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Hi everyone, After my post on Inflation and Cryptocurrency, I received a lot of requests asking me to analyze other areas of the Crypto market. I figured that I would tackle Decentralized Finance and the two major areas of crypto functionality within DeFi. What is Decentralized Finance (DeFi)? The internet isn't any one thing, its a beautiful and incredibly elaborate series of connections between servers. Everything on the internet needs to be stored somewhere, traditionally that meant stored either on a personal computer, a personal server, or as a small part of a massive server farm hosted by a tech company. The issue with this setup is that the owner of the server, if left unrestricted, can determine exactly what is hosted on their hardware. This fear of potential and real censorship has led the push towards a decentralized internet hosted on a trustless foundation. A system that is secure. This idea has spread throughout the niches of the internet economy. The target of the system is decentralized finance, or how to commodify the internet to allow for a decentralized flow of money. There are two main areas that this overlays with crypto, the first, like Bitcoin, a currency, is primarily an asset, the second, like Ethereum, is primarily a platform for functionality. Before we get started, let me quickly run-through some factors that I used to determine the Fundamental Analysis and subsequent Technical Analysis. Fundamental Analysis: Fundamental Analysis is attempting to put an accurate price on a item based upon an objective calculation of its worth. This is normally a nebulous number that roughly correlates to its in-kind purchase power if transferred to a universally traded currency. It answers the question of, given the ability to buy its competitors, what is the value of this good in a fair market setting. Fundamental Analysis generally seeks to answer whether the current price is overvalued or undervalued. Some Fundamental Analysis include:
Best sources for Fundamental Analysis data: https://research.binance.com/en/projects Technical Analysis: Technical Analysis is to Fundamental Analysis as a crystal ball is to a NYSE ticker quote. Technical Analysis is the attempt to predict the market value of an item given all the outside factors that influence it. A technical analysis is generally done when historic numbers are used to predict future trends. Correlation analysis, candlestick patterns, and social media references are ways analysts assess a coins technicals. Technical analysis generally seeks to predict the future price of a coin. The White Paper This, often overlooked, gem is the thesis behind the coin. This is the coin's reason for being and the market space that it intends on owning. A coin with an undefined white paper is a coin with an undefined answer, namely to the question, what makes you so special? It contains:
Valuation and Bubbles A bubble can occur when there is a deviation between the Fundamental Analysis, what something should be worth based upon its own merits, and the Technical Analysis, where the market places the item's worth based upon outside factors. The idea of a bubble occurring is driven largely by projected future value and real future value. Both types of analysis seek to explain the market evaluation of an item. A quick word on bubbles and bitcoins. This hits on tokenomics, or the inherent value of the coin based on its function as a store of value, unit of account, and medium of exchange. A coin's risk can be determined by its degree of usability, valuations, inflation rate of the coin, information surrounding the design team, and volume of fees (indicating a rough level of willingness for people to trade coin for other currency). Two major System Types: Proof of Work (POW): The basis for traditional Cryptocurrency, where a complex equation is solved, providing the equation solver with a unit of currency. The currency gains intrinsic value through the value of the expended energy used to complete the equation. Thus, the tie between energy and currency allows the valuation of the currency. Examples: Bitcoin (BTC), Ethereum (ETH) Pros:
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Proof of Stake (POS): The newer version of POW, favoring efficiency over whole-chain verification. Ouroboro’s Genesis-based POS relies on actors providing collateral to verify reduction of tradable coins in the marketplace. Traditionally, verification was performed through a reduced version of POW, where a portion of the blockchain is recorded and used to verify that the owners had not spent the stake. A second method of verification involves creating a lag time between when the currency being un-staked and the ability to spend the coins. Examples: Zilliqa (ZIL), Cardano (ADA), Polkadot (DOT) Pros:
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So lets get to it: The industry leader: Ethereum (ETH) – March 22 Functionality: DeFi Platform Network: Ethereum Cryptocurrency: Ether Market Cap: $203.87B
Transaction Count: 1.21M Average 24 hour transaction fee: $16.07 Tech: Proof of Work (ETH). Proof of Stake (ETH 2.0) Oversite: Decentralized Ethereum is the prototypical alt coin. Second only in Market Cap to Bitcoin, but with an amazingly versatile and proven functionality that bridges the gap between currency and utility. It was launched as a type of global computer that allows platforms to build upon it, utilizing its computational capacity for their business functionality. It was made to scale the blockchain technology, and its done a great job so far. Utilizing smart contract technology that triggers when the outlined terms are met, ETH's smart contract functions as a decentralized broker that eliminates the need for traditional financial middlemen. Pros:
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The competition: Ripple (XRP) – March 22 Functionality: Currency (Unit of exchange) Network: Ripple Cryptocurrency: Ripple Market Cap: 25.3 B
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Tech: XRP Ledger Consensus Protocol Oversite: Centralized by Ripple Ripple was founded 2004 by Ryan Fugger. Ripple Protocol, outlined in Ripple’s 2018 Whitepaper, describes its model for using the Byzantine Agreement system in conjunction with decentralized trust. XRP was started by the folks at Ripple, and finished through open source collaboration. As a coin, XRP does not achieve a traditional system wide consensus and is instead powered by a ledger based consensus. These ledgers are, in part, managed by the company itself through their verification system. Ripple has done a commendable job diversifying their ledger owners, referred to as Unique Node Lists(UNL). Ripple has an extensive list of partners who have adopted their tech, and are growing at an impressive rate. XRP supports a number of functionalities including: Payment channels, escrows, deposit authorizations, a decentralized exchange, amendments, and invariant checking. Pros:
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Stellar Lumens (XLM) – March 22 Functionality: Currency (Unit of exchange) Network: Stellar Cryptocurrency: Lumens Market Cap: 9.09 B
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Tech: Stellar Consensus Protocol Oversite: Decentralized nodes Stellar, was founded by Jed McCaleb, a co-founder of an earlier coin, Ripple. The Stellar White-Paper explains the reasoning for the currency and the market gap it seeks to fill. Stellar seeks to create a word wide financial network, ensured through a Stellar consensus protocol (SCP) built around a decentralized trust model called the Federated Byzantine Agreement (FBA). Through implementing its decentralized trust model, SCP, the Stellar system seeks to ensure:
Technicals: Unlike competitors, XLM seeks to fix POW’s latency, trust, and security problems through their SCP model. It’s worth noting that XLM’s SCP model was built before Ouroboro’s Genesis. XLM allows individual users to select trusted nodes, separating them from Ripple’s earlier attempt to create master sheets with trusted nodes. Rather than individually selected by users, the master sheets employed by ripple ended up transferring the byzantine system of authority from ripple to the sheet owners, leading to sheet owners maintaining control over the term “trusted nodes” within Ripple. The XLM model diverges from the decentralize admission Ripple attempted in an important way, rather than relying master node lists that are editable, FBA relies on a consensus between decentralized nodes. Turning different nodes into individual owner’s elected officials that verify transactions for them. Thereby allowing for a decentralized consensus along with all the benefits of the Byzantine Agreement. This change, according to XLM, allows their model to create the decentralized consensus that achieves their goals of decentralized control, low latency, flexible trust, and asymptotic security. Pros:
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Cardano (ADA) – March 22 Functionality: DeFi Platform Network: Cardano Cryptocurrency: Cardano Market Cap: 32.62
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Tech: Stellar Consensus Protocol Oversite: Decentralized nodes Cardano was founded by Charles Hoskinson, a co-founder of Ethereum, and was launched in 2017. The main goal of Cardano was to solve Bitcoin’s speed and rigidity, while also addressing Caradano’s stated issues with Ethereum’s scalability and safety. Technicals: Cardano, unlike Bitcoin, uses a Proof of Stake (POS) rather than Proof of Work (POW). This difference rewards the first rather than the most powerful, a system known as Ouroboros Genesis, where miners can rejoin their chain and continue where they ended. The goal of POS through Ouroboros was to reduce the amount of energy needed compared to BTC and ETH, which both use POW. Secondly, like ETH’s ecosystem, the second layer of the Cardano is a layer similar to ETH, enabling using the system for smart contracts and applications. Cardano’s POS and computation layer, when combined, offer the benefits of BTC’s security and ETH’s functionality. Pros:
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Final Thoughts World Computer: DeFi has a lot of room for multiple coins. The current enterprise space is littered with blockchain tech supported by the largest tech giants. Unlike ETH, these ecosystems are unlikely to be as secure and are limited by the security of its founder. This security also comes in the form of potential censorship, either by the company or through regulation. For this reason, its likely that the blockchain functionality through a decentralized currency has real utility. In that light, the functionality allowed through the adoption of ETH and ADA is here to stay. Between the two, there is enough space to support both coins, especially as the ADA model seeks to promote exchanges in developing countries. However, the transition to ETH 2.0 presents an incredible opportunity to reduce ETH's marketshare. ADA's superior latency and fees, paired with its proposed functionality will make ETH's competition market share based. The release of ADA's second tier is likely to come before ETH 2.0 is fully implemented. The impending switch to the POS model will likely keep many ETH users on the ETH network, but the high fees may cause newer adopters to prefer ADA's system. Either way, ETH has something that ADA does not, a fully functioning system, while ADA does not have a scalability problem and is likely to arrive on market as a full POS. They are both likely to increase in value, as neither coin is the other's Deus Ex Machina. Currency: In regards to utility, Ripple and Stellar are likely to continue their battle as a secondary exchange. Ripple, with their recent scandals attached to their network, has an uphill battle to regain trust. Stellar has the advantage in number of transactions, which can largely be attributed to the reduced fee structure. XRP, while supported by Ripple, is not a humanitarian effort, and the efforts to commercialize the coin has landed them in hot water with the FEC. Ripple's profit seeking nature gives it a higher likelihood of price growth, as they have little incentive to act in the best interest of the system as a whole. Stellar, while a non-profit, is more likely to seek out adoption regardless of the price. This lack of accountability to Ripple owners gives Stellar the ability to plan long term and sacrifice short term gains for long term strategy. Between the two currencies, I foresee a split in effectiveness. XRP will most likely bring the most profit from holding in the short term. The adoption rate of XLM will continue to surpass XRP and will eventually allow for continued compounded growth. The latency and reduced fees of XLM will entice retail investors, while XRP, over the long term, will most likely attempt another white paper pivot towards hosting on its functionality rather than facilitating exchange. Any data, text or other content on this page is provided as general market information and not as investment advice. Past performance is not necessarily an indicator of future results. Edit: Coindesk listed incorrect market cap for XLM & XRP, Thanks to commenter who pointed out. **CoinDesk does not seem to be a reliable source for Market Cap Data** -For those interested, Coindesk, Coinmarketcap, Coinbase. -XLM Consensus as of 3/22/22, around 9.1B- -XRP consensus as of 3/22/22 at 25B- submitted by /u/Ameri-CantBeWrong |
