Ethereum Exchange, Beacon Chain, And Smart Contract Supplies
Summary
– The MVIS Smart Contract Leaders index rose 4% this month, with most of the gains happening in the last week.Ethereum led the sector, up 14%, largely due to short covering.
– Interestingly, since the September merge, an increasing proportion of Ethereum outstanding has either been locked in smart contracts (DeFi, +$3b since the merge) or staked to the Beacon chain (+$1.3B).
– October saw the launch of Aptos (APT), the latest high-profile attempt to build a monolithic blockchain promising a better mix of speed & cost than Ethereum.
– The MV Infrastructure Applications Leaders Index rose 10% in October, led by continued relative strength from Quant Network (+26%) and Polygon’s MATIC token (+15%).
In October, crypto asset prices traded in a tight range, with Ethereum outperforming major stock indices, bonds & most commodities (except heating oil & gasoline).
Crypto asset prices traded in a tight range in October, with Ethereum especially outperforming major stock indices, bonds & most commodities (except heating oil & gasoline), even as value stocks beat growth stocks for the month.The most likely reasons for digital assets’ positive performance were 1) the U.S.dollar DXY index fell in October for only the second month in the last ten months; 2) Elevated short interest and a strong equity market prompted more than $2b in leveraged short ETH & BTC positions to be liquidated on major exchanges during a three day period mid-month, including the largest daily sum since July 2021; 3) Republicans’ odds to control the Senate rose sharply in October, implying a lower chance of the US congress passing harmful regulation after the midterms; and 4) UK lawmakers voted in favor of adding crypto to the scope of activities to be regulated via a proposed Financial Services and Markets Bill, the first legislative attempt by new, purportedly pro-crypto prime minister Rishi Sunak.
For the month, ETH rose 14%, Nasdaq +4%, the MVIS Smart Contract Leaders Index +4%, and Bitcoin +4.5%.
Staying on the prospects of further dollar weakness, Saudi Arabia and China have reportedly discussed pricing some oil sales in RMB, according to the WSJ.Russia’s Secretary of State told a legal forum on October 20th that Russia would “bypass” the EU’s crypto-related sanctions and would “provide businesses with the ability to carry out cross-border settlements” making use of “cryptocurrencies, the digital ruble, or a hybrid.” And even as Egypt devalued its pound and sought IMF protection, new central bank governor Hassan Abdalla touted a new currency indicator (including gold but not the USD) meant to wean people off the U.S.
dollar: “America is not my major trading partner,” he lamented.“I don’t know why people are always fixated on the dollar.” Vietnam, Nigeria, Argentina, Lebanon and China all devalued in October; all of them but Lebanon rank in the top 20 for crypto adoption, according to Chainalysis’ recently updated global crypto adoption index.
Since 2009 and especially post-2020, governments, not corporate or households, have driven most of the growth in global debt.
Thus, we continue to believe that government (and thus FX) failures will mark this cycle, highlighting Bitcoin’s appeal as a neutral, supply-constrained reserve asset that can be used as both a stranded energy sink and a geopolitical negotiating tool by frontier states with unique domestic politics.We will be speaking on this topic at the “Adopting Bitcoin” conference in El Salvador later this month, with the aim of putting some specific probabilities on countries’ likelihood of adopting Bitcoin as legal tender.(For those still making the argument that digital assets are a Ponzi scheme compared to military-backed Fiat, we note that long-term inflation-linked gilts are now down 79% from their peak, exceeding the peak-to-trough decline in the Bitcoin price.
Fourteen major currencies have declined more than 20% vs.the dollar this year.)
Meanwhile, amidst the tailwinds of the weaker dollar in October, we noticed some meaningful examples of mainstream adoption of crypto payment rails in the month.
– Cash App users can send and receive payments in BTC via the Lightning Network.
Previously, the app could only send on-chain BTC payments.(Currently, the feature is available across the U.S., except for New York State.)
– Visa filed several crypto-related trademarks, including one on October 22nd, that would clear the way for Visa’s distinctive character mark to be used in software “to view, store, monitor, trade, send, receive, transmit and exchange” crypto assets and NFTs.
– Google introduced its new ‘blockchain node engine’ business, which will offer a “fully managed node-hosting service,” starting with Ethereum; Coinbase was announced as the first major customer in a deal that will see Google accept crypto for some of its cloud computing clients.
– Western Union filed three trademark applications with the US Patent & Trademark Office for cryptocurrency and digital-asset related activities, including management and maintenance of digital currency and electronic wallets, exchange operations, and issuance of “tokens of value.” A recent IMF report highlighted that the highest remittance fees are paid by the world’s poorest citizens.
– Fidelity said it would hire 100 more people in its digital assets division, bringing the total headcount in the group to more than 500 by the end of Q1.
– Nubank, a Brazilian neo-bank listed in New York with a $23B market cap and Berkshire Hathaway as its 5thlargest shareholder, announced plans to launch its own cryptocurrency early in 2023.“Nucoin” will be used as a “new way to recognize customer loyalty and encourage engagement with Nubank products.” Holders will receive discounts and other perks.
– MetaMask, the leading self-custody wallet with 30 million monthly users as of April 2022, added instant bank transfers according to its key backer ConsenSys.“Instant ACH allows orders to complete in minutes instead of days like a standard ACH order and works on holidays, unlike regular ACH,” ConsenSys said in introducing the new method.
“Instant ACH is more likely to work as paying with cards may be declined in 50% of purchases,” according to the company.
– BNY Mellon, the nation’s oldest bank, said it would begin receiving clients’ cryptocurrencies in October, becoming the first large US bank to safeguard digital assets alongside traditional investments on the same platform.The bank is using software developed with Fireblocks.
|Digital Asset||Market Cap||7 Days||30 days||90 days||365 days|
|Bitcoin||$396.1B||1.9%||4.5%||-10.3%||-66.4%|
|Ethereum||$195.3B||8.0%||14.2%||-2.4%||-63.5%|
|Digital Asset Index||Market Cap||7 Days||30 Days||90 Days||365 Days|
|MVIS® CryptoCompare Decentralized Finance Leaders||$8.7B||3.44%||6.00%||-26.81%||-78.10%|
|MarketVector™ Centralized Exchanges||$57B||13.40%||13.20%||5.40%||-40.53%|
|MVIS® CryptoCompare Infrastructure Application Leaders||$17.9B||1.06%||8.00%||-0.45%||-74.98%|
|MVIS® CryptoCompare Media & Entertainment Leaders||$6.1B||6.20%||-9.70%||-27.20%||-86.25%|
|MVIS® CryptoCompare Smart Contract Leaders||$253.7B||7.24%||4.20%||-12.83%||-77.14%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
Smart Contract Platforms:
The MVIS Smart Contract Leaders index rose 4% this month, with most of the gains happening in the last week.Ethereum led the sector, up 14%, largely due to short covering, as noted with the liquidation data above.As for fundamentals, despite continued lackluster volumes on-chain (demand), ETH supply has grown only +0.16% since the September migration to proof-of-stake, with negative supply growth in October.This compares to Bitcoin supply +1.7% and a 3.6% ETH inflation rate under the old proof-of-work algorithm.Defi (30%), NFTs (23%), MEV applications (2%), and layer 2s (2%) comprise the largest sources of the ~56,000 ($~84M) ETH gas fees burned in October.Interestingly, since the September merge, an increasing proportion of Ethereum outstanding has either been locked in smart contracts (DeFi, +$3b since the merge) or staked to the Beacon chain (+$1.3B).Ethereum available for sale on exchanges, conversely, has fallen by more than 1%, or $2.5B.
In aggregate, Ethereum captured more than 75% of total fees paid for all space on all open-source blockchains in October, and has gained market share since the merge.
Ethereum Supply
Source: Glassnode, as of 11/1/2022.
Among competing layer 1 protocols, October saw the launch of Aptos (APT-USD), the latest high-profile attempt to build a monolithic blockchain promising a better mix of speed & cost than Ethereum.Founded by Avery Ching and Mo Shaik, who worked on Meta’s Diem project.Aptos differentiates itself from competitors by using “parallel execution” and the Move language.Parallel execution allows for multiple, simultaneous transactions to execute at the same time, allowing—theoretically—for faster speed overall.
However, there are some tradeoffs to this approach, notably seen in the performance of the similarly parallelized Solana blockchain, which has had several outages this year.One difference is that Aptos smart contracts are natively written in Move, a Rust-based language initially designed for the Diem project.Move prioritizes security and scalability and consistently ranks among developers’ favorite programming languages.
On the general topic of Layer 1 blockchains and whether the ‘fat protocol thesis’ is still intact: despite the poor price performance this year of most crypto assets, developers continue to release meaningful upgrades to the open-source code of layer 1 protocols.This developer activity, which can be tracked using public github repositories, has increased year-to-date for every smart contract leader aside from Solana.
Indeed, the ratio of developers working on these smart contract leaders, relative to those working on open-source blockchain protocols overall, has recently reached an all-time high, as seen in the below chart.We see this as an indication of consolidation amidst the crypto winter.
Smart Contract Leaders Are Taking Developer Mindshare
Source: Artemis, Santiment as of 9/25/22.Past performance is not indicative of future results.
Smart Contract Activity Scores And Weekly Developers
|Dev Activity Score||YTD Growth||Average Weekly Devs||YTD Growth|
|Ethereum||328||289.98%||244||9.09%|
|Polkadot||410||222.72%||320||34.15%|
|Cosmos||355||1193.23%||180||50.00%|
|Cardano||769||864.16%||329||45.02%|
|Near||173||480.77%||135||38.14%|
|Tron||21||329.41%||19||318.18%|
|Avalanche||138||557.82%||56||52.94%|
|Solana||183||-58.09%||130||-82.15%|
|Algorand||80||14.96%||70||3.37%|
|Fantom||6||114.29%||8||-57.14%|
Sources: Santiment, VanEck Research as of 10/30/2022.Past performance is not indicative of future results.
Not a recommendation to buy or sell any of the names mentioned herein.
|Marketcap||30 days||365 days|
|Cosmos||$3.99B||17.30%||-38.04%|
|Ethereum||$195.26B||14.3%||-63.21%|
|Avalanche||$5.45B||12.92%||-85.63%|
|Waves||$0.39B||-8.82%||-88.59%|
|Internet Computer||$1.44B||-12.26%||-75.40%|
|NEAR Protocol||$2.54B||-13.16%||-89.17%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
Infrastructure Applications:
The MV Infrastructure Applications Leaders Index rose 10% in October, led by continued relative strength from Quant Network (+26%) and Polygon’s MATIC token (+15%).
Polygon launched its zkEVM (zero knowledge, Ethereum Virtual Machine) testnet on October 10th.ZkEVMs are a key part of Ethereum’s scaling roadmap that improve throughput by transferring computation and state storage off-chain.ZK rollups submit transaction data to Ethereum along with zero-knowledge proofs, which verify the validity of off-chain transaction batches.Early ZK-rollups lacked the ability to execute smart contracts and were constrained to simple token swaps and payments.
But, with the introduction of EVM-compatible zero-knowledge virtual machines, ZK-rollups are starting to support Ethereum dApps.Polygon’s zkEVM testnet comes amidst heavy competition but few available token options.ZkSync, another contender in the zkEVM race, launched an updated version of their scaling solution that is EVM compatible, and has been promoted as the first-ever “product-ready” rollup with a zkEVM.However, public access will be limited until the end of the year, and there is no token yet.
Polygon also benefited from its partnership with Reddit, which introduced the second generation of its NFT avatars in October.Reddit whitelisted independent artists from within the Reddit community to create the avatars and paid a share of all primary and secondary sales to creators.
The avatars can be used as profile pictures on the platform and give users access to new profile animations.Reddit’s first generation of avatars was released in July and took a few weeks to sell out.Their second collection launched on October 21st and all 40k avatars were sold on the first day.The ability to own an avatar in a password-protected “vault” rather than a crypto wallet and not marketing the avatars as NFTs are two factors that led to the success of the collections.At the TechCrunch disrupt conference, Reddit chief product officer Pali Bhat revealed that users created more than 3 million Polygon-based Reddit Vault wallets to store their NFTs.
The combined market cap of Reddit Avatars now exceeds $100M.
Infrastructure Application Performance
|Marketcap||30 days||365 days|
|Quant Network||$2.04B||25.78%||-40.73%|
|Polygon||$7.94B||14.53%||-54.02%|
|Arweave||$0.52B||12.62%||-80.83%|
|Loopring||$0.37B||-6.65%||-74.10%|
|The Graph||$0.60B||-14.36%||-77.75%|
|Helium||$0.53B||-18.46%||-86.13%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
DeFi:
The MV Decentralized Finance Leaders index rose 5.6% in October, with makerDao’s MKR (+17%) Uniswap’s UNI (+14%) and Aave (+16%) leading gains.
MakerDAO is the largest defi protocol by TVL ($8.15 billion) and issuer of the DAI stablecoin, which has a $6.2 billion market cap.In October, MakerDAO members voted in favor of an “endgame” proposal by founder Rune Christensen, who wants to make the protocol more decentralized and resistant to censorship, such as the Tornado Cash sanctions.
While the voting process itself was criticized for a lack of decentralization, as Christensen influenced 63% of the votes backing his proposal, it appears likely that MakerDao will vote to split into a number of MetaDAO clusters, each with its own governance token.The “endgame” also proposes that MakerDao begin to buy staked Ethereum (stETH) in order to build a balance sheet that can serve as collateral for a non-dollar-backed algorithmic stablecoin in the future.Note that the Endgame is a long-term gambit; in the short-term, MakerDao delegates recently voted to move $500M worth of DAI tokens into short-term US treasuries and corporate bonds, custodied by Swiss digital asset bank Sygnum, which will issue the funds into a portfolio of BlackRock ETFs.MakerDAO also voted in October to custody $1.6B with of the DAO’s USDC coins with Coinbase in return for an annual 1.5% reward, another example of lines blurring between DeFi and real world assets.
In other DeFi news, Aave Companies, one of the contributors developing the Aave protocol, has released a technical paper on Aave’s upcoming GHO stablecoin, along with the results of its first security audit.
GHO is a decentralized, over-collateralized stablecoin that was proposed in July.Aave plans to stabilize GHO via algorithm and on-chain governance, depending on the different “facilitators” minting GHO and on the collateral pledged by borrowers, to set an appropriate rate.Facilitators refer to protocols or entities whitelisted by AAVE governance to mint and burn GHO tokens.Since Aave will employ an overcollateralization strategy, it will rely on arbitrage and monetary policy to stabilize GHO.
When GHO is below $1, borrowers will be incentivized to purchase GHO at a discounted price and repay/liquidate, profiting on the difference.Conversely, when GHO is above $1, users are incentivized to borrow GHO and sell it on the market, repaying their loan once GHO stabilizes and profiting from the difference.Because GHO is minted via borrowing on the protocol, GHO cannot be used as an asset on the supply (lending) side.Also, the borrow interest rate will not dynamically adjust by the usual supply and demand mechanics.
Instead, Aave Governance will set the GHO interest rate, adjusting the borrow interest rate and the discount rate depending on the collateral pledged in order to expand or contract the GHO supply.
GHO is designed to accrue interest when supplied to a liquidity protocol.
GHO will have a lot of ground to cover in order to gain market share over its established competitors like Dai.However, Aave’s position as the largest DeFi protocol could help accelerate the growth of GHO’s demand and turbocharge the security and decentralization of AAVE since stkAave holders can mint GHO at a reduced interest rate.GHO’s first facilitator, the Aave Protocol, will initially allow users to mint GHO using deposited assets on its lending market.This may limit the amount of GHO that can be minted due to overcollateralization requirements.But, once GHO has shown to be stable and having sufficient demand, minting could potentially be carried out using delta neutral positions, real-world assets (RWAs), or automated market operations (AMOs), whether by the Aave Protocol itself or by another facilitator.
We look forward to talking with Aave founder Stani Kulechov at a VanEck event in London on November 9th.
Lastly, in DeFi, Mango Markets (MNGO), a decentralized finance platform hosted on the Solana blockchain, was exploited for over $100 million by DeFi trader Avraham Eisenberg, who called the attack “a highly profitable trading strategy.” The gambit was enabled by Eisenberg’s manipulating the price of the native MNGO token threefold higher on an illiquid venue and then taking out a $116M loan, leaving Mango’s treasury with a negative balance.Eisenberg later negotiated a settlement with Mango leadership, which enabled depositors to be made whole while Eisenberg kept $47M.The attack raises legal and ethical questions about whether market participants need to consider the intentions of the code-writers and not just the code itself.Blockchain analytics firm Peckshield estimated 44 exploits grabbed $760M in ‘stolen funds’ in October, a record, bringing the YTD total to $3B, double last year’s sum.In a poll on Twitter, podcaster Laura Shin asked, “Is code law?”: 44% of the respondents voted “hell yeah” vs.
56%, “hell no.” In the wake of the Mango Markets attack, Solana’s TVL dropped 23% to $997 million from $1.32 billion.
|Marketcap||30 days||365 days|
|Maker||$0.89B||16.62%||-64.04%|
|Aave||$1.19B||15.95%||-73.97%|
|Uniswap||$5.21B||13.98%||-72.19%|
|Curve||$0.51B||3.68%||-80.11%|
|PancakeSwap||$0.68B||0.61%||-75.06%|
|Compound||$0.35B||-18.77%||-86.67%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
Metaverse:
October metaverse land sales reversed lower after a positive September.Aggregate land value fell 8% in October, with APE’s Otherside continuing to command the highest average sale price of 3.5 ETH, down from the 4.5 ETH it averaged at the start of the month.Decentraland and NFT Worlds were the only metaverses that saw increases in volume (11.6% and 4.8%, respectively) over the past 30 days.
Recent news articles have highlighted the lack of users in Decentraland specifically, something the platform hopes to turn around in November with their Metaverse Music Festival from the 10th-13th.These platforms continue to explore product market fit with regard to curated experiences.
NFT trading volume across major blockchains was mixed this month, with only ImmutableX, Polygon, and Avalanche seeing increases in trading volume of 107%, 44%, and 30%, respectively.NFT trading on ImmutableX was mainly driven by their genesis game, Gods Unchained, which accounted for over 90% of the $21.4 million of volume.ImmutableX also announced mid-month that they would reward NFT traders up to 100k IMX tokens per day to incentivize activity on the network.The increase of NFT volume on Polygon was largely a result of the popularity of Reddit’s Collectible Avatar NFTs discussed above.Avalanche’s NFT trading growth was supported by OpenSea integrating Avalanche NFTs in its marketplace and the launch of an NFT farming game, Chikn Farm.
Despite these developments, the NFT volume on Avalanche was still less than 1% of the total NFT volume over the last 30 days.Solana experienced the largest decline, with NFT trading volume falling by 39%.
Blockchain Share Of Monthly NFT Volume
Source: Cryptoslam, VanEck as of 10/31/2022.Past performance is not indicative of future results.Not a recommendation to buy or sell any of the names mentioned herein.
|Marketcap||30 days||365 days|
|Sandbox||$1.31B||5.98%||-59.12%|
|Chilliz||$1.21B||5.03%||-49.82%|
|Audius||$0.19B||1.88%||-90.78%|
|Basic Attention Token||$0.45B||1.34%||-71.11%|
|Decentraland||$1.25B||-4.49%||-78.60%|
|Axie Infinity||$0.96B||-24.88%||-93.34%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
Centralized Exchanges:
Centralized exchange tokens continue to perform well, up 6% in October, with low volatility thanks to FTX and BNB’s continued market share gains and attractive buy-back-and-burn tokenomics.
In September, Coinbase spot trading volumes fell 18% to the lowest levels since January 2021, while competitors OKX, Binance, and FTX saw their spot volumes rise 24%, 8%, and 5%, respectively.
Meanwhile Huobi token (HT) paced sector gains +106% in October after HK-based About Capital announced plans to buy a majority stake in the 8th largest exchange globally.While the transaction of an undisclosed amount crowns About Capital as Huobi’s new controlling shareholder, the exchange stated that core operations and the existing management team would remain unchanged.Justin Sun, the Tron co-founder and reportedly a major investor in About Capital, also announced he would be joining Huobi’s global advisory board, prompting the Sun’s Tron (TRX) token to outperform most layer 1s in the month.
|Marketcap||30 days||365 days|
|Huobi Token||$1.39B||105.81%||-7.73%|
|KuCoin||$0.97B||10.22%||-42.63%|
|OKB||$0.96B||4.32%||-33.69%|
|BNB||$45.92B||4.17%||-39.83%|
|FTX Token||$3.27B||1.19%||-60.96%|
|Cronos||$2.82B||-3.56%||-45.10%|
Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 10/31/2022.
Past performance is not indicative of future results.
Not a recommendation to buy or sell any of the names mentioned herein.
Disclosures:
An investment in the strategy is subject to risks which include, among others, regulatory, general investment and trading, opaque spot market, digital assets, digital asset exchanges, investing through DEXes, stablecoin, OTC transactions, valuation and liquidity, cryptocurrencies lending, digital asset lending and borrowing, DeFi lending of digital assets, digital asset lending programs offered by certain CeFi and DeFi exchanges, rebasing of digital assets, credit, credit market illiquidity, third party wallet providers, loss of private key, volatility and speculative nature of digital assets trading, digital asset network protocols and software, digital asset network malicious actors, forks and airdrops, digital asset miners ceasing operations, cybersecurity, computer malware and viruses, data loss, incorrect transfer of digital assets, initial coin/pre-sale initial coin offering, synthetic investments, options, futures, forwards, lack of blockchain company operating history, blockchain company failure, short selling, leverage, limited diversification, non-U.S.securities, and counterparty risks.
The views and opinions expressed are those of VanEck.Fund manager commentaries are general in nature and should not be construed as investment advice.Opinions are subject to change with market conditions.Any discussion of specific securities mentioned in the commentaries is neither an offer to sell nor a solicitation to buy these securities.
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