Hubble Protocol - the one-stop shop for interest rate products in the Solana ecosystem.

Decentral Park Capital is incredibly excited to have participated in the pre-seed round of Hubble Protocol along with the Solana Foundation as well as the recent subsequent seed round along with Three Arrows Capital, Delphi Digital, DeFi Alliance, and others.

Decentralized Finance (DeFi) has now amassed over $250B in total-value-locked with the sector market cap climbing to $140B.

Lending has become one of the first primitives in DeFi to achieve product-market-fit on Ethereum with Aave’s credit market size reaching $25B in liquidity. In the last 12 months, lending has continued to evolve including the advent of self-paying loans.

A more recent iteration has been zero-interest borrowing. DeFi protocols today require users to pay variable interest rates while being severely over-collateralized up to 175%. Liquity was one of the first to tackle this head on, allowing users to pay a one-time borrowing or redemption fee when they open or close their positions. Today, Liquity has over 490k ETH locked in its protocol (~$2B) across 1.3k collateralized-debt-positions (Troves).

We believe higher capital efficiency and cost-effective ways to access leverage against user assets has been a key driver in Liquity’s success to date. However, the use of yield-bearing assets as collateral in this model has also been largely untapped.

Ethereum’s scalability and speed continue to be troublesome for dApps. Solana’s high throughput processing makes it an attractive foundation for high-use DeFi applications.

Introducing Hubble Protocol.

Hubble is building a suite of interest rate products on Solana. In phase 1, Hubble will offer a zero-interest loan product where users can open collateralized debt positions (CDPs) and withdraw Hubble’s stablecoin, USDH, against that collateral. Hubble will also allow users to maintain a collateral ratio of 110% and above.

One major difference to existing zero-interest lending protocols in alternative ecosystems is that Hubble allows for any asset represented as an SPL (Solana Program Library) token standard to be used as collateral once approved by the Hubble DAO. Widening the collateral asset universe provides flexibility for users in how they choose to mint USDH and naturally expands the potential market cap of USDH all else equal.

There already exist a wide range of product partners that Hubble can integrate with. Marinade Finance, a Solana-native liquid staking derivative protocol, can be the source of SOL yield while Hubble can receive yield on the newly received mSOL within the Solana DeFi ecosystem.

A second difference is the embedded stability layer. Aside from liquidators who can earn revenue for maintaining a healthy system, a stability pool of USDH maintained by depositors can act as a backstop when a collateral ratio falls below 110%. This is a necessary mechanism that uses focal point game theory to maintain USDH’s peg.

For phase 2, Hubble will explore structure products, lending markets, and eventually undercollateralized loans in phase 3. Therefore, we believe Hubble is more than just a lending protocol – it is providing a complete, interconnected suite of DeFi products for the Solana ecosystem.

Aligning The Incentives: The HBB token

HBB is the native token of the Hubble Protocol which grants holders participation in governance while being used as a fee-sharing mechanism generated by the system.

A one-time fee of 0.5% is applied to every collateralized-debt position for when USDH is borrowed and when USDH is redeemed. We believe that interest-free loans represent a fruitful path for market participants as it removes any potential cognitive friction, streamlines the fee calculation, and operational overhead in managing a loan.

Fees collected from debt positions will be distributed among HBB holders on a pro rata basis when those positions are opened. In other words, the HBB token earns 100% of the fees generated by the protocol. The HBB token is backed by the underlying usage of Hubble and captures further fundamental value with increased adoption of its product suite.

Finally, HBB will be the critical bootstrapping tool for bringing in users and liquidity to the protocol. For example, rewards will be in place for liquidity providers directly supporting their network contribution to Hubble inducing the stability pool and USDH liquidity on external pools.

We also believe the design space for incentivising borrowing is enormous. Like the design mechanics of Olympus DAO, USDH holders that provide liquidity to various Solana exchange pools can receive discounted HBB tokens for supplying their LP tokens to the Hubble protocol. LP fees that are earnt by the protocol can be distributed to USDH borrowers as an additional incentive to open positions (‘Hubble Pro’).

This can create a positive fly wheel effect whereby users seeking discounted HBB tokens will buy USDH and drive the stablecoin above its peg. This should incentivise further borrowing to drive USDH back down to its peg by increasing supply. USDH then become more liquid in the process while the USDH borrowers receive higher LP fees and HBB stakers earn higher protocol fees.

As conviction in Hubble increases along with revenue, the demand for receiving discounted HBB tokens through USDH LP commitment also increases.

USDH – Becoming A Core Solana Stablecoin

We believe Hubble is more than just a DeFi Hub. Hubble is building a primary stablecoin for the Solana ecosystem.

The use of yield-bearing collateral to back USDH allows users to maintain exposure to any future upside with their principal. In other words, users are economically incentivized to use USDH as collateral over alternative stablecoins like minting UXD or selling for USDT.

For example, a liquidity provider can achieve two yield streams by committing USDH in a USDH-USDC Saber pool – one from staked SOL and the other from LP trading fees collected in the pool. Hubble and the use of USDH could form a key role in yield aggregator strategies like Tulip over time.

We believe USDH can also form the build block for other DeFi protocols that encompass stable assets at the core of their design. One example is derivatives where Optimism-based options protocol, Lyra, is now using Synthetix’s sUSD for delta hedging. However, not relying on the global market cap of a single asset makes USDH an attractive, scalable stablecoin for these emerging primitives.

Hubble will also have use cases for USDH inside its own ecosystem. Besides being the rewards token for HBB stakers, USDH can also be used as the core stablecoin for its future bond and lending products.

To further maintain the USDH peg to realize this vision, Hubble can look to build permissioned pools that use undercollateralized loans to arb peg deviations. One potential model here could be ‘Keepers’ using a central USDH deposit pool where on-chain profits are re-distributed back to USDH LPs as well as the Keepers themselves. This can drive demand further for USDH by being a crypto capital asset along with HBB.

The Hubble team is led by Marius Ciubotariu who was previously a Senior Software Engineer at Bloomberg for 8 years. Marius built the company’s first production apps in Rust. Since our first engagement, Marius has been relentlessly executing on building Hubble’s core components and we are incredibly excited to see his expertise in cross-asset derivatives translate to the new financial ecosystem.

Hubble’s vision of establishing USDH as the de facto stablecoin on Solana is bold but inspired. Decentral Park looks forward to working with Marius, the Hubble team, and our Solana ecosystem partners in realizing that vision.

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The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.

2021 has been a good year for crypto. Perhaps one of the most memorable - seeing clear fundamental growth, all-time-highs for valuations, and DAOs raising capital to buy copies of the United States Constitution.

As we wrap up the year and look to the next, we breakdown 21 charts that helped define the year and what it all means. We look forward to seeing what 2022 brings.

Wishing you a happy holidays and a great new year!

- The Decentral Park Capital Team

#1 Bitcoin Hashrate Share By Country

Why It Was Defining

Chinese miners have historically accounted for over 70% of Bitcoin’s hashrate. China then clamped down on mining operations in Q2, crypto transactions, and businesses. Sichauan province was hit hard where many of the pool miners sauced its abundant hydroelectric power.

The high geographical dominance meant Bitcoin’s hashrate fell 53% in less than 2 months.

Where Do We Go From Here?

Bitcoin’s hashrate has recovered since. The removal of China has catalyzed the flourishing of mining operations elsewhere - namely North America. Incentives to reduce CapEx and ESG pressures will push mining operators to green energy further.

#2 Lightning Network Growth

Why It Was Defining

The Lightning Network is a payment protocol layered on top of Bitcoin. Lightning had it largest annual growth in node count, channels, and capacity in 2021. El-Salvador became the first country to formally adopt Bitcoin as legal tender, putting the ‘medium-of-exchange' narrative for the asset back to centre stage.

Where Do We Go From Here?

Metcalfe’s law is particularly salient for a network like Lightning. Users get greater value from a greater number of nodes (i.e. merchants) forming an exponentially larger number of channels.

We may see further nations follow suit, particularly those that pay a large percentage of cross-border remittances to financial intermediaries. But it will take time.

#3 The ETH/BTC Ratio

Why It Was Defining

The ETH/BTC ratio hit a 3-year high in December, with bids hitting as high as 0.0835 BTC on Coinbase.

The ratio was a key driver in fuelling the ‘ETH flippening BTC’ narrative.

BTC lost its credibility as a defensible asset, underperforming on the rallies as well as the drawdowns. Ethereum had a collection of narrative tailwinds in the hopper including the ETH2 merge,Altair upgrade, EIP-1559, and the L2 chain roll outs.

Where Do We Go From Here?

Ethereum faces a major event catalyst in 2022 - the ETH2 merge. While the exact timeline is not well defined, we should reasonably expect significant attention be drawn to its success or failure.

At the same time, Ethereum scaling initiatives will continue to be built out in parallel.

#4 Ethereum Gas Price vs. Polygon Network Utilization

Why It Was Defining

We witnessed clear spikes in median gas prices on the Ethereum base layer in early 2021. Retail users transacting smaller amounts continued to be priced out, mirroring the dynamics from summer 2020.

Polygon’s PoS sidechain was one of the first scaling solution in history to have adoption at scale by offering lower fee environments. As network utilization skyrocketed on Polygon, gas costs reduced dramatically on Ethereum L1.

Where Do We Go From Here?

We will see sidechains, L2s, and self-sovereign EVM-based blockchains provide even lower fee environments. A higher number of transactors will inevitably put pressure on fees as their network utilization increases.

#5 Polygon/Ethereum Token Deployments And DAUs Ratios

Why It Was Defining

It was the first time we saw a scaling solution at scale see a higher number of token deployments and daily active users (DAUs) than on the base layer. NFT market hype drove a large portion of polygon usage in October. Trader count multiplied by nearly 46x and NFTs sold by 17x.

Where Do We Go From Here?

Project founders will consider launching their projects natively on sidechains and L2s more over time. This will be the case for higher bandwidth application including derivatives. We writing is on the wall - Lyra was the first DeFi app to launch natively on Optimism in August.

#6 ETH Burned Via EIP-1559

Why It Was Defining

EIP-1559 made it easier to estimate transaction costs and introduced fee burning mechanisms for Ethereum in August.

Over 1m ETH has now been burned since EIP-1559 went live with the number of ETH burned accounted for a larger percentage of ETH’s circulating supply (>1%). In other words, the net ETH emission has declined significantly.

Where Do We Go From Here?

Ethereum will burn over 3% of its supply by 2022 year-end at current rate (all else equal). With other L1 assets implementing their own burn mechanics, Bitcoin is unlikely to be the only target asset for investors during a potential inflation/hard asset narrative in 2022.

#7 ETH2 Staking

Why It Was Defining

We saw high, persistent levels of conviction by ETH holders to deposit their assets without having a clear withdrawal timeline.

Over 8.7m ETH (~$35.2B) has now been committed, with over 7% of the circulating supply now locked until the ETH2 merge. The more interesting aspect is the clear product-market-fit of liquid staking derivatives.

Lido Finance has facilitated over 18% of total ETH2 deposits, highlighting the preference for liquidity and overall risk appetite.

Where Do We Go From Here?

The jury is out if the ETH2 merge (where stake withdrawals enabled) will result in higher or lower commitments by holders.

We will see the rise of liquid staking protocols for other PoS chains that can service the growing $300B market.

#8 DeFi Market Cap And Dominance

Why It Was Defining

The DeFi sector started an exponential growth curve in market capitalization, climbing from $21B to over $148B in 12 months (7x).

DeFi’s market cap growth also outpaced wider market growth materially. DeFi’s ‘dominance’ made 3 new all-time-highs with the ratio now standing at 6.2%.

Where Do We Go From Here?

Continued roll out and adoption of applications across a growing number of ecosystems can help drive a continuation of an exponential growth curve. If so, we may see DeFi’s market dominance climb above 20% by year end.

#9 DEFIPERP/ETH And Alt ‘Core Asset’ Performances

Why It Was Defining

2021 was the year for core assets like L1s and sidechains like SOL, MATIC, and FTM which all gained significant ground with their ETH counterpart. What was clear was the value of these alternative ecosystems grows proportionally to the value committed to them.

FTX’s DEFI PERP index on its ETH ratio showed the underperformance of the DeFi sector at large relative to core assets.

Where Do We Go From Here?

Higher cap core assets getting bid up paves the way for capital rotation down the risk curve. This is particularly salient as we enter a time when DeFi producing valuable use cases across a growing range of primitives and ecosystems. On that note…

#10 DeFi Apps On Mainnet vs. DeFi TVL

Why It Was Defining

We saw exponential growth curves in DeFi that wasn’t pure valuation-based. We saw it for the number of applications launch on mainnet and the total value committed to DeFi applications in aggregate.

Where Do We Go From Here?

We have started to see number of application launching in the sector accelerate in recent weeks. But really…we have yet to get underway. More nascent DeFi ecosystems are far from being fully realized with ramped up production on a growing number of ecosystem results in exponential growth.

Macro dynamics is one thing but fundamentals are another.

Ask yourself: are you tech crypto or money crypto?

#11 DeFi TVL Market Shares

Why It Was Defining

It was the first time we saw the total-value of liquidity committed to ecosystems be significantly diversified. The launch of alternative ecosystems in the past year has resulted in Ethereum’s TVL dominance falling from >95% to 65% today.

2021 was the year DeFi truly became multi-chain.

Where Do We Go From Here?

Ethereum TVL dominance will likely continue to fall and lose its majority status.

One clear key driver will be the deployment of funds from ecosystem foundations to foster innovation, drive users and their liquidity to protocols, and attract talent.

#12 Ecosystem Fund Sizes

Why It Was Defining

We saw over $8.4B allocated in ecosystem funding with single foundations/councils contributing up to $5B. Teams clearly saw the need to compete for talent and users in an increasingly competitive landscape.

Funding was kept generalized targeting sectors from DeFi, NFTs, and CBDCs.

Where Do We Go From Here?

High levels of funding and incentives for developers as well as users. There is also nothing preventing these foundations from re-upping their contributions as has been the case with high cap chains like Avalanche.

#13 Road To $10B Ecosystem TVL

Why It Was Defining

We saw accelerated pace for ecosystem reaching unicorn status for total-value-locked. Solana took a quarter of the time to reach this threshold than Ethereum. This rapid growth can be attributed, in part, to growth in rapid asset appreciation like SOL and ecosystem funding mentioned above.

Where Do We Go From Here?

TVLs can create reflexivity in the value of ecosystems for users - regardless if that growth is attributed to appreciation of just a few assets (higher liquidity and lower slippage to name just two).

That said, the asset underlying TVL will also become more diversified over time. The proliferation of stablecoins being bridged over to ecosystem is just one recent example. Infra that makes it easier to bridge assets should accelerate the ‘road to $10B’ for chain even more.

#14 L2 TVL vs. L2/ETH L1 TVL Ratio

Why It Was Defining

2021 was the year where we first saw TVL on L2 scaling solutions hit over $5B, growing 34x YTD. This growth has also outpaced TVL growth on Ethereum 1 which printed an all-time-high of 4.5%.

The advent of optimistic-based solutions in 2021 were key growth drivers in Q2 with zk-based dYdX accelerating this more recently.

Where Do We Go From Here?

The genie is out of the bottle when it comes to L2 solutions. We are likely heading into a zk-Rollup narrative as users await for the full launch of Starknet and ZKSync 2.0,

Bringing EVM and smart contract functionality to zk-Rollups is only going to push the L2/L1 TVL ratio higher.

#15 Google Search Trends (DeFi, NFT, Metaverse)

Why It Was Defining

We saw interest in NFTs outweigh interest in DeFi throughout the entire year. 2021 marked a fundamental cultural shift in how curators across domains were able to distribute to their audience and monetize their curations.

Facebook’s decision to pivot to the Metaverse renewed global interest to the sector, also overtaking DeFi along the way.

Where Do We Go From Here?

NFTs may continue to gain momentum over 2022 but it’s important to zoom out. All of the above will be connected under the ‘Web3 macro framework’ - a new decentralized web.

Users will want to unlock certain utility, liquidity, and accessibility of their NFTs (yes, even within the Metaverse). At some point the demand for the financialization of NFTs will mean DeFi plays catch up. We are already seeing an explosion of solutions across various financial primitives including exchanges (e.g. OpenSea), indices (e.g. NFTX), and lending (e.g. NFTfi).

#16 NFT Total Sales vs. Sales By Market

Why It Was Defining

We saw daily global NFT sales surpass $1m, $10m, and $100m. Global volumes YTD are now 172x that of 2021 ($11.6B). Game-based NFTs were in vogue for most of 2019 and 2020 but 2021 was the year of collectibles which often accounted for >70% of volume.

New collectible ranges like Bored Ape Yacht Club saw huge demand, overtaking CryptoPunk price floors for the first time.

Where Do We Go From Here?

There will likely be huge innovation around how NFTs can be used in games, ecosystems, and communities. Examples include community-owned IP as well enhanced functionality within the Metaverse and meatspace.

#17 Olympus DAO’s “POL”

Why It Was Defining

Olympus DAO flipped the liquidity mining model on its head by innovating around ‘Protocol Owned Liquidity’. Rather than relying on 3rd party providers to continue their liquidity contributions to protocols, they can indefinitely secure its own liquidity by issuing discounted bonds.

Olympus now owns the vast majority of the Sushiswap OHM-DAI pair liquidity.

Where Do We Go From Here?

Protocols will look to launch their own Olypmus-style bond mechanisms to own their own liquidity as well as create a new revenue-streams for adopters of that respective protocol. These founders will have to pay careful attention in extrapolating the Olympus game theory mechanics within their own frameworks.

#18 LUNA Total Supply vs. UST Market Cap

Why It Was Defining

We saw one of the largest L1 token burnings in crypto - $3.5B. The Terra community voted in favour of burning LUNA in order to mint (back) $4.5B worth of stablecoin, UST. Terra’s UST has now become one of the fastest growing algorithmic stablecoins in the market

Where Do We Go From Here?

This evolving trend is interesting for 3 reasons:

1. It’s a clear case of an L1s becoming deflationary proportional to their underlying ecosystem usage (e.g. UST demand necessitating LUNA burn)
2. Terra’s model limits the drawbacks of burning capital by simultaneously injecting liquidity for protocol bootstrapping initiatives
3. It simultaneously boosts rewards for stakers from LUNA-UST swap fees

Terra applications looking to boostrap their own liquidity may be served via similar mechanics. It remains to be see if other blockchains take a lead out of Terra’s book.

#19 Pocket Network Relay Count vs. Revenue

Why It Was Defining

Pocket Network became the first decentralized node relay network to operate at scale. To date, there has been a lack of relay node incentives for blockchains and reliance on Infura has translated to security and single points of failure risk for dApp developers.

These pressures have now translated to clear measurable growth for decentralised relay node infra like Pocket Network which generated $28.7m in revenue for November and is forecast to generate $532m annualized revenue in December - of which 89% is directed to service nodes staking POKT.

Where Do We Go From Here?

Decentralized relay node networks like Pocket are only servicing a fraction of relays serviced by centralized competitors (ATH of 2.2B/day). Network outages and redundancy issue will lead to protocols rerouting their requests via decentralized networks like Pocket.

#20 Stablecoin Market Caps (Market Shares)

Why It Was Defining

We saw the emergence of new USD-pegged algorithmic stablecoins like UST, MIM, and FRAX take meaningful market share from their collateralized counterparts (~10%).

It shouldn’t come as a surprise that this market shift comes at a time when regulation around stablecoin issuers has intensified.

After a largely failed algorithmic stablecoin season in 2020, these new entrants are challenging the incumbents through mutualistic relationships.

Where Do We Go From Here?

The decentralized issuers have the ability to achieve rapid growth over 2022 by over-indexing on DeFi composability (including cross-chain).

The next iteration of stablecoins may revolve around derivative-supported stablecoins like Lemma Finance and Angle (e.g. delta-neutral strategies). Oh, and expect to see major FX-pegged stablecoins like EUR and GPB make headway.

#21 dYdX vs. Uniswap Daily Trading Volume

Why It Was Defining

Perpetual swap markets popularized in 2016 by BitMex can trade anywhere between 2-10x more than spot every day. With liquidation and high transaction count being economically unfeasible on Ethereum L1, the launch dYdX on the performant StarkEx engine gave us a glimpse into the future relationship between spot and perpetual DEXs - albeit briefly.

dYdX daily trading volume grew from <$100m to over $5B, overtaking Uniswap’s total volume throughout September.

Where Do We Go From Here?

Perpetual swap DEXs will account for a growing share of global DEX volume in 2022 as more networks go live on performant foundations.

DEXs are already eating CEX’s lunch. DEX to CEX spot trade volume ratio has now climbed to 12% and perpetual venues in DeFi can drive this above 20% before too long.

BONUS Avg. DeFi Exploit Amount vs. % of DeFi Covered

Why It Was Defining

It illustrates how developers were tested like never before by increasingly sophisticated attacks. We saw over $1.6B worth of funds stolen in DeFi from attackers in 2021 with the average exploit amount climbing to new all-time-highs ($60m).

The percentage of DeFi covered by insurance protocols like Nexus Mutual remains low but it appears the saliency of recent high-value exploits is driving covered value higher in recent months.

Where Do We Go From Here?

Exploits will not be eliminated entirely and risk management has become an urgent challenge. The $4.3 trillion insurance industry has yet to develop maturely within the multi-chain DeFi ecosystem. ‘Horizontal’ insurance networks like Nexus Mutual are positioned to benefit from this dynamic in 2022 and beyond.

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The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.

Blood, tears, relief, sweat, then exuberance.  22 regulatory predictions for 2022.  Here we go…in a lot of run on sentences…

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1. Legislators force regulators to the middle - Regulation by enforcement is well underway and will accelerate in the first quarter under purposeful lack of regulatory clarity, before omnibus crypto legislation gains consensus in the legislature, and regulators double down on cases that establish eminent domain; while institutional crypto VCs finally get their way.

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2. SEC has an epic day of reckoning, approves a spot BTC ETF, and turns the tide in favor of institutional investors - The cryptoverse wakes up on a Monday morning in mid-Q1 to a salvo of enforcement actions and inquiry letters delivered en masse to core teams and projects across DeFi and financialized NFTs and generally anyone with a token in play; followed by the approval of a spot BTC ETF by July, in conjunction with stablecoin regulations that allows Tradfi banks and institutions to enter the market at scale pulling traditional regulatory oversight into crypto with it.

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3. Crypto becomes a single issue vote - From presidential candidates, to gubernatorial races, to the Senate and the House, incumbent candidates will pander to the crypto masses and new junior politicos will sweep into office stumping for crypto reform, all funded by the CT (if you don’t know, stop reading now) war chest.

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‍4. Lobby spending goes parabolic - Education is the name of the game where crypto trade groups are the shield, and venture capital firms and DAO treasuries are the sword.  War chests will continue to amass and deploy at scale as regulatory chop accelerates into summer.

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5. Stablecoins are regulated by charter, creating a regulatory floor for mass adoption - This is a long time coming and Q1 will see sharp compliance clamp down on asset based stablecoins after it is announced that projects must register under a hybrid charter that requires minimum capital reserves and strict transparency, forcing a flight and flow of value to algorithmic stablecoins.

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6. Ripple settles SEC lawsuit for a win - Ripple squeezes out a settlement from the SEC which is generally seen as a victory, followed by a harrowing market celebration and price appreciation for XRP, that is further sustained when the world wakes up to Ripple’s deep B2B efforts and cash flow, only to see the SEC take a desperation shot at ETH by tackling a staking protocol.

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7. US announces the covert development of a CBDC - J. Powell and the PWG concludes, after secretly researching and piloting CBDCs, that a US CBDC is the only real broadsword of dollar supremacy and rapidly moves to deploy a digital dollar standard and weaponizes with the rest of the developed world.

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8. Tokenization is the real threat to TradFi - Token registration sandboxes and friendly regulatory regimes in Bermuda, Bahamas, and other traditional island tax havens legitimize CeFis piloting projects there and pit them directly against the traditional insurance and asset management stalwarts that hold reserves offshore and rehypothecate assets back into the US and global financial system, effectively allowing these crypto issuers to eat the system from the inside out.

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9. Lending, derivatives, and exchanges give regulators all the attack vectors they need - If it looks like crypto, smells like crypto, and hell even tastes like crypto, who cares to understand it when it is lending and derivatives at the core, and regulators throw the same old book at the same old products regardless of underlying asset type – buyer beware TROs seizing up the crypto credit markets.

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10. KYC / AML becomes a competitive moat before being broadly adopted - A handful of smart and ostracized founders shun the permissionless ethos, tear down the geofence, and embrace permissioned KYC, which allows them to survive and thrive above board during significant 2022 regulatory chop, as purely decentralized and permissionless protocols keep a lower profile until regulatory clarity sets in.

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11. Wallet native passports will become the norm - Wallets become a KYC trustmark that follows the user everywhere, from the yield farm to the metaverse, streamlining the retail and institutional crypto experience; finally capturing the hearts of crypto users everywhere and eliminating a key attack vector of banking regulators.

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12. Founders run out of islands to hop as FATF adoption sets in - The explosion in fundraising related KYC overkill catches up with the traditional tax havens (who have historically been the most forward thinking jurisdictions with clear crypto regulatory regimes) who broadly adopt recent FATF guidance, and traditional founders entering the space begin to look back towards home countries to register, realizing the futility of the KYC rabbit hole for token issuances.

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13. IRS will take center stage and lead the enforcement charge while FinCEN / OFAC continue to be the silent cowboys of crypto - The IRS goes from last to first in the enforcement race, issuing clear guidance on staking rewards, wash sale rules, and cash transaction reporting, casting a broad net on the US populus; while FinCEN and OFAC emerge from policing in the OTC shadows to enforcing against protocols with domestic teams and tokens as unlicensed money transmitters. 

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14. US adopts omnibus crypto legislation with a safe harbor - The Madame Senator from Wyoming or the gentleman Don from Virginia garner broad consensus support for crypto regulation that passes one of the houses in Q3, with a version of Crypto Mom Peirce’s safe harbor at 18 months.

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15. The Wyoming DAO fallacy unfolds, starting a state level arms race towards crypto-friendly federalism - States do not recognize Wyoming’ DAO construct, Wyoming does not recognize foreign (read ‘not in state’ for the non-lawyers) projects registering in state, and federal banking regulators do not recognize Wyoming crypto projects, and the only thing that changes is Vermont, Texas, Florida, and a dozen other states launch sandboxes and write friendlier legislation.

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16. Decentralization is debunked as a tool against Howey - The SEC concludes that Uniswap’s decentralized personality is a legal misnomer due to disproportionate governance concentration among VCs and low voter participation, and generally concludes that the untested decentralization narrative for crypto projects is not a prophylactic device against securities scrutiny under the Howey test; only to be saved by safe harbor legislation under an omnibus bill.

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17. EU’s MiCA forces US to adopt portability standards - EU’s push for reciprocal protocol registration and global standards throughout Europe goes live in late spring and draws waves of innovation and further positions Berlin as the epicenter of crypto development; but more importantly forces the US and UK to a global middle ground and bolsters talk of a global standard in the second half of the year.

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18. Compliant US and EU tokens will flood the market - It turns out that the innovation desks at the SEC, CFTC, FinCEN, and FINRA were genuine after all, or at least become genuine by necessity, and several tokens are ushered to market that have regulators’ stamp of approval.

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19. Two regional powers will adopt the BTC standard (LatAm, Eastern Europe) - Lets call it Chile (or Argentina:), and Ukraine (or Turkey – to easy:)...for obvious reasons.

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20. DAOs will go stateless, then compliant again - The race towards statelessness will accelerate for founders doubling down on decentralized go-to-market strategies and robust DAOs looking to shed legal wrappers, before cash-flowing DAOs reconnect with the real world and the first wave of corporate litigation and legal actions emerge against DAO member bases remind everyone that existing legal structures have merit.  

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21. DAO M&A will accelerate, driven by treasury consolidation - Vaporware tokens and protocols will die and functional products without traction, KYC, or decentralized communities will be gobbled up by the largest DAOs across DeFi and infrastructure protocols as treasuries go to work to help consolidate feature sets and develop full stack and gamified product offerings.

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22. More DAOs than members will position infrastructure providers as king makers - Dunbar’s number tells us effective communication and coordination caps out at ~150 people – as DAOs become oversaturated by the same population of degens chasing bounties and rewards, and are disproportionately active at the tails of the voter base distribution, coordination tools (i.e. Gitcoin, Aragon, etc.) will emerge as the leaders of the asset class, not DAOs themselves….picks and shovels.

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Fragile Data Infrastructure

Decentral Park recently participated in Pocket Network’s latest $10m strategic round along with Rocktree Capital and Arrington Capital, building on our very first investment back in April 2020.

Applications within Web3 need data from public blockchains in the form of API requests to operate.

Given the sheer number of Web3 applications that will be in need of public blockchain and public data as well as the diversification of blockchains that are in need to offer that public data, the size of the Web3 data infrastructure market will be measured in the hundreds of billions.

To-date, we have seen centralized blockchain infrastructure like Infura drive API calls to blockchain data in the billions by being able to easily implement, maintain, and develop data networks.

However, the costs associated with those centralized providers are significant. In November 2020, Infura experienced a severe outage for the Ethereum network, directly impacting all applications using the service. More recently in September 2021, Avalanche node providers for Metamask went down, leading Coinbase to ask for information on available public nodes on twitter.

Events like these clearly highlight the risks of single points of failure from both a redundancy and security standpoint. At the same time, app developers don’t have the resources, expertise, or time to host their own full nodes. Together, this has led to an over reliance on a few, centralized providers.

Data infrastructure is the last fragile piece of the antifragile puzzle.

We believe a crucial part of the problem is the lack of relay node incentivisation at the protocol level. The good news is this is now changing.

Enter Pocket Network

Pocket Network is a decentralized API protocol that services Web3.

Pocket operates as an independent, application-specific Tendermint blockchain. At its core is a two-sided marketplace between applications and infrastructure providers running full nodes (e.g. Ethereum, Solana). Through token incentives, cryptographic proofs, and verifiable random functions, Pocket is able to provide a more robust and lower-cost API service for developers and their applications.

POKT: Aligning Pocket Stakeholders

Within Pocket, developers of Web3 applications who demand data from public blockchains in the form of relays are serviced relative to the amount of POKT they stake. Therefore, the POKT token represents a right to access Pocket’s network resources.

Equally, on the supply-side, infrastructure providers run full nodes and service these relays, receiving POKT proportional to the work performed. For node operators, POKT represents a right to provide work to the marketplace with each node required to stake ~15k POKT.

Each relay mints 0.01 POKT with service nodes receiving the large majority of tokens (89%), 10% funnelled to the Pocket DAO, and 1% to the block producer. Therefore, Pocket adjusts its rewards dynamically based on underlying market demand of API relays.

There are no centralized servers, no single points of failure, or limitations around node incentivisation.

Pocket is truly unique in how it provides a more resilient, lower-cost alternative to centralized solutions that exist today for Web3:

Resilience

• A more diversified topology of full node operators in both number and geography
• Incentivisation of redundancy creates a resilience by design structure
• Node runners can a operate a wide range of different client software across all supported chains

Cost

• The demand-side only pays for the relays they want to use
• The supply-side can increase/decrease their node count depending on overall market demand (e.g. incentives are dynamic and reactive)
• Pocket’s incentive structure within its marketplace adds no additional overheads to the network
• No payment intermediary between developers and node operators

A Burgeoning Infrastructure Ecosystem

As an agnostic middleware protocol, Pocket can provide API services for developers regardless of what blockchain that application lives on.

What’s unique about Pocket is its horizontal nature and not relying on any one blockchain to succeed for Pocket itself to succeed. The opportunity for Pocket is to become the default node infrastructure platform for multichain applications across the entire Web3 ecosystem.

With Pocket expanding across multiple chains, we will see rich development around its tooling. Over the past 6 months, we have already seen a large number of community-led projects like fractional staking and network explorers launch.

We expect the community engagement around existing and new Pocket-related infrastructure projects to only accelerate in 2022 and beyond as the network matures.

Lastly, by first focussing at the node (access) layer, it is possible that Pocket eventually adds an indexing layer that can sit on top of Pocket to eventually organize the data it serves to applications. Developing downstream within the tech stack into the indexing market marks just one potential natural evolution of the Pocket ecosystem longer-term.

The last but crucial element of Pocket’s structure is the Pocket DAO. The DAO will be the oversight to coordinate both sides of this marketplace and guide the long-term development of the protocol. Taking a truly novel and gamified approach to DAO voting, users have to earn the right to vote based on engagement and knowledge known as POKT Arcade.

We have confidence that the tremendous governance work led by Jack Laing will serve as an inspiration for other protocols and their communities.

Traction

Since inception, we have been nothing but impressed with the team’s commitment to building and shipping a secure and stable product.

While still in its nascent stages, we can already see the power of focussing on incentives for data infrastructure. Pocket now services over ~300m daily relays - a 12x increase from 6 months prior. This is still far below Infura’s multi-billion daily API requests but that gap is now closing fast.

Accelerated growth in relays has driven the average daily POKT rewards per node higher, increasing nearly 4x since last summer. As we continue to look ahead to a yield-starved world, individuals and entities are starting to identify and capitalize on Pocket’s future yield opportunity.

This has led to a healthy growth of nodes servicing relays for applications. Today, over 20,000 operating nodes across 24 countries are supporting the network. Over the past few years, we concluded that a higher node count would fuel a positive feedback loop for relays where the network becomes more resilient and attractive for applications to be serviced. This is the case today - scaling node runners paves the way for scaling usage by applications and vice versa.

We anticipate the introduction of stake pools like poktpool will also make it even easier for smaller POKT holders to support the network.

The current economics of Pocket dictates that higher relays serviced by nodes leads to proportionally higher POKT issuance. It is plausible that Pocket’s incentives will lead to most newly issued POKT to be staked back into the system to capitalize on further relay growth and avoid dilutionary effects. This brings the benefit of making the network even more resilient and scalable over time. Just this month, we saw the total staked POKT supply overtake non-staked POKT supply for the first time.

As Pocket moves from its bootstrapping to its growth phase, the DAO may vote to burn POKT staked by applications proportional to the number of requests they submit. Alternatively, nominal rewards per relay may drop once Pocket reaches some level of total supply or relay count. Discussing these critical aspects of the network is where Pocket’s community shines.

How successful Pocket is in realizing its vision will be determined by the breadth of blockchains it supports. Today, Pocket now supports an impressive 37 chains for 2,000+ applications. We look forward to seeing chain diversification accelerate over the coming quarters with blockchain integrations being a primary focus for the team in 2022.

We believe a key factor in driving this multi-chain growth is Pocket’s ability to dominate at the client layer too. There is a large design space for building simpler clients which offload work to other protocols.

This presents a clear opportunity for Pocket to become the primary node interface for protocols to build on.

One example is using Pocket’s SDK by default for archival, full, and light clients. This fits within our wider thesis of blockchain clients offloading much of their storage and networking layers to specialized middleware protocols.

Revenue Measured In The Billions

Pocket’s relay growth has led to 92% average MoM growth in protocol revenue over the past 6 months. Despite the network still in its nascent stages, annualized revenue for December surged past $1B (243x since July 2021) with service nodes receiving the majority of this protocol revenue.

This makes Pocket Network one of the highest revenue generating protocols in Web3 today.

At a $1.7B fully-diluted valuation, January’s forecasted annualized revenue implies a P/S ratio of just 1.05 - one of the lowest ratios in the entire market. As we enter a raised rate environment, analysts will be focusing more on fundamentals and value investing - a sentiment we think will carry over to cryptoassets more over time as the market becomes increasingly institutionalized.

We have also been impressed in the community’s engagement around Pocket’s economics in order to optimize the network further. For example, a proposal has been made for implementing an on-chain revenue share mechanism that aims to accelerate the onboarding of high-quality full node providers and enhance the overall efficiency of the network.

wPOKT

A current consideration by the community is the isolated liquidity of POKT on its Tendermint chain. In order to bridge POKT liquidity to other ecosystems and catalyze the onboarding of applications, the network will introduce a wrapped version of POKT (wPOKT).

Pocket will be introducing a truly unique ‘data farming programme’ that will allow users to stake against applications on their behalf to subsidize their infrastructure costs and earn yield via relays. Farmers looking for yield help extends usage by applications, increasing node revenue and yield in the process.

Finally, allowing farmers to stake against the perceived highest value dApps for Pocket and subsidize associated costs will increase the likelihood those applications will adopt Pocket over existing centralized solutions. Therefore wPOKT will be an effective mechanism to scale the supply to meet the demand for those applications that use Pocket the most.

wPOKT turns ‘speculative capital towards productive work within the Pocket ecosystem’.

Decentral Park is proud to have been a long-standing supporter of the 30-strong Pocket team and is excited to be helping them as well as Pocket’s community in achieving their goal of creating the default data infrastructure platform in Web3.

If you’re an dApp developer or node operator, join Pocket’s discord to find out how you can get involved. Pocket Network is also hiring - see available roles here.

The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.

A new valuation framework for a critical market in Web3.

Relevant Materials

APIs: The Digital Glue

Exchange Token Valuations: The PA Ratio (Elias Simos)‍

The Current Oracle Landscape

At the highest level, oracles networks provide external data to blockchains. Solutions like Chainlink seek to decentralize the oracle layer by introducing a network of nodes that facilitate data transfers between off-chain data sources and smart contracts.

Blockchains rely on oracle networks to come to a deterministic value of truth from the outside world.

As we see in other parts of Web3 tech stack, oracle networks attempt to remove single and centralized points of failure. After all, using centralized oracles nullifies the advantages of smart contracts.

Therefore, oracles are both necessary and value accretive to blockchains longer-term. The scope of the endeavour is vital with whole markets like Decentralized Finance relying on this very construct.

Today, the oracle market is valued at $16.2B or just 0.9% of the global crypto market cap. Since September 2017, Chainlink has helped drive decentralized oracle networks forward and has been invaluable in attracting attention from investors and developers to the oracle problem.

However there is still much more room for innovation with new entrants like API3, Pyth, and DIA all coming to market.

On New Valuation Frameworks

With oracle networks and their respective market only becoming more valuable over time, there has been surprisingly little research on valuation methodologies applied to them. Attempts to analyze value drivers for oracle networks have included Metcalfe’s Law and two-factor models encompassing wider market dynamics.

While these have been useful initial valuation frameworks for oracle networks, such methodologies often fail to consider use case-specific drivers (e.g. oracle feed-based metrics).

One type of network within a niche may have idiosyncratic value drivers to another network within another niche.

Arguably, one of the most important idiosyncratic metrics for any oracle network is to measure is the total value secured by its respective data feeds. The value of an oracle network should increase proportionally to the total value secured by its oracle feeds.

This is inline with viewing cryptonetwork governance as capital:

“The value of a system’s capital is proportional to the value of the resources it governs” - Joel Monegro (2019)

For oracle networks, one definition of ‘governed resources’ can be the total value secured by data feeds. Although oracle networks don’t govern the value directly, the work performed by their node operators is indirectly governing value downstream. In other words, the reliability and usability of Web3 applications is dependent on the accuracy of the data they consume.

In most cases, ownership of a decentralized oracle network can be expressed through a native cryptoasset meaning changes in a network’s resource value (e.g. value secured) may be reflected in the underlying cryptoasset price by the market.

Introducing The VSPT Ratio

The VSPT ratio takes inspiration from Elias Simos’ research on Exchange Token Valuations (2020).

A ‘value secured per token’ (VSPT) ratio is presented as a new composite metric that ascribes a fair market value to an oracle network’s native cryptoasset.

The VSPT ratio considers the value secured by oracle feeds on a per token basis. The VSPT ratio can be calculated as:

where VS (‘value secured’) equals the total value within an application that relies on an oracle network’s data feeds and t equals the total supply of the oracle network’s native cryptoasset.

An undervalued/overvalued (U/O index) can then be constructed to compare the relative difference between the actual market value of the cryptoasset and its VSPT fair market value:

where a value of >0 may indicate an overvalued cryptoasset relative to its VSPT fair value and the opposite for values of <0 (i.e. negative).

Chainlink serves several protocols across a wide range of primitives including credit markets, stablecoins, and synthetics.

Each VS value maybe calculated differently depending on the type of network in question. For example, an appropriate VS for a lending protocol may be the total credit market value reliant on oracle feeds. For stablecoin-centric protocol like Frax this might be the total monetary supply of the stablecoin itself (which sometime relies on these data feeds to factor in peg dynamics).

Continued integrations with DeFi protocols in 2021 (e.g. Compound, Frax Finance, and Liquity) has led to accelerated VSPT growth over the years.

Until April 2021, LINK’s market value had been trading at a ~300-400% premium to the total value secured by its oracle feeds.

This may not be too surprising given that:

1. Chainlink network was still very much in its bootstrapping phase
2. Chainlink had garnered one of the strongest communities since inception which has undeniably aided in putting oracles on the map for developers, investors, and users globally

However, as Chainlink has matured as a network, we see LINK market value and its VSPT have started to converge.

In July 2021, LINK traded below its VSPT fair value for the first time and since August 2021, has yet to trade back above it.

Plotting LINK’s U/O index shows the ratio of its market value and VSPT. Today, LINK trades at ~40% discount to its VSPT fair market value.

To understand why we are now seeing this divergence, we can look to wider market dynamics. The week when LINK first traded below its VSPT ratio was the period when several DeFi asset prices fell relative hard relative to underlying fundamentals.

For example, using the APT ratio valuation methodology for lending protocols, we can see that large cap DeFi names were printing record-breaking oversold signals (e.g. AAVE U/O -70% and COMP U/O -68%).

Therefore, LINK’s discount to its VSPT fair market value appears in line with other divergences seen across the market - fundamentals hold firm relative to price action.

These valuation methodologies would also imply asset prices have yet to catch up to their underlying fundamental growth.

Oracle Network TAMs Through The Lens of VSPT

As existing value within DeFi protocols grow and new protocols come to market, the TAM for oracle networks grows proportionally.

Note, this only accounts for endogenous value within crypto but oracle networks can equally provide value for value that sits outside of crypto like Open Banking data.

If total value overseen by oracle feeds is a value of driver oracle network valuations, one proxy measure for their TAM could simply be the total-value-locked (TVL) within DeFi. Today, over $188B is now contributed to DeFi protocols, showing an 8% average MoM growth over the past 6 months.

Through the lens of the VSPT ratio, it is important for oracle networks to service a meaningful portion of the value stored within the DeFi market.

At $188B, the implied TAM for oracle networks is already significant. Even if oracles is a winner-take-all market, it is unlikely that the leader services all value within DeFi.

One approach to evaluating the growth potential of emergent oracle networks is to assess their ability to service DeFi protocols across different TVL brackets.

Newer entrants within the oracle market will likely have to prove their price feed resilience and security with lower tier protocols before servicing the higher tier networks.

This still presents a great opportunity for those networks. Assuming a steady state, Oracle network data feeds can service value between ~$5-$16B for mid-tier protocols. At lower-tiers, total value serviced is still ~$3-5B.

This is relatively high if you consider that soon-to-go-live oracle networks like API3 have valuations of less than $180m.

The implication being that if these early-stage oracle networks can capture a small segment of the lower tier DeFi market, the accumulated value serviced by their oracle feeds would start driving clear quantifiable value to that network.

Through extensive testing and pure lindy effect, these new oracle networks can look to service higher-tier protocols over time.

Scratching The Surface

We are only beginning to understand how we apply fundamental valuation methodologies to oracle networks. However, much work is to be done.

Some key questions include:

• How will protocol revenue/fee mechanics inform valuation methodologies for an oracle network?
• How might VSPT apply for a first-party oracle solution vs. a third party oracle solution?
• How can oracle network valuations account for value not secured by price-based data feeds (e.g. banking credit scores or verifiable random functions)?
• Will the market mature whereby it places a premium on the total value secured by its price feeds?

The VSPT ratio represents just one valuation framework for oracle networks and we look forward to seeing more complex valuation models develop over time.

‍

The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.