Continuing from the previous article , in "5 Million Rows of Data Recap: Investigating The Crypto Market’s 3-Year Bull Run @LUCIDA ", LUCIDA analyzed the macro performance of the entire Crypto market in the past three years through data.
In this article, LUCIDA will analyze the "public chain" with SnapFingers DAO.
Introduction
The massive success of Ethereum has made smart contract public chains a holy grail for capital to compete. At present, Ethernet is still the largest and most important platform in Smart Contract public chains, but a large number of applications are not suitable to run on Ethereum due to low performance and high cost.
New public chains are taking up this spillover demand for Ethereum with their performance and cost advantages. Especially during the bull market of 2021, many applications emerged, and the new public chain ecosystem exploded one after another, from BSC to Polygon to Solana, while the Avalanche, Fantom, and Terra ecosystems also grew significantly. As Vitalik Buterin tweeted, "the future will be multi-chain" the growth paradigm of this bull market public chain may have some implications for the future "multi-chain" pattern.
I. Public Chain Market Performance in the Great Bull Market 2020-2022
Public chains are the infrastructure and the most important component of the crypto market. The public chains discussed in this paper include smart contract and cross-chain platforms, 21 in total. Except for Ethereum, other selected samples and classifications are listed below. The criteria for selecting the sample are the top 100 in market capitalization with an established ecosystem and market interest.
1.1 Formulation of public chain price index
The prices of 21 public chains vary a lot, up or down, and in order to make it easier to observe the overall performance of the track, we made the public chain index (Chain_Index) with a weighting algorithm. The specific algorithm of the public chain index (Chain_Index) is as follows:
Price of public chain index for the day = ∑ Closing price of the underlying asset for the day * Weighting factor of the underlying for the day
Underlying weight factor for the day = Average daily turnover of the underlying asset in the past 30 days / ∑ Average daily turnover of the underlying asset in the sample in the past 30 days
To make it easier to see the overall situation of the public chain track, we have made a chart of the public chain index prices and changed the axis to a logarithmic axis.
1.2 The public chain track has a better excess return to return-risk ratio in a bull market
- In the current bull market, the maximum gain of the public chain index is 3013%, with the lowest point occurring on March 16, 2020, after the 312 crash, and the highest point occurring on May 11, 2021.
- The largest retracement of the Public Chain Index was 36.4%, which occurred between February 18, 2021 and February 28, 2021.
- The maximum bear market decline in the Public Chain Index (as of June 20, 2022, the date of data acquisition) is 72.5%.
If we compare the performance of Bitcoin over the same period using the maximum upside, maximum retracement, and maximum bear market decline, we see that the public chain track has a better return-to-risk ratio than Bitcoin overall. And, as of now, public chains has not shown an overshoot in the bear market, so the defensive nature of the public chain in a bear market is no worse than bitcoin. (But assuming the bear market persists, don't rule out the possibility of the public chain making up for the drop).
1.3 The trend of the largest increase of each public chain is seriously differentiated: some with thousands of times increase, and some listed as highs
Next, LUCIDA will do a separate data analysis of these 21 public chains.
Let's look at the gains section first.
The chart above shows the biggest gains of 21 public chains in the bull market. The first place is Fantom (FTM) with 144,198%, followed by Solana with a maximum gain of 50,152%.
LUCIDA also found that the distribution of the largest gains in the public chain circuit is well spread out:
- First Tier with 100x Increase: Fantom 144198%, Solana 50151%, Polygon 35434%, Harmony 22862%, Cardano 12287%
- Second Tier: Binance, Avalanche, Ethereum as representatives, the largest increase is within 100 times.
- Third Tier: represented by Internet Computer and Moonbeam, listing at its peak .
Therefore, LUCIDA believes that investment in public chain needs to be carefully selected, otherwise it is likely to be deeply trapped.
1.4 The maximum withdrawal of each public chain is 60%, lasting for 2 months, and BNB is the most resilient public chain
After talking about the distribution of returns, let's take a look at the risk.
The green chart below shows the time distribution of the maximum rise of 21 public chains; most of them started to rise in March-August 2020 and topped out in September-December 2021, with an average rise period of 467 days.
The red chart below shows the time distribution of the maximum withdrawal of 21 public chains; most of them experienced the maximum withdrawal from February to May 2021, and stabilized and rebounded from June to August 2021, with an average withdrawal period of 69 days and an average withdrawal range of 59.9%.
It is worth mentioning that BNB's maximum withdrawal was only 36.9% and lasted for only 9 days before recovering its losses, making it the most resilient public chain in the bull market.
II. Development pattern of bull market public chains from 2020 to 2022
After talking about the overall performance public chains, LUCIDA will sort out the pattern them. Ethereum is the undisputed leader in the public chain track, maintaining a share of over 50%. However, if we break down the public chain track in terms of TVL share and market cap share, we will find something interesting.
Starting from February 2021, Ethereum's TVL share suddenly decreases, BNB chain suddenly rises, and led by BNB chain, Polygon, Solana, Tron, Avalanche and other public chains taking over Ethereum's dominance together.
Statistically speaking, starting from February 2021, the proportion of Ethereum's market cap has dropped significantly.
Note: The above data is from DefiLiama, which does not provide TVL data for Internet Computer, IOTA, or Polkadot, and the TVL data is only available from August 2020, which will have a slight impact on the quantitative calculation of TVL share, but should not affect the qualitative analysis of the text.
III. The Logic Behind 2021 Bull Market Public Chain Outbreak
3.1 DeFi creates overcrowding in Ethereum
After DeFi Summer in June 2020, the demand for Ethereum interactions increased dramatically, leading to a surge in Ethereum Gas. Compound's liquidity mining blew DeFi off, and in July, token mining named after food took the crypto world by storm with high returns completely igniting the entire crypto space, although the high returns did not last.DeFi is on the rise again in the fourth quarter. At the end of the year, not only a large number of new projects were launched, but the original leading projects were more frequently updated.
With the DeFi boom, Ethereum's daily Gas fees increased by more than 100 times from $447,000 to $49.55 million (June 2020 -- February 2021), with DeFi accounting for the highest percentage and fastest growing transactions.
3.2 BSC- the first to seize the opportunity of public chain
Ethereum Gas remains high, the DeFi money making effect is in full swing,the huge demand gave new public chains the opportunity to catch up, and the first to seize this opportunity was BSC (later renamed BNB Chain), which was officially launched in September 2020, followed by the announcement of a $100 million seed fund to support DeFi project owners and developers on the BNB chain to further support CeFi and DeFi ecosystem synergy.On February 2, 2021, the BNB chain reached a milestone of 1 million unique addresses after 5 months online, and on February 9, the number of transfers on the BNB chain exceeded 1.6 million, surpassing the 1.32 million transfers on the Ethereum chain.
3.3 Polygon, Fantom, Harmony, Avalanche and Other Public Chains Use Incentives to Promote Growth
Polygon, which exploded in April-May, is also EVM-compatible. Unlike BNB chains that are empowered with BNB tokens, Polygon launched a $150 million incentive program at the end of April, in which a $40 million liquidity mining incentive plan was directly introduced to the leading of Ethereum DeFi protocol Aave, and TVL rose by a maximum of 68 times in 2 months.
In September and October 2021, Fantom, Harmony, Avalanche ($180 million), Celo and NEAR launched their incentive plans one after another. Some public chains have chosen to be EVM compatible, such as the aforementioned BNB chain, Polygon, and Fantom, which are compatible with EVM to better channel the Ethereum ecosystem.
3.4 Solana's strategy of "Light on Technical, Focus on Ecology" to overtake the market
Solana is one of the top gainers of public chain tokens, and its rise has been driven by a strategy that is light on technology and heavy on ecology. Compared with Avalanche, Algorand and other well-known PoS public chains, Solana chooses a more centralized technology solution, which greatly reduces the difficulty of technology implementation and enables rapid roll-out to meet the needs. To make the ecosystem flourish, the Solana team and its investors have adopted a number of incentives to encourage users to experience their platform, such as introducing liquidity mining, providing subsidies to developers, hosting hackathons, and providing donation funds.
As you can see below, the Solana chain has attracted a lot of developers. In 2021, Solana Ecology will have the highest number of developers and the highest growth rate.
3.5 NFT Re-ignites Public Chain Demand
NFT is the largest source of demand for public chains from the second half of 2020 to the first quarter of 2021.
In the second quarter of 2021, NFT succeeds DeFi as the second application area that brings a large demand for transactions. With the participation of celebrities, NFT began to spread and go out of business, a large number of investors and projects emerged, and the transaction scale of NFT continued to expand. Ethereum, as the first public chain, has absolute advantages in capital, number of developers and ecological scale, and therefore has the most NFT projects. Meanwhile, other public chain NFT tracks are also developing rapidly. Solana Chain, for example, even bucked the trend with an uptick in NFT volume during the market downturn in May 2021. It is now the second largest NFT ecosystem after Ethereum.
3.6 Reasons Behind Public Chain Rotation Logic
Therefore, it can be said that the outbreak of this bull market is caused by the prosperity of the application layer and the lack of scalability of Ethereum. The public chain rotation logic is summarized by the following reasons.
- The DeFi boom caused the high cost of Ethereum Gas and congestion, which lasted until 2021, and the rotating boom of NFT and GameFi will continue to put demands on the scalability of public chains.
- The huge demand for various applications during the bull market enables public chains with fast technology implementation and substantial capital to occupy the first opportunity and attract various applications to join the ecosystem.
- Different public chains have different resource endowments, and even if they use the same general formula of "EVM-compatible/cross-chain bridge + eco-incentive," their specific strategies are different: BNB Chain and Solana use native token to empower them, while Polygon integrated the Ethereum leading DeFi protocol .
- EVM compatibility allows for faster access to Ethereum outcomes, including the Fork protocol and developers.
3.7 The technical difficulties and slow landing of Cosmos and Polkadot are one of the reasons that affect the increase
Cosmos and Polkadot, for example, didn't benefits from the bull market, due to the technical difficulty and slow landing of the common chain, and the need to build a separate bridge to connect to Ethereum.
LUCIDA believes that this also explains why Cosmos and Polkadot are only ranked 12 and 15 in the previous statistics of "1.3 maximum increase of each public chain".
IV. Advantages of Public Chains
After a round of bull market, new public chains have attracted developers and users, and also established their own infrastructure and ecosystem. Just like Vitalik said, the future will be a multi-chain pattern, so what are the advantages has been built by each public chain after this bull market.
4.1 Ethereum
Ethereum ranks second in the crypto market in terms of market capitalization, with a long-term market capitalization of 17% - 22%, which is significant for the whole crypto market. The data in the Etherum Report for the first quarter of 2022 shows that there are 4,011 stable running DApps and more than 7,220 Smart Contracts in Ethereum.
Ethereum is the most advantageous public chain, with a high degree of decentralization and security, a large number of users and a large number of developers. Complete infrastructure (wallet, predictor, developer tools), rich application types, network effect has been formed, with soil for innovation, has been leading the trend of blockchain application:
- （2017-2018）At the end of 2015, Ethereum introduced the ERC20 standard, which eventually led directly to the bull market caused by the lCO launch in 2017. In 2017, the issuance of smart contracts expanded the boundaries of blockchain technology, and blockchain entered the mainstream as the underlying technology. This round of market, Ethereum market value ranked second laid the foundation, and drove the valuation of other smart contract platform and infrastructure sector; In Ethereum ecosystem, the number of DAPP has exploded, and the rising effect of NFT, GameFi and Fork coin shows obvious increase. ETH has initially become the anchor target of the altcoin market.
- (2020 - 2021) In this cycle, the total market capitalization of cryptocurrencies reaches up to 3 trillion USD, and the trading volume of Ethernet network exceeds 3.6 trillion USD. Ethereum's share of market value has risen to about 20% from 11% in early 2021. In this round of market, the rotation within Ethereum ecosysterm includes DeFi (DEX, AMM, liquidity mining, mortgage lending), NFT, Meme, GameFi, Metaverse, etc.
- (2021 - 2022Q1) In the crypto market mini-cycle, NFT and DeFi remain its hype, the market reconstruction of the valuation logic of the public chain has promoted the rising market of the public chain.
In the above process, the projects in each cycle of the Ethereum ecosystem will undergo a shuffle in the bear market, and only 10%-20% of the projects survive and grow to become important blue chip projects and common infrastructure in the next cycle.
Despite the multi-chain trend, the share of total lock-in value (TVL) on the Ethereum network has diluted, with the landing of Layer 2 expansion solutions. As new public chains continue to divert developers, users, and applications from Ethereum, Ethereum itself has reduced GAS volatility and the rate of ETH accretion through EIP-1559 upgrades, open the stage for several L2 protocols, including Optimism, Arbitrum, dYdX, and others.
4.2 Binance Smart Chain
BSC officially launched in September 2020. shortly after BSC's TVL crossed the $15 billion mark in Q2 2021, its TVL more than doubled to $35 billion in ten days due to a sharp increase in the price of BNB and its derivatives such as CAKE and XVS.
Following the 5.19 crypto market crash, BSC became the most active attack platform for hackers, and 6 attacks occurred in succession. Flash loan was the main attack method, and the amount of loss was generally large, and a significant short-term impact on token price. The euphoria generated by the record high quickly wore off as a series of negative catalysts hit the market, including the $200m Venus liquidation and the $45m PancakeBunny flash loan attack. The increase in exploits drained user confidence and caused token prices and TVL to plummet. From March 2021 to September 2021, the average TVL market share remains around 15%.
The advantage of BNB chain is that it has a large user base and the capital, technical and other support of Binance. The disadvantage is that the network is highly centralized and the ecosystem is heavily dependent on the Ethereum developer community.
4.3 Solana
The Solana protocol mainnet Beta was launched in March 2020. As of today, there are nearly 2,700 projects on the Solana chain, covering 8 major areas such as DeFi, wallets, NFT, infrastructure, decentralized gaming, and 15 sub-sectors such as stablecoins, DEX, derivatives, etc.
Solana has developed a relatively complete NFT ecosystem, such as project tools and trading markets. Magic Eden is a Solana-based NFT marketplace.In the early stage of development, it chose to build Solana without EVM because of its high-performance advantage and focus on the game field. Currently, the trading volume accounts for more than 97% of the entire Solana ecosystem. It is worth mentioning that Opensea, which previously only supported Ethereum, started to support Solana in April this year, but the majority of transactions of its leading project Okay Bears are still done on Magic Eden.
Due to Solana's relatively low network fee revenue, it may not be possible to support a cash flow-based valuation model unless dAPP and usage increases or fees increase. Like BNB chains, Solana networks are highly centralized. With the expansion of the user scale, Solana network showed continuous instability, and there have been multiple crash that stopped block production.From last year to this year, Solana had multiple crash incidence. In the continuous accidents, people began to suspect that Solana's innovation mechanism did not really solve the "impossible triangle", but only saved the "efficiency" at the expense of "safety".
V. Conclusion
The market performance of public chain tokens is both explosive and risk resistant, making them a very important segment in asset allocation. From the public chain rotation outbreak in this bull market, despite the first-mover advantage of Ethereum, the public chain structure has not yet been determined. Whether it is through ecosystem incentives, better connectivity to Ethereum or introducing blockbuster applications, the public chains can quickly capture market share.Public chains that overdrawn its expectation prior to official launch performs slightly worse which means that public chains are demand-driven.
In this round of bull market, public chains benefited from the burst of DeFi and NFT applications as well as the lack of Ethereum processing power, and whoever can provide the performance support and financial support needed for new applications will grow quickly. The reason this logic is expected to be slightly different in the next cycle is that after the market settles down, quality applications that have survived the bulls and bears will capture more of the market and, accordingly the public chains where these applications are located will benefit as a result.
Author and reference articles
Lisa Yao@SnapFiners DAO、嗷嗷@SnapFingers DAO、LiHui@LUCIDA、ZnQ_626@LUCIDA
6角度横向对比6条公链、2021公链赛道回顾、2021-2022区块链趋势报告、2020-2021报告、Electric Capital 2021开发者报告
About LUCIDA
LUCIDA is a quantitative crypto hedge fund located in the Cayman Islands. LUCIDA entered the crypto market in April 2018 with massive investments in the secondary market; we are mainly engaged in CTA, statistical arbitrage, options, and other financial derivatives strategies. Also, LUCIDA provides financial management services for high-net-worth clients, and we release in-depth investment research reports from time to time.
About SnapFingers DAO
SnapFingers has now proudly announced that its transformation towards the DAO based on Proof-of-Contribution, an innovative consensus, has been initialized. On this voyage of discovery, SnapFingers will actualize those visionary proposals raised by the community and live up to its name by snapping the fingers and causing a stir in the crypto world.
How to contact LUCIDA
- Email： [email protected] / [email protected]
- Twitter：@ZnQ_626 / @lucidafund
- website：https://www.lucida.fund