Analysis & Opinions

This Week in Crypto: A Data Perspective (July 6- 12)

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While Bitcoin has stagnated the last couple of weeks, there have been some exciting developments going on with other top tokens. Leveraging blockchain’s transparent nature, IntoTheBlock is able to extract valuable insights, providing a data-driven analysis of the news about the top cryptocurrencies. 

This week, we will cover two much-anticipated protocol upgrades: Cardano’s Shelley and Kyber Network’s Katalyst. We will analyze on-chain activity for these two tokens and the implications of their respective upgrades. As well, we will dive deep into the recent growth in DeFi led by COMP’s yield farming and discuss some of the risks associated with this. 

Cardano’s Shelley Upgrade Generates Optimism

As the Cardano Virtual Summit came to an end on July 3rd, there has been an advancement of major developments and announcements regarding the upcoming Shelley upgrade. One of the largest steps taken towards the Shelley hard fork was the deployment of the first mainnet node on July 1, as covered on CoinDesk. Up until then, Cardano had been running an incentivized testnet. On July 7, the mainnet code was rolled out to the general public.

IOHK — the research company led by Cardano’s founder Charles Hoskinson — also announced the release of a decentralized identity system, Atala Prism, and a $20 million Cardano development fund. As well, they announced a partnership with Coinbase Custody that will enable users to stake their ADA tokens, prompting speculation of a potential listing on the San Francisco-based exchange. 

Based on Cardano’s roadmap, the Shelley upgrade will allow it to become 50 to 100 times more decentralized than other large blockchains. The upgrade also rolls out a Proof of Stake consensus mechanism that lets holders to earn ADA tokens through staking. With all of these developments, Cardano’s Shelley upgrade is a major milestone towards its “Ethereum-killer” ambitions. 

Along with all of these announcements and releases, there has been an increase in price activity as one may expect from the crypto space. Cardano’s ADA token is up over 250% year-to-date, reaching levels not seen since August 2018. Despite still being down 90% from it’s all-time high, the majority of ADA addresses are making money on their positions as stated on IntoTheBlock’s In/Out of the Money indicator.

As of July 7, 2020 at 7PM (EST) using IntoTheBlock’s In/Out of the Money

The Global In/Out of the Money metric uses machine learning to identify the most relevant clusters of addresses based on the average price at which they have received their tokens for. If the average price is less than the current price, the address is considered to be “in the money” as they are profiting on their position, at least on paper. The fact that the majority of Cardano holders are in the money points to the likelihood that new addresses bought ADA at lower prices and long-term holders accumulated to drive their average cost lower. 

Furthermore, by analyzing the number of addresses with a balance of ADA we can corroborate that new addresses have been buying at lower prices. As we have shown in the image below the total number of addresses with a balance has been growing at an increasing rate throughout the second quarter of 2020:

As of July 7, 2020 at 7PM (EST) using IntoTheBlock’s Addresses Stats

Overall, Cardano appears to have hit an inflection point with its Shelley upgrade. Whether ADA’s price drops with a case of “buy the rumor, sell the news” following the hard fork on July 29 is still unknown, but on-chain indicators point to holder optimism and network growth as the date approaches. 

Kyber’s Katalyst Launches 

DeFi’s superb growth throughout 2020 could be narrowed down to one word: incentives. As covered in my analysis of Bitcoin on Ethereum, the ability of DeFi protocols to come up with systems that align their project’s health with token holders’ interests has propelled the growth of DeFi tokens throughout 2020. This week, the decentralized exchange Kyber Network released a major upgrade incentivizing token holders to participate in decision-making and liquidity providers — referred to as reserves within the Kyber ecosystem — to supply tokens to be traded on the exchange.

Kyber Network’s anticipated Katalyst upgrade launched on July 7 as announced through an official blog post. The upgrade features a few main updates to the Kyber ecosystem. Amongst these is the introduction of the Kyber decentralized autonomous organization, KyberDAO. Through the KyberDAO, holders of Kyber’s native KNC token are now able to vote in protocol proposals having a direct impact on the path taken by the protocol. 

KNC holders are incentivized to vote (or delegate their vote) through staking rewards. In order to do so, a user simply has to connect their wallet to the platform review proposals and vote for the desired outcome, or select a trusted user or address to vote on their behalf.

Contrary to most staking procedures executed by other DeFi projects, Kyber holders will receive rewards in ETH as opposed to the protocol’s native token. 65% of the fees that Kyber Network’s decentralized exchange charges will be distributed to stakers in proportion to each voter’s KNC holdings. This incentivizes token holders to play an active role in the path of the protocol while decentralizing its governance.

In addition, 30% of the Kyber network fees will go towards offering rebates to the decentralized exchange reserves. Reserves act as market makers supplying tokens for platform users to trade. Through these, Kyber incentivizes the creation of more reserves and professional market making activity, promoting higher liquidity to strengthen the network. 

Even though KNC’s price has dropped since the release of the Katalyst upgrade, on-chain indicators signal robust growth for the underlying network. For instance, the number of daily active addresses reached a two year high on July 3.

As of July 7, 2020 at 9PM (EST) using IntoTheBlock’s daily active addresses for Kyber

The number of daily active addresses has not been this high since April 2018. Similarly, the number of KNC transactions reached a two year high a few days ago as can be seen in the graph below:

As of July 7, 2020 at 9PM (EST) using IntoTheBlock’s transaction stats

The number of daily KNC transactions has averaged 3,970 over the last week, representing almost a 10x increase versus the number seen at the beginning of 2020. Overall, anticipation for the Katalyst upgrade has evidently led to on-chain growth for Kyber’s underlying network, similarly to how Shelley has affected Cardano. Ultimately, now that the upgrade is live, we will see if the growth in on-chain indicators derived from speculation, or if the changes implemented actually lead to more users joining the network and better liquidity for the decentralized exchange.

DeFi Value Locked Surpasses $2 Billion as COMP Leads the Way

Total value locked has become a widely-followed barometer of the growth in decentralized finance (DeFi). The reasoning behind this is that traditional tech metrics like daily active users do not properly reflect the value captured in DeFi, as these protocols do not rely on third party advertising and thus do not depend on grabbing as many eyeballs as possible. Instead, DeFi projects offer financial services which are generally backed with user collateral, which is locked in smart contracts. Because of this, total value locked has quickly become one of the most followed metrics in the DeFi space. 

Earlier this year in February, total value locked surpassed $1 billion for the first time. Despite dropping by almost 50% during the market-wide crash dubbed as Black Thursday, this amount has continued increasing, hitting new highs throughout June and July as shown in the image below:

As of July 7, 2020 at 11pm EST using DeFi Pulse

Observing this graph closely, we can spot an inflection point in mid-June coinciding with Compound’s COMP token release. Within less than a month after, the total value locked in DeFi protocols managed to double. This has been largely because of the incentives users receive through so-called yield farming

In a nutshell, yield farming is the process of earning rewards in the form of tokens and/or interest in return for providing liquidity to a DeFi protocol. The concept has been around since the summer of last year when Synthetix rewarded users for providing liquidity to its derivative sETH pair on Uniswap by paying them with their native SNX tokens. However, it was not until the launch of Compound’s native token COMP that this became a popular practice and buzz word within the crypto space. 

In Compound’s case, users are able to yield farm by borrowing or lending tokens to the protocol, receiving COMP tokens in return. Given COMP’s current price of around $180, the incentives received in tokens have been large enough for users to profit from borrowing money despite having to pay interests on their loans. As a result, users have rushed into Compound, increasing the total value locked in the protocol by more than 6x since this release to over $650 million. 

Some people in the space have praised this practice as a DeFi “growth hack.” Analyzing key on-chain insights, we can evaluate the effectiveness that yield farming has had in increasing COMP’s adoption. For instance, let’s observe how the number of holders has varied since the token’s inception. 

As of July 8, 2020 at 12am using IntoTheBlock’s newly-added COMP analytics

As can be seen in the graph above, the number of COMP addresses with a balance has quickly risen from near-zero to over 10,000 within less than a month, effectively capturing a sizable community and decentralizing token ownership from the get-go. To put this in perspective, BitFinex’s token UNUS SED LEO (rank 15 on CoinMarketCap) has less than 2,000 holders, while MakerDAO’s MKR has 22,000 despite launching in November of 2017. 

While Compound’s capability to incentivize quick adoption and decentralization of its token has led DeFi’s recent growth, it does not come without risks. Some of the risks to consider with yield farming COMP and DeFi in general include potential hacks, loan liquidations, unpegging of stablecoins (which tend to be used as collateral) and depreciation of the tokens received as rewards. I will not dive into the details of these risks here, but it is imperative for readers to research them if they intend to use DeFi protocols. Ultimately, though, COMP yield farming is a great example of how DeFi protocols are managing to grow as a result from incentives, but it is important to keep associated risks into consideration. 

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The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.

ITB is a tribe of data scientists, cryptocurrency experts and AI geeks that set out on a journey to unlock the mysteries of crypto assets and provide investors with relevant intelligence about the market.

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