This week in crypto: Jan 3-9: What's behind a cryptocurrency price, NFT community taking control and more...
What’s behind a cryptocurrency price: comparing blockchains
Why are there so many blockchains? Why are there so many cryptocurrencies?
These are some of the most popular questions we hear from crypto beginners.
The answer is that the world needs multiple blockchains.
They aim at solving different problems, or solve one problem using different methods, and their different designs and marketing attract different types of developers and entrepreneurs willing to build different types of DApps (decentralized applications) on them.
Why do blockchains need a currency?
Apart from Bitcoin, which is largely used as a payment method and a store of value, the main role of most other blockchains is to allow the development of smart contracts, which in turn allows to host DApps.
Blockchain’s native cryptocurrencies act like fuel that makes the whole system work, incentivizing network participants to process transactions and maintain the blockchain. People using DApps built on these blockchains are usually required to pay transaction fees in blockchain’s native crypto, which creates a demand.
The more DApp users, the bigger the demand for the blockchain’s cryptocurrency, which eventually makes its price go up.
That’s it. So easy. Or is there more to it?
In practice people who buy crypto to pay a transaction fee influence its price less than people who buy it as an investment, expecting the blockchain to become more popular in the future.
How do investors choose within a plethora of blockchains? It’s not an exact science for sure, but the main points to be considered, in our humble opinion, are the following:
blockchain design and the problems it solves
ecosystem built around it
Blockchain designs and specializations
Most common denominator in all blockchains is a consensus – the way all nodes agree on the updates to the blockchain.
Bitcoin was the first one to propose a working consensus – the Proof-of-Work, which is also used by Ethereum (at least for now), but newer blockchains experiment with other types of consensuses, expected to improve blockchain’s scalability (number of transactions per second).
Out of the 10 biggest cryptocurrencies by market cap, 6 use some mix of Proof-of-Stake (nodes lock up a certain amount of the blockchain’s crypto to prove their honesty) and PBFT (nodes exchange a big number of messages to agree on an update) consensuses: BSC, Solana, Cardano, Polkadot, Terra and Avalanche. Ripple relies mostly on PBFT, while Dogecoin, being a fork off Bitcoin, naturally uses PoW.
The blockchains also often have their specialization: for Polkadot and Cosmos (20th by market cap) it’s interoperability, for Solana – gaming, for Terra – integrated algorithmic stablecoin, for BSC – perks and smooth integration within different Binance services… The specialization becomes clear as more DApps are being developed and used.
A good way to measure blockchain’s usefulness is to take a look at its ecosystem, i.e. DApps and interfaces developed on it.
There are over 3000 DApps built on Ethereum, with top 10 generating over $112Bn of trading volume monthly (mostly DeFi DApps, but also NFT marketplace OpenSea are the leaders). BSC and Solana are breathing down Ethereum’s neck (on some metrics BSC has even surpassed Ethereum, with its top 10 DApps now generating over $248Bn monthly).
Data aggregators like DappRadar are a helpful tool in getting an idea about a blockchain’s ecosystem.
DApps, however, take time to be developed, and the ecosystem can change drastically from one day to another. One of the ways to assess blockchain’s potential is to look behind the scenes.
Web3 projects are often open source, which makes it rather easy to track developers’ activity, and that’s exactly what a crypto VC firm Electric Capital has done. For its 2021 developer report the firm’s analysts have analysed a big number of public repositories and compiled them into very interesting graphs (the figures may not be exact, since closed source not included). Here’s the review of the crypto space overall.
Blockchain-wise, Ethereum, Polkadot, Cosmos, Solana and Bitcoin ecosystems have the biggest number of developers in 2021.
Among the ecosystems with 300 to 1000 developers, Solana has the fastest growth: almost x5 since last year, and a promising new blockchain NEAR (key features: sharded PoS, user-friendliness, metaverse-oriented marketing) has seen the number of its developers increased x4.
Finally, among the ecosystems counting 50 to 300 developers the biggest 2021’s successes were Internet Computer and Terra.
Crypto is code + community, and even if marketing efforts matter, in the end of the day it is the code that counts. It is not always obvious to assess by the people without IT skills, but luckily the open-source crypto space can give enough data: from blockchains’ white papers to the number of DApps developed, to the number of developers contributing to different blockchains.
Now you have them too 😊
Art and NFT
The most interesting NFT event of the week was undoubtedly the rebellion of the Pudgy Penguins community.
Frustrated with its founders’ incapacity to develop the project and their greed (they were reportedly willing to sell an empty company for as much as 888ETH), some of its most active members deployed a smart contract allowing to lock in the Penguins and to receive “Wrapped Penguins” - basically the same characters, but with royalties going to the community instead of the initial owners.
Now, each time a Wrapped Penguin is sold, 3% of its price go to a multisig wallet controlled (at least temporarily) by 4 community members, with the proceeds to be used to buy back the Intellectual Property rights from the initial owners, in order to dismiss them completely from the project. You can read the full story here.
It all happened really quickly: the scandal bursted on Wednesday, Wrapped Penguins smart contract deployed and Wrapped Penguins listed on OpenSea on Friday, several special artwork NFTs to support the movement minted and sold since then. There are currently 380 Wrapped Penguins on OpenSea.
Whether or not the Wrapped Penguins project or a dedicated community DAO ultimately gains traction, the fact that NFT communities can rebel against poor leadership and control their destiny is another proof of crypto space’s ingenuity✊
The year didn’t start so well for the Bitcoin price. It has lost additional 12%, bringing the total price loss since the November’s $69k all-time high to -39%.
Market sentiment is largely dominated by fear, but we’d like to zoom out and remember that exactly one year ago Bitcoin price was at the same level… but back then it was an all-time high and market was euphoric.
We don’t usually turn to graphs to find solace, but the weekly chart might be drawing a huge ascending price channel, and the analysts agree that $40k level is now key to understanding what Bitcoin could do next.
Bearish analysts believe that the Fed hinting at the soon raise of interest rates - a generally constrictive event for investors - will lead to big money pulling out of Bitcoin, making its price slump even further.
Bullish analysts believe that updated US inflation rate that should be announced this week would confirm the dollar’s further depreciation and highlight Bitcoin’s value as a hedge, which could make it bounce off the channel’s bottom and start rising.
Ethereum, although having a different role from Bitcoin, still often follows its price movements, showing that its investors are still more influent than its users. Its price has fallen -16% since the beginning of the year, marking -35% loss since its all-time high of $4’870 in November.
$3k is now Ethereum’s support level, which is still impressive, considering that one year ago ETH was worth only $1.3k.
Quote of the week
“I believe that cryptocurrencies – with bitcoin as a standard – offer a protection against this onslaught of the government, because you’re protected by math. You’re protected by the limited number of any code behind the respective currency. Cryptocurrencies, and all the products related to cryp"tocurrencies, are absolutely vital for the future development of our world.”
Garry Kasparov, the greatest chess player in history