#21 On basic crypto metrics, regulation in the Russia, regulation in USA and decentralized social media
What are the most basic metrics used in crypto? Market cap, TVL, floor price...explained. Also, regulation in Russia and the US, doxxing and Solana
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Snapshot of crypto metrics.
Alex (@somospostpc on Twitter) sent us a link last week suggesting a possible topic to cover in this newsletter. The article is ”How Much Money is Flowing into Crypto?” and it’s a brief and straight to the point hypothesis on a way to calculate how much money is entering the space through stablecoin creation. You should read it, but it does require some familiarity with basic crypto metrics.
We thought: “how about we provide a snapshot of the most basic metrics in crypto? We could give a quick intro to the main indicators usually featured in headlines and present them with definitions and caveats for a safe toe-dip.” So, here it goes.
Cryptocurrencies
Price and market cap are probably the most popular of all crypto metrics. They often portray a horse-race scenario where coins/tokens compete to have the highest number, so it’s good to understand their actual meaning and limitations.
The price of cryptocurrencies is determined by supply and demand. There isn’t a centralized source of information providing the info; just a fast-paced market of buyers, sellers (and arbitrageurs) achieving a certain level of consistency across platforms.
Market capitalization, or market cap, is the total theoretical value of a cryptocurrency at a moment in time. It is calculated by multiplying the unit price by the number of units issued.
Often some crypto projects will be evaluated by people according to the market cap of their tokens, disregarding other relevant aspects like liquidity or volatility. Shiba Inu currently stands at $0.00003 and has a market cap of ~$1,6B. But if holders were to suddenly lose faith, or stop finding the meme funny, and start selling, both metrics could sink drastically in a matter of hours.
Price and market cap are also sometimes used as a proxy to the value of a blockchain, but there are relevant differences between a blockchain and its token. For example, while the Ethereum token has a price and market cap (~$3k and ~$370B at the time of writing), the market cap of the whole blockchain should probably add the aggregate totals of all the ERC-20 tokens that run on the Ethereum blockchain. That would shoot the total market cap to the sky, based on the (very often fragile and unreliable) valuations of all the other tokens.
Probably, market cap is not the best way to measure a blockchain’s worth. Blockchains are complex systems where other numbers such as active developers, projects, wallets, or, indeed, the native token’s price, better service to estimate overall health.
Exchanges
An exchange is a platform that allows customers to buy or sell cryptocurrencies for other assets, including conventional fiat money and/or other digital currencies. Binance and Coinbase are two of the most popular ones, although they have become huge companies with a broad scope of products and services that make them look more like the crypto versions of traditional banks. Exchanges can be classified according to the type of asset traded in them (spot or derivatives) or to the degree of centralization (centralized, or CEX, decentralized, or DEX).
Regardless of the type, the primary go-to metric for exchanges is 24h transaction volume: the amount, in dollars, of value, exchanged on their premises. Transaction volume helps get a hint on the fees collected by an exchange; these translate into benefits for the companies behind CEXs or the revenue distributed among token holders and liquidity providers in DEXs.
A relevant distinction to make has to do with the transparency of the information. At the same time, the data from centralized exchanges need to be trusted because it is private to the company managing the platform; decentralized exchanges operate transparently on the blockchain. Therefore any users can quickly validate their metrics.
Stablecoins
A stablecoin is a digital asset whose value is pegged to another asset like a commodity or another currency and therefore has a stable price. In addition, stablecoins are collateralized assets; the issuing institution needs to lock an amount of money, generally in fiat, to issue new coins.
The most relevant metric for a stablecoin is the market cap. Analogous to any other token, the market cap is the value multiplied by the number of tokens. But in the case of stablecoins, the market cap offers another insight into the stablecoin ecosystem.
The companies or organizations that manage stablecoins need to lock collateral before issuing new coins. The type of collateral is a way of categorizing these different assets: some, like Tether or Circle, are theoretically fiat collateralized: every USDT or USDC is supposed to be backed by one dollar in value of “offline” assets. Other stablecoins are crypto-collateralized (backed by other cryptocurrencies) or algorithmic. Therefore, the market cap is not only the measure of the volume of a stablecoin, but it also represents the capital that has been locked to back its supply.
This value, today, currently exceeds $173B, according to The Block
DeFi
Decentralized Finance comprises all those financial services provided directly by blockchain-based protocols: by definition, Decentralized Finance is non-custodial and permissionless. Users interact indirectly through protocols by locking their assets as collateral and obtaining different services.
An easy example is a loan: Alice could own 100ETH she bought long ago when 1ETH only cost $500. Alice doesn’t want to let go of her Ether because she’s seen it increase drastically in price, and she expects it to continue doing so. But she thinks she could get even more revenue if she could invest in other protocols.
She could hop on to Compound, Aave, or any other lending protocol and request a loan, using her ETH as collateral. The protocol would lock her ETH, and she could obtain a different token in exchange that she could then use in other platforms to try and generate value without losing her initial capital.
The primary metric used to compare the success or activity on a DeFi platform is Total Value Locked: the amount of funds investors like Alice have blocked in exchange for decentralized finance services. TVL is far from perfect; it is a very elusive metric with lights and shadows, but so far, it is the most widespread KPI. It often also permeates and serves as a proxy to the value of the native blockchain DeFi runs on: the size of alternative L1s can be measured in the TVL available in the DeFi running on top of them.
NFTs
NFTs are unique digital assets sold online analogously to physical goods. They have earned the consideration of the most relevant industry within crypto in the latest months by becoming the best-known application outside of the frontiers of crypto. NFTs have risen mainly thanks to art and digital collectibles. Therefore, besides transaction values, which is a colder metric, usually, NFT collections compete in floor price. The floor price is the lowest sales price of a given collection. Recently Bored Ape Yacht Club flipped Cryptopunks in floor price: the cheapest BAYC was more expensive than the cheapest Cryptopunk, which is generally understood as a signal of better consideration and market value.
Price, market cap, total value locked, and floor price are all imperfect measurements of the success of a project, whether it be a blockchain, a DeFi protocol, or an NFT collection. So beware of headlines that simplify things to one single KPI. But hopefully, this 101 above can give you some footing inside the immensely vast world of crypto metrics.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. Regulation | Russian change of mind
Crypto regulation has gotten cold-war-y.
In late January, the Russian Central Bank expressed tacit rejection to cryptocurrencies, going as far as suggesting a ban on all cryptocurrency production, trading, and investing by its citizens and banks within its borders. But just a few weeks later, the Russian government, together with the Central Bank, announced the upcoming publication of a regulatory framework meant to incorporate cryptoassets into the Russian economy in the safest possible way.
“The implementation of the concept will ensure the creation of the necessary regulatory framework, will bring the digital currency industry out of the shadows and create the possibility of legal business activities,” the statement reads. Russia Moves to Recognize Crypto as a Form of Currency
Many have pointed out the recent geostrategic tension as a possible reason behind this change of mind. Crypto’s censorship resistance could be a solid feature for Russia to help undermine the dollar's predominance and minimize the impact of international economic sanctions.
2. Regulation reloaded | Taxation in the USA
As a follow-up to the topic above, we should say that the US has seemed a little schizophrenic in its approach to crypto these days. Top institutions are speeding up stablecoin regulation quite aggressively. Long story short, different public bodies in the US are converging around a proposal that would require stablecoin issuers to obtain licenses that would turn them into banks. Some use other words and say that regulators want to hand over stablecoins to banks.
In the meantime, the same country is producing some minor wins in taxation:
A bipartisan group of US House members is pushing a bill that would exempt consumers from paying taxes on crypto payments of less than $200. This proposal would simplify tax burdens on daily crypto users who must now report even the most negligible capital gains.
Also, the IRS refunded a couple after a court ruled in favor of their request to invalidate a payment of $3,293 of income tax paid in 2019 for the receipt of 8,876 Tezos tokens earned by staking. This sets an interesting (non-binding) precedent, as it exempts the revenue generated by staking from income tax.
These are two examples of regulators adding much-needed nuance to crypto regulation.
3. Corporate crypto treasury | KPMG joins the club
KPMG Canada announced that they had added Bitcoin and Ethereum to their corporate balance sheet, although they did not disclose the amount. The accounting firm entered the select club of big firms with crypto in their treasury, a list of outliers and eccentrics, such as Microstrategy and Tesla.
By the way, the news came in the same weeks when it was made public that Tesla’s $1.5B investment in Bitcoin had grown to become a $2B bag. And BTW number two: Tesla’s $2B in Bitcoin is a smaller amount than the Department of Justice, which recently retrieved $3.6B from the Bitfinex hack in 2016. Does that entitle the DoJ to be added to the list above? :P
The US branch of KPMG has assessed Microstrategy in its Bitcoin purchase. It would seem reasonable that that division entered the space, but Canada has been historically more friendly to crypto, and this has been proved once again with KPMG’s move. Like when the northern neighbors accepted the world’s first spot Bitcoin ETF in March 2021.
“Having gone through this process ourselves now, we’re confident we can guide clients and prospective clfients through the process of cryptoasset treasury allocation,” KPMG said in the email. “Our investment allows us to share our journey, our experiences, our challenges with them so that we can help them navigate the cryptoasset world.” KPMG Canada Adds Bitcoin, Ethereum to Corporate Balance Sheet
4. Culture | Ape does not dox ape
Buzzfeed tech reporter Katie Notopoulos recently wrote a piece on Bored Ape Yacht Club where she unveiled the identity of the yet anonymous founders of this groundbreaking NFT collection. While other publications (like Rolling Stone) had already featured them in their writings, so far, nobody had gone beyond the aliases of Gordon Goner and Gargamel.
For Notopoulos and Buzzfeed, it was about time to shed some light on the identity of the people holding the wheel of a project with such size and growth. BAYC has signed agreements with Universal Music or Adidas; celebrities have purchased apes like Eminem, Jimmy Fallon, Post Malone, or Stephen Curry. And it is being rumored that Yuga Labs, the studio behind the Bored Apes, might be in conversations with Andreessen Horowitz to raise funds at a $5B valuation.
Some people disagree with Buzzfeed.
Anonymity is a crucial feature of crypto. It is embedded in the technology by default: crypto does not ask who or where you are. And this technical aspect has transcended into the cultural ethos. Web 3 community is often pseudonymous, and users interact with each other using only screen names and avatars.
This is not only a matter of personal safety like Cozomo points out. It is a unifying characteristic that prevents prejudice and inequality. But while it does so, it also has dangerous side-effects, like making it easy for money laundering and fraud.
This is going to be a tricky thing to solve.
5. Decentralized Social | Aave Lens
One of Web 3’s core features is that it redistributes the benefit created by the network effect. So if your actions contribute to making a project more valuable, web 3 says you deserve some retribution too and offers ways to materialize it through tokens.
Every time you post a photo to Instagram, you create value for the whole network. Every time you click a like button, you increase the likeability that another person logs on to the app and interacts with you. And while they’re at it, they might as well scroll for a while, leave a few comments and write a 24h story.
Every interaction happening on a social network increases the overall value of the experience. And Meta, the owner of Instagram, makes a profit from that by selling ad space, thanks to you.
Enter Aave Lens. Aave is one of the most outstanding Decentralized Finance protocols, and Aave Lens is their venture in Decentralized Social Media.
Basically, the protocol enables users to create a profile, which is a fully composable NFT. These dynamic NFTs contain the history of all posts, reposts, comments, and other content generated including music, commentary, art, photography and video. A key difference is that profiles are tied to a wallet address, and owners can choose how to monetize their content. A follower can also collect someone else's publication and receive a tradable follow NFT. Aave launches Web3 social media platform, Lens Protocol
In crypto, you get what you give.
6. Layer 1 | Solana this, Solana that
If you have one foot in crypto, you’ve probably heard of Solana. Solana is one of the most popular “Ethereum killers”: the monicker given to Layer 1 solutions that have emerged as alternatives to Ethereum and that could potentially defeat it if crypto was a gladiator war.
Last week, a bug in a bridge (a protocol that connects different blockchains) had $320M stolen from Solana. US-based trading firm Jump Trading reinstated the funds to stop the bleed in a move that says a lot about what makes Solana different. Here’s a bullet list of the main things you need to know about Solana:
Solana uses a Proof of History mechanism, paired with Proof of Stake. This solves all the environmental concerns of Proof of Work blockchains.
It was built to be fast. Solana can currently handle 65,000 transactions per second, VS Bitcoin’s 7 and Ethereum’s 30.
This, in turn, makes transactions much cheaper, which has pushed Solana to become a great place to start DeFi and NFT projects.
It has achieved this excellent performance at speed and price thanks to some concessions in the decentralization department. Validating blocks in Solana is extremely costly, and just a few manage to do so. This has made it easier for Solana to fail against attacks that wouldn’t have crashed other blockchains.
Solana has been backed since the early days by influential stakeholders. The first great sponsor was Sam Bankman-Fried’s FTX, who pushed Solana’s notoriety and credibility to the top. The high implication of big corporations has also hindered the project’s credibility in the eyes of hardcore crypto believers.
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