Executive SummaryOutlookBitcoinEthereumAlternative BlockchainsDecentralised Finance (DeFi)Conclusion
Thursday, 4 August, 2022
The Digital Investor
Ethereum Leading Market Recovery
After the prolonged downward trend of cryptocurrency prices for almost all months this year, July 2022 has been the time of recovery for the crypto markets. The total market cap increased by 24%, and it is now once again more than USD 1 trillion. The upward rally was led by the smart contract platform, Ethereum (ETH), gaining 58% in one month, followed by Bitcoin (BTC) at 21%. All assets in the SEBA coin universe have generated a positive return in the last 30 days, with DeFi as a sector outperforming others.
Table 1: Performance of SEBAX and SEBA universe coins as of 1 August 2022
Source: SEBA Bank, Coin Metrics
The SEBAX® Index, a selection of blue-chip cryptocurrencies, has also recovered in the last month by 31%. During the same time, alternative smart contract platforms such as Avalanche (AVAX), Solana (SOL), and Polkadot (DOT) have recovered more than Bitcoin but less than DeFi tokens, Uniswap (UNI), Aave (AAVE), Synthetix (SNX), and Yearn Finance (YFI). It is essential to note the year-to-date (YTD) performance of all assets in the SEBA coin universe are still negative, with Synthetix losing the least by 35% and Avalanche losing the highest at 78%.
Figure 1: 90-Day Rolling Correlation of Bitcoin with NASDAQ and VIX
Source: SEBA Bank, Investing.com
Cboe volatility Index (VIX), commonly referred to as the ‘fear gauge’ of the US (United States) stock market, shows the future 30 days of expected volatility in the market. It is low when the stocks are in the uptrend and would rise only when the fear in the market is growing. BTC still has a long way to go to be termed as an uncorrelated asset. The chart below shows that BTC has been increasingly correlated with Nasdaq and inversely correlated with VIX. This goes to show that Bitcoin does not perform well when the overall sentiment in the US stock market is risk-off, a far cry from a safe haven asset.
After three consecutive months of negative returns for the apex digital asset - Bitcoin, July 2022 has been the best performing month of the year, with gains of 21%. Unlike previous positive performance months that were led by Bitcoin and followed by Ethereum and alternative cryptocurrencies, several smart contract blockchain assets and decentralised application tokens have performed better than Bitcoin in the last one month.
Figure 2: Bitcoin network mining difficulty and daily miner revenue in USD
Source: SEBA Bank, Coin Metrics
The difficulty adjustment directly correlates with the estimated mining power required to run the network. The total hash rate was on a downtrend since the all-time high in June of 2022, given the falling price of bitcoin and the increased electricity cost, resulting in reduced miner revenues.
Ethereum has been building momentum in July towards its much-anticipated move to proof-of-stake after years of discussions and hard work. Ethereum has outperformed Bitcoin and other leading smart contract platforms in the SEBA coin universe with 58% returns in the last month. The Ethereum merge is in the final stages of testing, with only one more testnet, Goerli, to be executed by the second week of August 2022. After testing this last testnet merge, there will be a mainnet merge with a tentative timeline of September third week.
Figure 3: Ethereum supply issuance over time
Source: SEBA Bank, Coin Metrics
Ethereum proof-of-work mining will become absolute after The Merge is executed. Ethereum miner revenue on an annual basis has been higher than Bitcoin in the year 2021, which is still the case this year. But soon, the miners will be replaced by staking validators, which will drop the mining revenue from double-digit USD billion to extremely low numbers or zero. The following chart shows the increasing share of the new fee mechanism of the network.
Figure 4: Ethereum transaction type adoption after the implementation of EIP-1559
Source: SEBA Bank, Coin Metrics
Among the alternative platform blockchains, Avalanche (AVAX) has outperformed in the last month with 48% returns, followed by Solana (SOL) at 29% and Polkadot (DOT) at 28%. Layer 1 blockchain ecosystem is a highly competitive space. Blockchains like Avalanche, Polkadot, Solana, Tezos, Near, and others are competing for developers, users, innovative new apps, partnerships, and even funds in some cases. One way to compare these ecosystems is to compare their current usage.
Table 2: On-chain activity of leading smart contract blockchains
Source: SEBA Bank
A perfect blockchain has users’ and miners’/validators’ interests perfectly aligned. Blockchain revenue fuels validator interests and incentivizes innovation through public goods funding and the onboarding of talented developers. In July, Solana and Ethereum had the highest number of developer commits. Albeit this metric is only quantitative and not qualitative in nature.
Decentralised Finance (DeFi)
The decentralised finance (DeFi) sector has outperformed layer one blockchain protocols in terms of one-month price performance. It was led by Yearn Finance (YFI), which is up 100% in the last 30 days in anticipation of their V3 launch within the next two months that will have improved tokenomics and optimised yield generating strategies. This is followed by lending and borrowing protocol, Aave (AAVE) generating 74% returns, the most prominent decentralised exchange, Uniswap (UNI) generating 72%, and Synthetix (SNX) making 60% for the month.
Figure 5: Total value locked (TVL) across decentralised applications on multiple blockchains
Source: SEBA Bank, DeFiLlama
The on-chain activity for DeFi tokens has been positive on monthly basis in terms of daily active addresses and new addresses for all assets in the SEBA universe. The daily count of transactions has been up for Uniswap and Aave over the last month, but Aave token saw negative growth in transaction size measured in US dollars.
Figure 6: Stablecoin supply of multiple tokens on different blockchains
Source: SEBA Bank, DeFiLlama
Stablecoins gained immense popularity in the last two years as DeFi summer began in 2020. Stablecoins are essential for adoption of DeFi and provide a base for swap or interaction between different coins. 2020 saw an influx of experimentation in the form of algorithemic stablecoins but that experiment failed to a wider market contagion. Investor confidence was shaken and trust in centralised audited stablecoins was reinforced. As a result, the leading stablecoin USDT circulating supply has been reduced by almost 20%, and USDC has gained 10%. The total supply of stablecoins in the market continued to increase, although bitcoin and other crypto asset prices have decreased since November 2021. It is only after the fall of Terra Luna; that the overall supply has been reduced.
The much-needed recovery in the crypto market was seen in the month of July 2022. It has been the best performing month for Bitcoin since October 2021, and Ethereum has led the rally with alternative platform blockchains also generating higher returns than bitcoin in the last 1 month. Decentralised Finance (DeFi) sector has outperformed layer one blockchains based on double-digit growth in key on-chain activity indicators as well as positive news around the development of these projects.
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