Category: Market Analysis

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/

By Chris Kilbourn | Crescent City Capital Market Analyst Intern

After weeks of turmoil, conflict, inflation, and fear, the crypto market seems to be getting a rare and gracious rest day.  Executive orders and FOMC meetings have come and gone, and almost three days have passed since the news cycle had anything new to report about war in Eurasia, cold or otherwise.  What better time to escape the doom and gloom and discuss crypto’s eccentric, right-brained auxiliary?  For just as digital gold promises to inexorably change the global financial order, and decentralized finance the face of lending, so too does the NFT space promise to change popular culture, and this week we see a minor turning point in that process.  As of this week, Larva Labs has sold the Crypto Punks franchise to the creators of Bored Apes, and the relationship between creators and consumers in this society may be forever changed as a result.

The crypto punks were neither the first nor the most refined NFT collection, but they seemed to generate the most commotion at the time of their release, and even today their appeal seems far more enduring than contemporaneous projects.  While Curio Cards and Rare Pepe NFTs have fetched $1.2M and $3.6M at auction for their status as early examples of crypto art, both are dwarfed by the prices commanded by the Punks.  Four of the top ten most expensive NFTs ever sold came from the collection, with one garnering a $23M price tag.  So what explains the mystique? 

A Punk’s Allure

Two explanations come immediately to mind, one aesthetic and one practical.  The obvious answer is that unlike ordinary tokens, the value of an NFT largely comes down to taste, and the Punks are genuinely valued for what they say.  Great art often gains traction because it grasps historical developments early and produces cultural artifacts that express the emotional experience of the societies undergoing them.  Just as Warhol used image to document the commodification of human life in a society where culture is mass produced, or Vaporwave artists employed auditory nostalgia to mourn the irretrievable loss of the analog world with the aesthetic language of the early tech that replaced it, the Crypto Punks seemed to encapsulate the time in which they were produced.

Their visual appearance – simultaneously interchangeable and unique – seemed to provide a self-aware commentary on a new system in which money isn’t just a condition for self-expression, but the very medium in which it takes place.  The creators chose to suggest crude characters from an early NES video game, conferring the sense of a technology at its absolute infancy that we paradoxically know in advance will someday take over the Earth.  For the same reasons that Curve is intentionally designed to feel like banking on Windows 3.1, the visual impact was very clear: to buy a crypto punk was to buy a piece of history before the history was even made, because Web3 is still in the Macintosh stage.  If that’s not enough to make someone drop the cost of a college education on a new profile picture, what is?

This leads into the other reason for the Punks’ appeal, and into the broader topic of the developing role that NFTs will play in the culture of Web3.  At the time that Crypto Punks were released, previous NFT projects had taken the form of games or collectible trading cards.  The Punks, generally resembling 8-bit mug shots of exotic and unsavory characters, proved ideal for profile pictures in the notoriously private crypto world of 2018, and thus introduced the idea of NFTs not simply as collectible art, but as a means for branding or self-identifying. 

The Commercial Rights Revolution

Yet while Larva Labs expanded the sphere of use cases for NFTs with this design breakthrough, their business model was essentially set up to limit their product’s utility beyond this simple application.  While buyers were entitled to ownership of their NFT punk and permitted to use its likeness for whatever non-commercial use they desired, the terms and conditions of all sales put defined restrictions on a user’s rights to the commercial use of their newfound property.  In essence, a purchaser could use a Punk as a profile picture, but any reproduction of their property for material gain was limited to physical goods, not digital, and limited to producing $100,000 of income per year before the user was required to seek a commercial license from Larva Labs.  For a token billed as a unique and non-replicable piece of property under the sole ownership of whichever wallet holder happened to purchase it, this seemed strangely restrictive of user property rights.

This system of commercial rights remained the norm until April of 2021, when Yuga Labs’s flagship NFT project was released – the Bored Ape Yacht Club.  BAYC introduced a policy of “You Own Your Ape,” in which Yuga granted users “unlimited, worldwide license to use, copy, and display” their NFT specifically for the purposes of creating derivative works to be independently marketed and sold.  This was enabled by Yuga’s main sources of revenue – through royalties collected every time an ape was resold.  By comparison, Larva’s marketplace had no fee structure in place, so no royalties were collected on an ongoing basis.  Larva’s only method of generating income was through separating ownership of the Crypto Punks from the commercial rights, retaining the intellectual property, and then licensing it to brands or products who wanted to use a punk as part of their own business. By creating a model in which revenue came from a source besides extracting value through intellectual property, Yuga ultimately emancipated the NFTs from centralized control and put the power of commercial use into the hands of their owners — potentially recreating an entire industry in the process.

The Future of Intellectual Property

By the same token that Bitcoin produced a digital ledger to establish ownership of currency, the technology underlying NFTs has introduced a system of property rights that applies to digital goods.  With this system in place, it’s now possible to put a price on something that exists only on the internet, and thus buy, sell, and own the intangible.  When Yuga purchased all rights to the Crypto Punks this week and converted them to the unlimited commercial license model, it certainly struck a blow for property rights in the NFT space by distributing the licensing ability to the rightful owners.  But the victory of this model represents significantly more than a user’s right to lease out his Twitter PFP. 

Because we are more likely to trust the opinions of recognizable voices to whom we already know we relate, the concept of celebrity endorsement is as old as advertising itself.  In the same way that the creators of Miquela experimented in 2018 with entirely fabricated celebrity in the form of a digital Instagram influencer, it’s easy to see how future franchises like the Bored Apes will develop stories and brand identities around entirely fictional characters and then use them to market to the demographics to whom they are designed to appeal.  With owners now granted unlimited commercial rights to the use of their NFTs, Yuga has done more than accumulate multiple billion-dollar NFT franchises, they’ve created an instrument through which brands themselves can be valued and sold.   

The next step on Yuga’s road map is to launch their decentralized NFT exchange, and while OpenSea’s dominance is unlikely to be challenged in that arena, Yuga may be positioning itself as the dominant broker in commercial NFTs – high profile NFT franchises designed to be used in marketing or brand collaborations.  It’s easy to envision an immediate future in which new protocols are developed that enable commercial NFTs to be leased out to advertisers for set periods of time, or even pre-defined levels of engagement.  It’s not difficult to imagine that in a world where all purchases are made on chain and can be easily scraped for data about purchasing habits, advertisers could factor analyze transaction histories, deduce demographic categories for the consumers behind them, and airdrop commercial NFTs calculated to appeal to them as a means of delivering targeted marketing material.  These are all hypothetical reasons why advertising is likely a colossal future use case for blockchain technology and an emerging sector to watch going forward. 

Epilogue: In the time it took to write this article, Yuga released a token called ApeCoin to serve their growing ecosystem.  It is up 1400% in the past 24 hours.

https://www.researchgate.net/publication/343060059_Vaporwave_A_e_s_t_h_e_t_i_c_s_Internet_Nostalgia_and_the_Utopian_Impulse

https://meebits.larvalabs.com/meebits/termsandconditions

https://cryptoslate.com/this-cryptopunks-nft-was-sold-for-8000-eth-23-million/

By Aidan Kalish | Crescent City Capital Market Analyst Intern

Polygon is a highly ambitious cryptocurrency project that intends to resolve some of the major challenges that Ethereum faces today. While Ethereum is the most popular hub for decentralized finance (DeFi) development, it has been burdened by issues such as high transaction fees and network congestion. Polygon looks to solve these issues by making transactions processed through its network significantly cheaper and faster than those made on the Ethereum blockchain.

Formerly known as the Matic network, Polygon was founded in 2017; the project experienced significant success in the last year after going through a rebranding. Polygon’s ecosystem currently boasts more than 7000 decentralized applications (dApps) including DeFi applications like Aave and decentralized exchanges such as UniSwap and SushiSwap.

Polygon is a Layer 2 solution which means that Polygon processes transactions within the Ethereum network rather than being processing those solely on the Polygon blockchain. Polygon supports two major types of Ethereum-compatible chains, stand-alone chains, and secured chains. Stand-alone chains are blockchains that are directly compatible with Ethereum while secured chains are blockchains that use “security as a service” by utilizing a pool of professional validators. Both chains use a proof-of-stake (PoS) consensus which helps to speed up transactions and reduce fees. Polygon can be thought of as an add-on to Ethereum operating on top of the network, allowing users to utilize the speed of Polygon along with the functionality of the blockchain itself. This results in the Polygon network being able to achieve 7,200 transactions per second (TPS) which is 480 times the speed of the Ethereum blockchain’s 15 TPS when used directly.

Polygon is powered by the MATIC token which is an ERC-20 token based on the Ethereum blockchain, allowing it to be stored in an Ethereum wallet. MATIC can be used to pay for services offered by the Polygon network but it can also be used for governance, staking, and the gas fees that occur. Transactions involving MATIC are only processed through the Polygon network which requires less computing power and in turn results in lower gas fees. These lower gas fees are appealing to dApps with a focus on Non-Fungible Tokens (NFTs) as a gas fee is necessary for an NFT to be minted. At the time of writing MATIC has a market cap of $10.3 billion and a fully diluted market cap of $13.5 billion. The token was one of the top gainers in the past year with a beginning price of $0.01 on January 1, 2021 surging to its high point at $2.92 on December 27. While at the time of writing the price of MATIC has fallen to $1.35 the token’s growth over the past year is evidence of increasing interest in Polygon and for potential future growth as well.

There have been many recent developments involving Polygon. Coinbase, one of the world’s biggest crypto exchange platforms has announced plans to integrate Polygon into their first scaling solution. DraftKings, a massive U.S.-based sports betting company has also recently announced the plan to launch an NFT marketplace on Polygon. Polygon’s low gas fees have attracted OpenSea, the world’s biggest NFT marketplace, which just recently integrated with Polygon. Polygon has enormous potential for consistent growth thanks to the numerous dApps and DeFi projects that are run on the Polygon network. Given the past growth of MATIC and the new ways Polygon is currently being utilized, the token may revisit its prior highs by the end of the year, despite its current fall in price. It is important to note that while the MATIC token may prove to be profitable relatively soon, its full profit potential may not be realized for years to come, thus making it a token to invest in now and hold on to for the long run.

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://polygon.technology

https://ih.advfn.com/crypto/Polygon-MATIC/chart

https://coinmarketcap.com/currencies/polygon/

By Chris Kilbourn | Crescent City Capital Market Analyst Intern

I. Thesis

The NEAR Protocol is a layer one blockchain network that uses a proof of stake consensus mechanism to validate its transactions.  It boasts higher than average throughput with lower than average costs, and its ongoing implementation of dynamic sharding as a scaling solution is likely to maintain these network benefits as it grows.  NEAR has the stated goal of building the infrastructure that will underlie web3 and it gears its ecosystem towards scalability, interoperability, and user experience towards that end.  Due to its coherent vision of the open web and active role in encouraging its development on the network, the NEAR protocol is likely to become a significant rival to other layer ones as the use cases it focuses on supplant the current internet structure. 

II. Qualitative Analysis

Metric Comparisons with Proof of Stake Layer 1s

As a layer 1 blockchain platform, NEAR is responsible for providing the decentralized infrastructure upon which the applications and networks in its ecosystem depend, and it utilizes a delegated proof-of-stake (DPOS) mechanism to achieve consensus among validators.  There are a variety of metrics upon which the strength of this mechanism can be gauged, and a number of these have been included below with the measures of comparable layer one protocols.  As NEAR uses a proof-of-stake consensus algorithm, it is compared here to SOL, AVAX, ALGO, and FTM on metrics that measure platform performance and decentralization.

Platform Performance (Transactions per Second and Time to Finality)

NEAR stands up well to other layer ones in terms of its throughput capacity, though this metric (transactions per second) is notoriously manipulable and subject to discrepancies in the ways protocols choose to take its measure.  Although time to finality (TTF) is itself affected by transaction volume, it may provide a better sense of network speed.  By this measure, NEAR finalizes transactions in approximately 2 seconds, faster than the strong majority of layer one blockchains.  NEAR’s theoretical speed of 100,000 TPS reflects its capacity when fully sharded, suggesting that TTF may remain highly competitive even after the network sees considerably wider adoption.  By both of these measures, NEAR is the second fastest of these networks.  

Decentralization (Number of Nodes and Nakamoto Coefficient)

NEAR’s speed is competitive, but this is perhaps enabled by sacrificing a degree of decentralization.   While not as poor as FTM, it nonetheless lags behind more established layer ones with only 100 nodes at the time of writing.  NEAR has, however, embarked on the second phase of its Nightshade sharding implementation and seeks to have 200-400 validators online by the time it is complete.  In order to encourage that process, the protocol recently reduced the seat price for a validator node from 3.6M NEAR to 67,000, thus reducing the barrier to entry and creating the conditions for more validators to come online. 

These metrics paint the picture of a layer one ecosystem that is competitive in terms of speed, security, and scalability but makes sacrifices in centralization.  This is perhaps a reasonable avenue to widespread adoption in NEAR’s case, as relative centralization is likely responsible for its current speed and the progressive unrolling of its scaling solution will enable it to further decentralize as it grows – potentially without losing throughput capacity.  NEAR plans to implement Nightshade in full by Q3 of 2022, so it may be worthwhile to continue observing and see whether its number of validators improves by then.

Non-Quantitative

Setting the above aside, layer one performance metrics are only indirect predictors of future revenue inasmuch as they signify an ecosystem’s attractiveness to users and developers.  As revenue itself is always a function of transaction volume, the number of users on a layer one is the true determining factor, and there are several unquantifiable variables that contribute to NEAR’s likelihood of success in this regard.  Chief among these are the stated emphasis on building an ecosystem tailored to web3 applications and the deliberate pursuit of network effect through composability and interoperability.

Emphasis on Web3

Simply put, the NEAR Foundation has a coherent vision of what life will look like on the open web and uses its $800M ecosystem fund to encourage web3 applications with real world use cases.  Examples are profuse.  Myriad is a social media platform with a secure chat app and 2D metaverse that can be accessed on mobile phones.  NearPay, a bridge between NEAR and fiat that comes with a debit card to be used in the real world, attracted 18,000 users in its first week.  DeBio is a platform for tokenizing data from blood samples and distributing them to labs around the world, allowing for anonymous, decentralized medical testing.  This degree of innovation is uncommon and contributes to the developer-centric community that NEAR has sought to create, while also establishing NEAR as a major competitor in the world which end users will ultimately inhabit.

Emphasis on Interoperability

One of the hallmarks of this world will be users’ ownership of their own content and identities and their ability to move freely between protocols that engage with this migratory data.  From a development standpoint, this means these protocols must be interoperable with other applications both on and off their native blockchains.  The NEAR Foundation vocally anticipates this and has focused on the interoperability of the NEAR protocol in a variety of different ways. 

Foremost among these is Aurora, an EVM-compatible layer 2 protocol that allows developers to run Ethereum-based applications on the NEAR blockchain.  The Aurora Network accounts for a sizable portion of the activity on NEAR at this stage and acts as a significant on ramp by which Ethereum users become acquainted with the ecosystem.  Through bridges with other layer ones (e.g. Ethereum, Solana, Terra, Fantom), Aurora is the means by which outside tokens can be transferred into the NEAR ecosystem.  To date, this primarily serves the purpose of collateralizing tokens for use in defi protocols, but CEO Illia Polosukhin has suggested in videos that as the technology progresses, this will enable the movement between chains and protocols by users with persistent identities – and the free interaction of disparate blockchain protocols.     

Another vehicle for cultivating such inter-chain communication is the Octopus Network, which provides a software development kit for app-specific blockchains that it subsequently links together.  While similar to Polkadot in its networking of autonomous layer one protocols, Octopus itself is on NEAR and all of the app chains it produces bridge to it out of the box. 

In sum, this paints the picture of an ecosystem with a clarity of purpose and brand identity that is growing in a more coordinated direction than any other layer one.   This executive planning is achieved through financial incentives that, to date, have gone primarily to infrastructure projects designed to create the conditions in which an open and community-based internet can thrive.  Through this emphasis on building towards the real world use cases that will be relevant to the lives of web3 users, it is highly likely that NEAR will attract builders who onboard new users into the space and ultimately contribute to its success. 

III. Quantitative Analysis

Tokenomics

NEAR has a circulating supply of 647.5M with a total supply of 1B.  The inflation due to rewards emissions is fixed at a rate of 5% per year, though 70% of transaction fees are burned, which ultimately detracts from the 5% inflation rate.  The amount of $NEAR burned will naturally go up as the network sees greater volume, so it is anticipated that inflation will trend downwards over time. 

Many of the tokens distributed during the token generation event follow an elaborate vesting schedule, contributing to additional inflation as locked tokens steadily become available.  These tokens were divided between a number of categories, to include core contributors, backers, small backers, community sale, early ecosystem, foundation, operations grants, and community grants. 

As several of the categories were divided between tranches with different lockup periods, and the amounts distributed to each tranche are unavailable, figures here were determined based on the longest lockup period per tranche and thus the worst-case scenario for inflation.  The reality is inevitably lower. 

Token Allocations and Vesting Schedules

Inflation Due to Token Unlock

Token unlocks follow an elaborate though predictable schedule, and thus staking emissions are compounded by the introduction of these tokens into supply.  As staking emissions are 5% per year, or 0.416% per month, estimated total inflation will be not higher than 2.75% per month beginning in April of 2022.  This is somewhat steep at 33%, though not unheard of compared to other layer ones (AVAX stands at 39.9%, for one example.)

When examining these token allocations, it bears mentioning that the foundation specifically avoided the concentration of stake by limiting the amount of Series A funding they accepted from any one source.  As a rule, no backers were given more than 3.5% of the initial supply, and few ended up with more than 1%.  Between this deliberate effort to reduce concentration of supply and the fact that any vesting cliffs are behind us, it is unlikely that NEAR will experience any pronounced dump due to the sudden introduction of supply. 

Price Action

NEAR has consistently outperformed since its initial distribution, though the case could be made that this coincided with an “alt season” in which excess risk was undertaken by a market flooded with liquidity.  Following a dramatic shift in market conditions brought on by macro policy changes, it is currently unclear how alternative layer ones will perform going forward.  This being the case, it may be more relevant to ask how NEAR will perform relative to comparable tokens. 

One way to measure this would be to compare price action since the Fed announced the drawdown of Quantitative Easing on November 3rd.  As this was the catalyst for the precipitous decline in crypto prices, NEAR’s relative price action during this period may provide insight into how it would fare in a more austere macro environment. 

Performance of Layer One Protocols November 3^rd, 2022 – Present

Terra is a clear outlier due to the performance of its Anchor defi protocol, but it is questionable whether this is sustainable or a reasonable indicator of its inherent value.  Among the remaining projects, NEAR saw the greatest increase in price since the Fed began tapering, notably outperforming Ethereum’s benchmark layer one price by nearly 50%. 

One possible interpretation of this data is that the volatility of a layer one’s native asset is proportionate to its exposure to defi applications.  Experimental defi protocols are a magnet for risk-on capital in search of short-term yields – referred to in other contexts as mercenary liquidity – which make them prone to severe instability.  FTM, which fell 49.12% in the period since November 3^rd, provides a counterpoint to Terra’s success, as its price has newly imploded since the failure of a high profile defi project last week.  These dramatic swings in layer one asset prices may be correlated with liquidity rapidly entering ecosystems in pursuit of the returns offered by specific defi projects, before exiting just as quickly after yields dry up. 

With liquidity likely to wane further amidst the continued tightening of monetary policy, this type of speculative capital may find more reliable yields elsewhere, and much of the noise clouding short term price action will likely quiet down.  At such a time, amidst the continued development of real-world use cases for blockchain technology, more and more of the new liquidity entering the space will come from users employing these native tokens to complete the transactions for which they were actually designed.  In this type of environment, NEAR, with its consistent and focused push for applications that onboard new users to the open web, will continue to show an edge over its competitors and emerge as a leading layer one protocol in the web3 era. 

By Nayan Bandaru | Crescent City Capital Market Analyst Intern

History 

The Terra ecosystem was initially created in 2018 to incentivize mass adoption of cryptocurrencies globally with a price-stable digital asset. Founders Daniel Shin and Do Kwon had the idea of using Terra as a payment processing method compared to credit cards with much fewer fees than merchants. Terra had the support of the Terra Alliance (15 massive e-commerce companies in Asia). They supported Terra and its vision of the project bringing adoption and engagement of a large payment network. In turn, allowing a bootstrapped blockchain payment network to scale to the size it deserves and create products and various use cases within its infrastructure. The real gold of the ecosystem lies in its algorithmic stable coins (UST, SDT, KRT) and the native token Luna. 

What are Terra and Luna

In the Terra Ecosystem lies a dynamic duo of Terra (I will only be talking about UST) and Luna. UST is the algorithmic stablecoin that stays pegged to USD 1:1 using an incentivized arbitrage system. Luna is the native token of the platform and users need to own Luna to transact and essentially do anything in the Terra Ecosystem. 

Stablecoins are cryptocurrency assets that track the price of a currency; in the case of UST, that underlying currency would be the US dollar. These stablecoins are meant to be used exactly like a traditional fiat currency, except they come with the added benefits of blockchain technology. UST can stay at a 1:1 ratio to USD because Terra uses the basics of supply and demand to keep the price stable.

How the stablecoin (UST) is able to stay pegged to USD

When the demand for Terra is high but the supply is lower than the demand, the price of UST increases compared to USD. The vice versa is true if UST demand is low with a large supply, the value of UST drops. The protocol actually balances the supply and demand of Terra to allow the price to stay stable. 

This happens because the protocol incentives the users of the ecosystem to burn their Luna and in turn mint Terra when the price of UST is higher than USD. 1 USD of Luna is worth 1 Terra (This is a very important aspect of the system that will be explained later). What this does is that by increasing the supply of Terra in circulation it begins to match the demand levels and the price decreases to its optimal 1:1 ratio. This works in reverse when the price of Terra is low compared to USD. Users are incentivized by the protocol to burn Terra and mint Luna, thereby decreasing the supply of Terra and increasing the price. These two processes are called expansion and contraction. 

For example: imagine that UST is trading at 1.01 and USD is worth $1. People can use the Terra marketswap feature to exchange 1 USD of Luna for 1 UST. Users then can sell their UST for 1.01 making a profit by mint Terra by burning their luna. This arbitrage continues until the price falls back to $1 and stabilizes. That same process works in reverse for contraction. 

Proof of Stake

Terra uses a proof of stake (POS)  consensus mechanism. POS works as users stake a cryptocurrency they become validators. Then validators are chosen at random to validate or mine the next block on the blockchain. 

Terra uses Tendermint consensus to validate blocks. A validator also known as a proposer is chosen to essentially add the next set of blocks to the blockchain. There are 2 rounds for a validatory to vote on whether to accept or reject the block and if the block is rejected a new prosper is chosen to start the process again. The validators have a copy of all the transactions made on the network, which they use to compare against the proposed new block of transactions to check validity. 

Terra only allows the top 130 validators to participate in consensus, and their rank is determined by the amount of luna that is bonded to them. Validators may bond luna to themselves, but also can get luna bonded to them by delegators (users that stake luna). Delegators are people who want rewards from consensus without having to run a full node. As a delegator, you can stake your luna to a validator adding to their weight and thereby receive a portion of transaction fees as staking rewards. 

Rewards are distributed in 2 ways. The first is through transaction or gas fees. Validators are allowed to set their own minimum gas fees. The protocol usually estimates higher gas fees than the minimum to ensure transactions are completed, however unused gas fees are not returned. Transactions on Terra are not queued by their gas amounts rather in sequential order of when they were received. Currently, users are able to earn around 19% APY when staking their luna. 

Tokenomics

Circulating supply: 363,213,183

Total Supply: 995,414,805

Total Stake: $32 billion 

Luna by nature is deflationary as the tokens used to validate transactions are burned. This creates a diminishing supply of luna in the long run. What is interesting is as the Terra ecosystem continues to grow the value of luna also grows with it, as the token is needed for any interactions. As UST and other stable coins garner more demand the price of luna continues to rise. That fact combined with its deflationary nature means luna has lots of potential upside even after its already massive growth. Luna is currently trading at $99 at the time of writing. 

Conclusion

The Terra ecosystem is a revolutionary protocol that keeps its stablecoins values pegged to their respective fiat currency through an arbitrage incentivization system. The total staked value of Luna exceeds that of ETH, and the token by nature is deflationary. I personally believe that Terra will continue to grow and capture portions of the market cap of USDT or Tether. We do not know what actually backs USDT and any form of crisis for USDT can further push the adoption of UST and in turn luna. I would love to see how the ecosystem and users continue to grow as the vision of becoming a mass payment processing method comes to life for the protocol. 

References

https://docs.terra.money/docs/learn/protocol.html

https://messari.io/asset/terra/chart/sply-circ

https://messari.io/asset/terra/profile

By Nayan Bandaru | Crescent City Capital Market Analyst Intern

Avalanche is an open-source platform for launching decentralized applications (DAPPS) and blockchains all in the same space. It uses the proof-of-stake consensus mechanism boasting extremely fast and secure transactions at high volumes per second. The nature of Avalanche is not limited to P2P transactions and Defi systems; instead, almost any type of DaPP can be built on the platform ranging from games to decentralized exchanges. AVMs (Avalanche Virtual Machines) make it very easy for developers to create DaPPs using GO. 

Avalanche was initially released in 2020 by a team of Cornell computer science researchers. They raised $6 million in their financing round and then had later token sales amounting to $48 million from public and private sectors. AVAX is the native utility token of Avalanche. At the time of this writing, AVAX has a current market cap of around $20 billion and a fully diluted market cap of nearly $32 million. In 2021 AVAX was trading around the $2 mark in early January before exploding to reach $148 in late November. That is a 7,300% return in the period of 11 months, showing how fast Avalanche has been adopted by developers around the world. Their ecosystem currently has over 170 projects and over doubled the number of projects in their ecosystem between April and September 2021.

Avalanche is a layer 1 solution that utilizes a 3-tier (X, P, C-Chains) blockchain system to overcome ETH’s limitations with congestion and high gas fees. The X-Chain is used for purely managing and trading assets. The P-Chain is used to coordinate validators, keep track of all active subnets, and allow for the creation of new Subnets. Finally, the C-Chain is the chain that allows for the creation of smart contracts.  At the moment, ETH and BTC can process around 10-45 transactions per second, whereas AVAX can process nearly 6500 transactions per second with sub-second transaction finality. ETH has a recommended finality time of nearly 1 minute; Avalanche has a massive advantage in that space; however, this may change with ETH 2.0 coming soon. Gas fees on ETH are a major complaint with fees averaging around $36 per transaction and scaling significantly with the price of the transaction. AVAX has fees costing on average pennies per transaction, again far ahead of ETH. 

You can stake AVAX currently and will be earning a 9.3% APY. You need a minimum of 2,000 AVAX for validation staking and 25 for delegation. The minimum lock-up period is 2 weeks and the maximum is 1 year for both validation and delegation. 

AVAX is currently trading at $78.07 at the time of writing and has significant potential to rise back to its peak. The crypto market as a whole has been bearish over the last few months due to the increasing pressure from the feds to raise interest rates. This led to overall market volatility and a sharp decline in risker assets such as growth stocks and especially crypto. AVAX saw most of its decline due to the market sentiment, but also in part to some investors taking profits despite high performance. Amid the Russia-Ukraine conflict, however, the crypto market has seen a quick surge and correction from recent lows. This may be due to the demand in Ukraine and especially Russia for more stable stores of value as the rubel continues to drop. Expect a slight correction as the conflict draws on, but the market seems to be consolidating attempting to make a large bull run soon. There seems to be a support for AVAX around $76, so look to buy if that breaks keeping in mind market sentiment. Timing the market is very difficult and risky, and only should be considered if wanting to take quick profits. Layer 1 solutions such as AVAX are investments that hold tremendous value in the long run, and therefore timing the market will not make a large impact in the long run.

References:

https://docs.avax.network/

https://cointelegraph.com/news/what-is-avalanche-network-avax-and-how-does-it-work

https://coinmarketcap.com/currencies/avalanche/

By Christopher Kilbourn | Crescent City Capital Market Analyst Intern

There are a handful of men with an E.F. Hutton-like grip on the defi world, and rest assured that if ever Tetranode consults on a project by Andre Cronje, it’s time to listen.  Himself the founder of the legendary Yearn Finance and the more recent KP3R protocol, Cronje’s latest effort sees him teaming up with the recently disgraced Dani Sesta for the latter’s attempt at a redemption arc after his willful and high-profile association with a serial con artist. 

Is Sesta’s involvement a blazing red flag? For our purposes today, the question might be irrelevant.  Many – perhaps most – defi protocols prompt the user to define for himself what exactly counts as a Ponzi scheme, anyway.  To those who believe in the future of decentralized finance, however, it’s an article of faith that the infrastructure of an alternative global capital market is being developed in front of us in real time, and the financial instruments we see emerging almost weekly in the first quarter of 2022 will someday come to define its major actors.  With a bit of effort, the focus can remain on the brilliance and novelty of the mechanisms themselves, regardless of whether they were originally designed for a get rich quick scheme by a huckster who commands an army of amphibious otherkin. 

This week’s experiment is the Solidly Exchange, and in keeping with Cronje’s previous work, it continues to play at the frontier of experimental tokenomics.  The major components in this department come from two existing protocols, from which it lifts and syncretizes elements to produce a new type of automated market maker (AMM).  These protocols are Olympus and Curve, and the mechanisms they contribute are (3,3) and (ve.) What follows is a brief refresher on the protocols themselves, and a bit more detail to familiarize ourselves with their unique methods of incentivizing protocol growth. 

Olympus (3,3)

As discussed in the above referenced piece, Olympus is a DAO launched last year with the lofty goal of operating as a de facto central bank and issuing a crypto-native reserve currency – a native token that could be used as a medium of exchange across the crypto world, backed by a basket of cryptocurrencies held in the DAO’s treasury.  Unlike the average defi protocol, the DAO’s ultimate goal is not price appreciation but the widespread and irrevocable integration of its native token into the innerworkings of decentralized finance.  Who could have guessed that a man named Zeus would be more interested in power than money? This certainly appears to be the game, though, and its tokenomics differ drastically from its predecessors to achieve that end. 

Nowhere is this departure more pronounced than in the area of emissions.  Where a protocol aiming to drive token price as high as it can go is forced to tame inflation, to increase a token’s supply without tanking the market requires a treasury to both encourage and mitigate it. 

In the case of Olympus, there is a mechanism in place for each.  Simply put, the bonding mechanism is designed to attract new liquidity into the treasury and issue new OHM in exchange.  Thus, as long as new liquidity is being bonded into the treasury, there is a perennial and corresponding expansion in the supply of OHM.  How then does the protocol manage to dilute its tokens so aggressively without placing enough downward pressure on the price to trigger a selloff?  On one hand, by its revolutionary concept of protocol-owned liquidity (POL), which places a “risk-free” floor to the token’s value, since the token is backed by the perpetually expanding treasury.  But the other method is in its approach to staking.

Enter the (3,3) meme.  (3,3) refers to the protocol’s tokenomic method of incentivizing staking using a model informed by its creator’s background in game theory.  To oversimplify the meme for the sake of brevity, when you have two hypothetical OHM holders who each have the option to stake, bond, or sell, the maximum benefit for all parties occurs when both stake their OHM and thus take them out of circulating supply.  The worst outcome is when both parties sell their OHM, both missing out on staking benefits and offloading at a presumed discount due to the universal sell pressure. 

The tokenomics put in place by the Olympus DAO incentivize staking over selling by diluting the circulating supply of OHM as aggressively as they do, then distributing an artificially inflated amount of tokens as staking rewards.  For all parties involved, holding without staking is hardly an option due to the relentless token dilution.  But more subtly, it becomes disadvantageous to sell, as well – with upwards of 8,000% APY return, it’s difficult to justify cutting off the flow of staking rewards as long as OHM isn’t in active freefall.  More on that another day, but suffice it to say that (3,3) as a meme refers succinctly to a system of enabling the aggressive expansion of supply through a tokenomics structure that incentivizes staking through POL-mitigated dilution.   

Curve (vE)

The second of SOLID’s intellectual forefathers is Curve Finance, and its contribution is the original system of vote escrow it applies to its reward tokens.   After the Bene Gesserit mind training of a crash course in OHM tokenomics, Curve is thankfully straightforward.  Simply put, it is an AMM specifically for low-volatility currency pairs, overwhelmingly used to provide liquidity for stablecoins.  The fees are low, the depth reduces slippage, and impermanent loss is virtually unheard of.  If ever you’ve dreamt of exchanging $7,000 in DAI for $6,998 worth of USDC, Heaven has an easily memorized URL and you can get there on the Metamask app.   

Where Curve gets interesting is in the incentives it offers liquidity providers and the unexpected arms race that developed last year over the tokens involved in their governance.  There’s a short list of places on the internet where you can exchange $15 Million in USD stablecoins with minimal slippage, and there’s a reason Curve is one of them.  The liquidity pools offer highly competitive rewards, with providers receiving trading fees and earning yield from the use of their deposits in other defi protocols. All rewards are paid in Curve’s native token, CRV.   

Where things get interesting is in the protocol’s system of governance.  Curve pioneered their own system of vote escrow, in which liquidity providers rewarded with the native token could lock their CRV on the smart contract in exchange for a governance token called veCRV.  The longer providers committed to lock their CRV, the more veCRV they would be rewarded with – and the more veCRV a provider had, the more influence they had over the governance decisions that affect the protocol’s functioning.

Chief among these decisions is the yields distributed to different liquidity pools.  In other words, if you receive CRV for providing liquidity on the CVX-USDC pair, you can lock that CRV and use your veCRV to vote for higher rewards for the CVX-USDC pair.  And if you happen to be a defi protocol who produces CVX – you can probably fill in the blanks from there. 

The Curve Wars began when protocols realized that they could use their own treasuries to provide liquidity on Curve for both yield and CRV, which they could use to privilege the liquidity pools of their native tokens with higher CRV rewards.   Convex Finance was formed for no other reason than to take advantage of this defi life hack, offering users rewards for staking their CRV not on Curve, but on Convex.  They ultimately grew to be the largest single holder of CRV, and voted CVX’s rewards through the roof, causing the price of the token to skyrocket – like a strange Dallas Buyers’ Club for LP rewards.  Arguably, however, the true winner was still Curve, who successfully implemented a vote escrow system that incentivized protocols to mobilize massive amounts of capital to compete with each other over who could provide the greatest amount of liquidity on their AMM. 

SOLID

Solidly is an AMM that implements both Olympus’s (3,3) tokenomics and Curve’s (ve) vote escrow system – but where Solidly differs is that it’s being launched with Curve-style protocol wars in mind, essentially designed to attract liquidity providers as its first priority.  Its launch took place earlier this week, and took the form of an airdrop to the top 20 FTM protocols by total value locked.  This means that these protocols will now compete to provide liquidity on Solidly, being rewarded with a heavily inflationary SOLID token which can be vote escrowed for veSOLID. 

The brilliance of this approach lies in its appropriation of Olympus’s inflationary (3,3) strategy.  Olympus designed its tokenomics to mandate staking and thus enable a long-term expansion of the OHM circulation.  It then employed its own protocol-owned liquidity system to amass OHM liquidity pairs in its treasury, and deployed these liquidity pairs to AMMs across the defi world to both earn trading fees and establish itself as a widely utilized reserve currency. 

When Solidly uses the same gambit on their own token, they won’t be amassing liquidity pairs to stake on other people’s exchanges – they’ll be producing a token that keeps score in an arbitrary race for protocols to accumulate as much as possible.  Because the amount of LP rewards a protocol receives will be solely determined by the amount of SOLID they have, there is no point at which they will not want more. 

Then, with liquidity provisioning being the only way to compete in this race, Solidly will have the deepest liquidity of any exchange on FTM and make the lion’s share of its revenue off of the trading fees from its highly competitive exchange.  Finally, by employing the vote escrow system by which governance rights are only granted when reward tokens are locked, they are providing an even greater incentive to stake and thus prevent the dilution’s downward pressure on price. 

The emissions schedule on SOLID is set to pick up dramatically within the next six weeks, which means staking rewards will begin to accelerate around the same time.  Whether or not Andre’s latest experiment will take off is as yet undetermined, but Solidly is certainly worth watching as its trial run unfolds.  Much like the vote escrow and (3,3) systems themselves, the Solidly approach could form a new model for decentralized finance which all future AMMs will follow. 

https://academy.shrimpy.io/post/what-is-olympus-dao-ohm-explaining-the-3-3-meme-bonding-and-stablecoins

https://olympusdao.medium.com/the-game-theory-of-olympus-e4c5f19a77df

https://dyor-crypto.fandom.com/wiki/Olympus_(OHM)

https://www.gemini.com/cryptopedia/curve-finance-liquidity-provider-dao#section-how-automatic-market-makers-work

https://coinmarketcap.com/alexandria/article/what-is-solidly-exchange-features-tokenomics-and-price-prediction