cow.  The latest is the Terra ecosystem, whose UST has a $16B market cap and whose anchor protocol claims to be the official savings account of crypto, with a 20% APR for locked UST.  The stability of UST is a matter of grave importance for all those who keep their sidelined capital on Anchor, so it bears questioning whether UST’s peg could ever depeg permanently, as other algorithmic stablecoins have in the past.  Deciding whether or not this is a risk we’re willing to take requires a bit of research and a bit of review, so anyone familiar with the workings of stablecoins and UST in particular may prefer to skip to the “Today’s Scenario” section.

Collateralized Stablecoins

There are two basic types of stablecoins, collateralized and algorithmic, and the difference between the two involves how they maintain their peg to the US Dollar.  Collateralized stablecoins assert an intrinsic value that is defined by assets they keep in reserve, and they primarily rely on market participants to price their coin accordingly.  For example, USDC is a fully backed stablecoin, which means that for each USDC in existence, Centre has $1 held in reserves.  With this being the case, traders and exchanges acknowledge that the 42.5 billion USDC in circulation are backed by $42.5 Billion, and $1 is the agreed upon price.  While greater than average demand may drive the price above $1, traders and exchanges would then be incentivized to sell to take advantage of the premium.  This often takes the form of cross-exchange arbitrage, in which algorithms exploit the difference in price between multiple exchanges and buy large amounts of $1.00 USDC before sending it to another exchange to be sold for $1.01.  By this method, USDC has managed to remain pegged to the USD for the past four years. 

Algorithmic Stablecoins

While it’s easy to see the appeal of such a system, it’s also easy to see why developers would be curious to amend it.  $42.5 Billion is a nice bit of money, and anyone managing a $42.5 Billion treasury would start to wonder how little of it they could get away with keeping in reserve.  Algorithmic stablecoins were created to solve this problem.  Instead of holding collateral to back the stablecoins currently in circulation, the coins are issued by a smart contract that employs an algorithm to maintain the peg, allowing the supply to be uncollateralized so the reserves can be put to use elsewhere.    

Price stability is the chief concern when it comes to stable coins, and price is always a function of supply and demand – obviously if there is more demand than supply, the price will go up, and vice versa.  A perpetual balance must be kept between the two, and algorithmic stablecoins have unique methods of accomplishing this. 

The most common system requires two mechanisms to be in place.  When inflation is occurring – when the demand and thus the price is falling – there must be a mechanism in place to reduce the supply.  Reducing the circulating supply of these coins is referred to as burning.  And when deflation is occurring – when the demand for tokens is driving up the price – there must be a mechanism in place to increase the supply.  Increasing the circulating supply of these coins is referred to as minting. 

UST’s Peg

In the case of UST, this manipulation of the circulating supply is done by a form of arbitrage which is handled within the ecosystem and involves not one but two native tokens – UST and Luna.  UST is a stablecoin which is pegged to the US Dollar, but like all stablecoins, its price wants to move up as it undergoes wider adoption and is met with higher demand.  In this situation, Terra needs to dilute the existing supply by minting more in order to bring the price back to its peg.

Where UST differs from many other stablecoins is the role played by Luna.  When the price of UST fluctuates above or below $1, traders can perform arbitrage in house by exchanging their Luna for UST at a value of $1 per coin.  Even if UST is priced at $1.01, traders can still exchange $100,000 worth of Luna for $101,000 worth of UST.  When this action is taken, new UST is minted in proportion to the amount of Luna traded in, which dilutes the supply and restores the peg.  As an aside, this action also burns a percentage of the Luna when it is exchanged for UST, driving up the price of Luna in direct proportion to the demand for UST.

Today’s Scenario

This much we already know, and the material has been covered well by interns past.  What hasn’t been covered is the story of another stablecoin entirely – a stablecoin from 2021 known as Iron. 

Much like UST, Iron relied on another native token for its burning and minting mechanism.  On the Polygon chain, it was collateralized by a token called Titan; on the BSC chain its mechanism was identical and it was collateralized by an analogous token named Steel.  Much like its namesake, Steel proved more resistant to stress and did not cause Iron to depeg, nor did it collapse and jettison several billion dollars’ worth of token value, so in the interest of brevity we’ll focus on the Polygon side of the story below.

Iron was designed to be a partially-collateralized stablecoin, and it could be redeemed for $1 worth of the smart contract’s reserves – a ratio of 25% Titan and 75% USDC.  As a scheme to steadily lower the amount of collateral held in reserves, the ratio of these two was designed to be reduced over time, and Iron to be backed with an ever-greater proportion of Titan.  One intricacy of this variable ratio mechanism was its use in incentivizing arbitrage – the contract itself could modify the target ratio of collateral coins under the assumption that a higher proportion of USDC would be more alluring to arbitrageurs.  At times when Titan was below $1, the target collateral ratio would be raised to incentivize the purchase of Titan to be cashed in for USDC.  The system appeared flawless – until it didn’t.

De-pegged

In some ways, the governance tokens that underlie their algorithmic stablecoin counterparts function as plays on the stablecoin’s future breadth of adoption.  If users are required to burn Luna in order to mint UST, then the assumption that UST will see a never-ending surge in demand would suggest that Luna’s supply will be burned into oblivion – and its price will continue to skyrocket as more and more UST is minted.  This equation works both ways, however, and fear, uncertainty, or doubt about the well-being of the stablecoin inevitably casts a shadow on the governance token to which it is tied.   After all, if stablecoin adoption flags, presumably there will be less minting of the stablecoin, less deflation of the governance token, and thus less upward price pressure. 

This is precisely what doomed Iron.  For whatever reason, on June 16^th, 2021, several of the whales who provided liquidity on the Iron/USDC liquidity pool got spooked and decided to withdraw their funds and redeem their Iron for Titan and USDC.  While the USDC was locked on the contract, the protocol was designed in such a way that new Titan would be minted whenever Iron was redeemed.  In the exact inverse of the process described above, the massive redemption of Iron caused the supply of Titan to explode, and the subsequent cratering of Titan’s price was made even worse when investors immediately dumped their rapidly depreciating governance tokens.

Given that Iron was backed by Titan, and its theoretical value was propped up by the collateral underlying it, the collapse of Titan’s price – from $60 to $0 in relatively short order – also caused investors to run screaming from Iron, and it quickly lost its peg on the Polygon chain.  Both coins wound up trading at $0 and are currently delisted from all major exchanges.

UST Defense

The question, obviously, is whether this could happen to today’s stablecoin du jour, which has a circulating supply of $16.72 Billion and whose collateral ratio is exactly zero USDC for every UST issued.    UST has a few mechanisms in place to prevent this from happening, though it’s unclear whether this would be enough to prevent a depeg in the event of a Titan-style death spiral. 

Band-Aids

One of the fatal flaws in Iron’s design was the reliance of its peg on arbitrageurs buying the stablecoin for less than $1 to be exchanged for $1 worth of Titan.  Once the death spiral began, however, the threat of Titan losing value was enough to discourage anyone from taking the risk of holding any.  Nobody would bother arbitraging Iron if it involved being paid out in a governance token that may or may not be plummeting in value – even if it only represented 25% of the payout.  UST recently took efforts to circumvent this threat by accumulating large amounts of Bitcoin to be held in reserves, and which UST could be exchanged for in times of de-pegging.  Arbitrageurs can currently purchase UST for under $1 then exchange it for $1 worth of BTC, which may help this one potential issue. 

Another source of Iron’s woes involved its oracle system.  As in any defi product, actions are taken in response to price triggers, and price data is delivered to the contract by oracles that interact directly with the APIs of various exchanges.  In this case, Iron’s peg was maintained by allowing arbitrageurs to exchange $0.90 worth of Iron for $1 worth of Titan.  This condition required the contract to know Titan’s price, however, in order to determine how much $1 worth of Titan was, exactly. 

In order to avoid any exploits that would capitalize on noise in the pricing data, the Iron contract used a time-weighted price oracle that averaged the price of Titan over the past ten minutes or so and then reported that number to be used in Iron redemption.  In this case, however, the price of Titan fell so rapidly that the average price reported by the oracle wound up being considerably higher the current price, as it lagged behind any downward movement by up to ten minutes.  This in turn reduced the amount of Titan that was given for each $1, so exchanging Iron for Titan actually lost money every time.  Arbitrageurs quickly caught wind of the situation and abandoned their work maintaining the Iron peg.

UST has similarly attempted to escape this pitfall by employing a system in which validators who run nodes on its blockchain are required to submit pricing data on Luna/UST, Luna/USD, and UST/USD, then vote on the correct numbers.  These votes occur every five blocks, so the prices are updated approximately every six seconds – a substantial improvement over the ten minutes it took Iron Finance to update the price of Titan.

Conclusion

In spite of these safeguards, it’s hard not to look at the history of de-pegs in algorithmic stablecoins and see the bigger picture.  Regardless of whatever band-aids are put in place to remedy the specific issues that arose in the past, all algorithmic stablecoins rely on arbitrage to maintain their peg, and the purpose of the algorithm is to incentivize independent market actors to provide it.  The conditions for all de-pegs are created when these actors are not sufficiently incentivized, and this possibility is so simple that it can be summarized in one sentence: if the premium on the tokens with which arbitrageurs are rewarded is not enough to warrant arbitrage, then arbitrageurs won’t take the risk.

Terra has already acknowledged this by starting to shift away from its model of an uncollateralized coin, but its frankly questionable whether this could be enough to prevent future de-pegs.  Two points come immediately to mind. 

One, that it doesn’t matter if Bitcoin is the premier decentralized reserve currency of the crypto world, if Bitcoin is in freefall as we’ve seen so many times before, any arbitrageur in their right mind will wait until its price stabilizes before spending $0.90 on $1.00 worth of BTC that could be worth $0.75 later in the afternoon.  This lapse in arbitrage is in itself enough to end the peg of UST to the US Dollar. 

Two, that the foundation responsible for purchasing the Bitcoin reserve that will supposedly undergird UST’s peg has pledged to purchase $10 Billion worth of BTC to be redeemed by arbitrageurs at times of heightened stress.  This sounds like a great plan until you consider that UST’s current circulating supply is 16 Billion.  Even if the 10 Billion BTC were in place right now to be redeemed for sub-peg Iron, it would still leave the stablecoin 60% collateralized, which is barely any better than Iron was.  In light of the fact that UST has plans to expand ever-more aggressively into the normal, off-chain economy, the possibility that UST could command $100 Billion worth of the crypto economy with a 10% collateral ratio doesn’t exactly put the mind at ease.

Finally, the last thing to keep in mind is that the attractiveness of the governance tokens that incentivize arbitrage is entirely a product of the deflation produced by progressively more stablecoins being minted.  Arbitrage is a terrific opportunity when Luna is consistently being burned to mint new UST and there is constant upward pressure on its price.  As soon as UST adoption plateaus or begins to decline, the baseline level of arbitrage becomes considerably more precarious, and as we saw in the case of Titan, this proved a fatal flaw even when the governance token provided only 25% of the arbitrage rewards.   Even selling billions of dollars’ worth of Bitcoin to arbitrageurs at a loss – hardly a sustainable solution – would not be enough to incentivize arbitrage, as a major percentage of the rewards would still be in a depreciating asset propped up only by the expansion of the UST supply. 

https://hackernoon.com/mark-cubans-bane-how-iron-finances-dollartitan-crypto-crashed-from-dollar60-to-dollar0-n53e35gs

https://www.cbinsights.com/research/report/what-are-stablecoins/

https://medium.com/coinmonks/should-depositors-in-anchor-protocol-pay-attention-to-ust-de-peg-risk-8b59849d75bf

https://finematics.com/bank-run-in-defi-iron-finance-explained/

By Aidan Kalish | Crescent City Capital Market Analyst Intern

The Polkadot project is a next-generation blockchain that is considered to be one of the most innovative projects in the cryptocurrency space. Polkadot intends to resolve many of the limitations that blockchains currently have such as security and scalability. This is done by using a multi-chain network that bridges unrelated blockchains together through the Polkadot network.

One of the biggest inhibitions of blockchains is that they have limited applications for most projects due to not having the proper infrastructure to provide a seamless connection to other blockchains. Polkadot provides the proper infrastructure needed to bridge projects across multiple blockchains. This is possible because Polkadot operates as a relay chain, which is a large blockchain that connects other chains to itself and provides communication between them. The relay chain is designed to have minimal functionality, for example smart contracts are not supported and cannot be used on the relay chain. The relay chain’s main task is to coordinate the overall system and its connected parachains. Aside from connecting the parachains on its network, Polkadot also allows its parachains to connect to both the Ethereum and Bitcoin networks. This means that parachains no longer have to choose which network has the best connections for the project, allowing them to access and interact with a vast network of systems.

Polkadot uses a different approach to consensus methods by implementing GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement). GRANDPA provides Polkadot with a more secure and scalable network by allowing parachains to pool security. The main actors that take part in this consensus method are the validators, nominators, collators, and fishermen.

Polkadot’s relay chain also ensures shared security for all its parachains. This creates a shared state between the relay chain and all of the connected parachains. If for some reason the relay chain has to revert, then all of the parachains would also revert. This ensures that the system’s validity can be maintained, and no individual part can be corrupted.

Polkadot uses its native token DOT to carry out the key functions of the network. These key functions are providing governance for the network, operating the network, and creating parachains by bonding DOT. The first function of DOT is to give holders complete governance control over Polkadot. This includes determining the fees of the network, and the schedule for the addition of parachains, upgrades and fixes to Polkadot. DOT’s second function is to facilitate the network’s consensus mechanism. DOT is required to be staked for valid transactions to be carried out across parachains. The third function of DOT is the ability to add new parachains by bonding DOT. The DOT used will be locked during its bonding period and will be released back to the account that bonded them after the duration of the bond has passed and the parachain is removed.

At the time of writing DOT has a market cap of $22.9 billion and a fully diluted market cap of $25.5 billion. DOT had a significant amount of growth in 2021 beginning the year at $9.20 and reaching its all time of $53.88 on November 3^rd, 2021. DOT began 2022 at $29.73 and has since fallen to $23.07 at the time of writing. Despite its price crash, the DOT token continues to be popular among investors.

The largest risk to Polkadot is competition as there are other platforms that are taking different approaches to Polkadot’s functionality. Yet Polkadot’s innovative network still garners attention as the unique design of this platform and possible applications makes it easy to wonder what Polkadot will look like in a year or two from now. Polkadot has a lot of potential since it can be applied to essentially any blockchain. The ability for a project to interact with another project based on a different network creates even more possibilities for developers and strengthens the appeal of Polkadot’s network. This could potentially lead to a large increase in the amount of projects utilizing Polkadot, thus increasing the value of DOT making it a worthwhile investment.

Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. Please conduct your own due diligence before making any investment decisions.

References:

https://polkadot.network/

https://wiki.polkadot.network/

https://coinmarketcap.com/currencies/polkadot-new/

By Chris Kilbourn | Crescent City Capital Market Analyst Intern

Energy Web

As the repercussions of COVID-era monetary policy conspire with the West’s economic decoupling from Russia, energy is likely to see continued price volatility and likely shortages around the world.  Shortages can be mitigated by grid operators through supplementation with Distributed Energy Resources (DERs), but distributed generation requires digital infrastructure to mediate energy flows between large numbers of independent actors.   A variety of blockchain solutions have emerged which attempt to provide this infrastructure, some more ambitious than others.  While competitors offer more prescriptive protocols with designs on disrupting existing industry, Energy Web provides an ecosystem in which energy-centric dApps can be developed by utility companies themselves.  For the scalability of its product and its integration with existing energy infrastructure, Energy Web is significantly more likely than its competitors to capitalize on the ongoing introduction of renewable energy sources to the grid, the transition to a distributed energy marketplace, and the newfound upheaval in the supply chains of the global energy market.   

Qualitative Analysis

The utility sector has long been a centralized industry with little room for radical disruption, as grids have historically involved the one-way transmission of power from centralized generators to retail.   The past decade has seen the introduction of a new generation of DERs in the form of electric vehicles and small-scale generators, which allow consumers at the distribution level to support the grid by selling excess energy back into the system.   The ongoing incorporation of these resources by utility companies promises to not only introduce more renewable energy to existing grids, but also to ameliorate inefficiencies using distributed and data-driven energy flows. 

A number of existing blockchain solutions provide models for building out these networks, but because the utility sector is a crowded field with both entrenched interests and implications for national security, any changes require piecemeal alterations to existing systems and partnerships with existing industry, as opposed to radically new models.  This will almost certainly take the form of utility companies evolving their monopoly on the transmission of power to include the ownership of networks through which end users buy and sell energy resources amongst each other. 

The Energy Web Chain

Energy Web’s protocol is a layer one blockchain that facilitates the construction of these networks in several ways.  On top of its consensus layer is a “utility layer” that provides basic infrastructure like bridges and oracles, which are necessary for the purchase and transfer of EWT and the transmission of data relevant to measuring energy flows, respectively.  The utility layer supports the development of independent enterprise-grade applications, but a simpler solution also exists.

On top of this layer is a “toolkit layer” with templates that grid operators can use to quickly develop their own apps using Energy Web’s software development kit.  These dApps generally take the form of operating systems for upgraded, distributed energy grids, which are based on Energy Web’s virtual machine, EW-DOS.  The most important capabilities of these applications are the integration of retail DER devices onto the grid – typically solar panels and EVs – and the construction of on-chain energy markets in which consumers can exchange resources with them.  As the Foundation has said in the past, “Our vision is for grid operators to invest in, build, and operate digital systems that securely integrate millions of customers and customer-owned DERs into core operation and planning functions.”

The competitors examined who are working in the same field as Energy Web offered products in the form of dApps for the exchange of energy credits or dApps specifically designed as independent marketplaces for peer-to-peer energy trading in jurisdictions that have completely deregulated the energy market.  These appear successful at their own scale, but primarily serve isolated communities and real estate developments that are capable of experimenting with energy alternatives off grid.  As a layer-one ecosystem with its own virtual machine upon which enterprise partners can build their own products, EWT seems significantly more scalable and more appealing to the market participants who currently dominate energy distribution. 

Partnerships

The conversation around renewable energy is often contentious and presented as a dichotomous choice between green energy and outdated fossil fuels, with the debate polarized by unnecessary political overtones.  This is presumably because it has been framed in the past in terms of the wholesale – and unlikely – replacement of the energy sector by tech-centric alternatives, which is naturally an attack on conservative regions whose economies subsist on resource extraction.   Energy Web’s single greatest asset is its ability to bridge this divide by formulating a solution that incorporates renewable energy into distributed grids without fundamentally upending the existing order.  Three points on that subject:  

First, Energy Web was founded by the Rocky Mountain Institute, a non-adversarial think tank with a long history of collaborating with energy and utility companies to develop profitable, market-based innovations. 

Second, it has already partnered with energy and utility companies around the world to launch projects using EW-DOS – leaps and bounds beyond any competitors.  While similar projects are utilizing less ambitious technology to construct utopian energy communes outside the existing system, Energy Web is already working directly with Shell, GE, Siemens, PG&E, Elia, AES, Duke Energy, Eneco, AEMO, Equinor, and several dozen others in the industry to update existing grids in ways that are beneficial for all parties. 

Third, while EW-DOS exists on a permissionless utility layer, consensus occurs on a permissioned “trust layer” on which validator nodes are operated by 25 of these affiliate companies.  While such a short list of validators would ordinarily be considered a security risk for a layer one blockchain, this arrangement provides its own kind of security as it is unlikely that vetted, corporate validators will act in bad faith.  Perhaps more importantly, it maintains a system in which energy and utility companies are the major stakeholders and cements the Energy Web chain as a product both for and of these massive industries.

Quantitative Analysis

Energy Web has a market cap of $183,857,658 with an FDV of $611,592,090, and EWT has a circulating supply of 30,062,138 out of a max supply of 100,000,000 with no possibility of max supply increase. 

Tokenomics

Simply put, EWT has extremely advantageous tokenomics.  Energy Web never had an ICO, and there was no point at which the public purchased large amounts of EWT that could be dumped on the market down the road.  Its tokens were distributed in eight separate tranches, but these can be simplified to four distinct groups of token holders. 

Affiliate investors received 21,198,208 EWT. 
Founders received 10,000,000 EWT.
Validators will receive 10,000,000 EWT as block rewards over the next 10 years.
The Energy Web Foundation received 58,801,792 EWT for use in operations and the development of new technologies.   

The most significant observation about EWT’s token distribution is that nearly all stakeholders are directly invested in the functioning of EWT’s actual use case.  Investors were comprised almost entirely of the affiliate energy and utility companies with whom EWT has partnered.  The founders who received 10M EWT are not self-interested individuals, but the two organizations who collaborated to build EWT – Grid Singularity and the Rocky Mountain Institute.  Validators are also comprised of major corporations with a vested interest in EWT’s success, and the remaining token distribution went to the Energy Web Foundation, which is headquartered in Switzerland and thus forbidden from having shareholders or seeking profits.

Regarding inflation, staking rewards and community fund tokens represent 48M EWT and will be released over a ten-year period.  Community fund tokens have been slated to unlock at 3.79M per year, and block rewards will be released logarithmically at an average of 1M per year.  At 4.78 annual inflation of the circulating supply, EWT is highly competitive compared to most other staking-based blockchain protocols. 

Price Action

For the immediate future, conditions in the global energy market will be defined by the fracturing of supply chains that followed the Russian invasion of Ukraine, so the relative response of different protocols since that event on February 24th may offer some insight into future performance.  POWR and SNC are likely the closest approximations to EWT on the market – though not layer one protocols, both offer peer-to-peer energy marketplaces that should see increased investment as supply issues incentivize diversified forms of energy.  Wholly deregulated energy markets exist only overseas, so prices were denominated in BTC.  

Bitcoin has seen renewed interest since a bullish narrative emerged around the threat of weaponized financial sanctions, and EWT has moved in tandem with BTC even as its competitors fell increasingly behind.  This can be considered strong evidence that EWT’s unique approach to implementing distributed energy and its strong ties to existing industry make it the most likely beneficiary of changing conditions in the current energy market. 

This price action has taken place at a time of economic turbulence, before EWT has scratched the surface of its potential for widespread adoption, and while its price against the US Dollar increased by 17.45%.  It is the author’s belief that EWT will continue to continue to outperform even in the event of a BTC drawdown as it experiences wider adoption in the face of supply chain difficulties.

Price/Entry

EWT’s current price is $6.099.  As with other tokens, Energy Web is naturally correlated with the movements of the broader crypto market, and Bitcoin is currently at a range high of $45,000.  If BTC stays rangebound, other tokens will probably retreat as well, and $5.097 sits on a trendline between EWT’s daily lows and its confluence with the 0.618 fib level. 

While current catalysts exist to push EWT’s price up, it is important to remember that it also stands to benefit from a long and continuously unfolding process wherein companies in the utility and energy sector will inevitably incorporate developing technologies into their existing business.  In the short term, however, EWT exists as a solution to immediate and worsening problems with the world’s energy supplies and will likely attract increasing amounts of clients as these conditions persist.  Because of its involvement with an industry that performs one of the bedrock functions of society and its efforts to assist that industry in times of volatility and supply chain difficulties, Energy Web is very likely to outperform the majority of other crypto use cases in times of both inflation and economic downturn.

By Aidan Kalish | Crescent City Capital Market Analyst Intern

Decentraland is one of the first projects to utilize blockchain technology to power a virtual open-world platform. In it users can explore, participate in social experiences, and communicate with people from all around the world. Users can also create, experience, and monetize content and applications for fellow users. Yet this only scratches the surface of what makes Decentraland the revolutionary project that it is. Decentraland’s virtual world is considered a decentralized internet. Unlike traditional online spaces such as Twitter or Instagram, Decentraland allows people to truly own their digital assets. Using blockchain technology, users are able to make transactions on the platform itself and even buy plots of land located throughout the virtual world.

Decentraland was launched in 2017 by Ari Meilich and Esteban Ordano with the goal of creating an open-source system for users to build whatever they want within the virtual world. Whether it is a virtual store, social media platform or online casino, there are no restrictions or limits on what can be created in this decentralized space. Decentraland runs on the Ethereum blockchain but conducts transactions on a side-chain to combat scalability issues that can be found on Ethereum. Decentraland has a partnership with Polygon who provides the side-chain on the Ethereum network. This allows fast and very cheap transactions to take place within the virtual world. Decentraland is governed by its “Decentralized Autonomous Organization” (DAO). The DAO allows users to be in control of the policies created that determine how the world behaves. This is done by implementing a voting system where users can decide on a range of issues such as: the size of marketplace fees, specifics of land plot auctions and the allocation of grants to development efforts. Each user is allowed one vote per MANA token owned. This system allows the entire community to be involved in shaping Decentraland’s future.

A common question involving Decentraland is if it is the same as the metaverse. There are some similarities between Decentraland and the metaverse but there are some key differences between the two. The first is that the metaverse would be based on a centralized server system, meaning that the entirety of the virtual world exists online via a single computer system. Decentraland, on the other hand, is based on a distributed ledger system, using blockchain technology to store information on a network of decentralized computers rather than one sole server. This allows for increased security and reliability of data storage for users. The other difference is that the metaverse is still a concept to be built while Decentraland is one of the first iterations of the idea.

Decentralanduses two digital assets to run its economy: LAND a non-fungible token (NFT) that represents a parcel of land in which the virtual world is divided into; and MANA, an ERC-20 token that is traded on the Ethereum blockchain. LAND can only be bought with MANA. Every unclaimed LAND parcel can be purchased at the same exchange rate of 1000 MANA = 1 LAND (~$2,682 at the current MANA to USD exchange rate). Since LAND parcels are distinguishable from one another they can be traded at different prices on a secondary market. Currently, there is a total of 90,601 parcels of land. MANA is used to claim LAND as well as to make in-world purchases of goods and services.

The primary reason for buying a virtual plot of land is because of the return on investment (ROI) the plot offers. Since a LAND parcel is an NFT the owner truly owns the digital asset, and since it exists on the blockchain, its authenticity can be verified by anyone. The owner of a LAND parcel may decide to hold onto the plot and let it appreciate in value before deciding to sell it. Another option for the owner could be to rent the plot for exclusive virtual events. Many parallels can be drawn between LAND parcels and real world real estate such as functionality and possible revenue streams.

At the time of writing MANA has a market cap of $4.8 billion and a fully diluted market cap of $5.7 billion. About 1.82 billion MANA tokens, 82% of the total 2.19 billion supply, are currently in circulation. The token had one of the largest gains in the past year being valued at $0.08 on January 1^st, 2021 to reaching a high of $5.20 on November 26^th, 2021. Since hitting that high the price of MANA has fallen, opening on January 1^st, 2022 at $3.27 and at the time of writing is valued at $2.61. Despite its price crash, the popularity of MANA will likely rise among investors as major tech companies have begun to explore this emerging field, with Samsung partnering with Decentraland to open a pop-up store and special experiences within the virtual world. With the potential for collaborations with more big-name brands and the exposure that comes with them, Decentraland’s MANA token will likely continue to be highly profitable.

The utility of MANA has a strong appeal to those who are interested in being involved in virtual worlds. The MANA token allows the user to truly own the value of their time spent online as well as giving the user voting power in the DAO to help shape the future of Decentraland. MANA also has an appeal for those who want to further diversify a portfolio and are not looking to be directly involved with Decentraland. The MANA token can be invested in solely as a cryptocurrency which has a good track record of growth or as a means to invest in LAND parcels that can serve as a truly unique asset. Overall, Decentraland is still a very young project that is only beginning to what it has to offer. Investment opportunities will continue to multiply and as activity on the platform continues to increase, the currently low price of MANA helps support an argument for current investment.

Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. Please conduct your own due diligence before making any investment decisions.

References:

https://docs.decentraland.org/

https://decentraland.org/whitepaper.pdf

https://coinmarketcap.com/currencies/decentraland/