UST Aftershocks Weigh on Crypto

Digital assets struggled through another painful month with Bitcoin falling 16%, Ethereum 30%, the MVIS CryptoCompare Smart Contract Leaders Index down 42%, and the Nasdaq Composite down 4%.

Amidst the rout, Bitcoin’s 30-day correlation with the Nasdaq hit another two-year high of 0.78 in May as investors marked down valuations of most emerging technologies to account for sharply higher bond yields globally and recession fears. Meanwhile, the collapse of LUNA and its UST stablecoin have highlighted continued regulatory and governance risks in the space.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

Layer 1 Smart Contract Platforms

Crypto’s disappointing performance in May was catalyzed by the collapse in the Terra ecosystem, specifically the UST stablecoin. The run-on-the-bank fears we highlighted in previous blogs materialized and sent shockwaves through the industry leading to $43B of market cap destruction.

Nevertheless, it is notable that in a poll on Twitter in the wake of the collapse by prominent crypto data analyst @gojo_crypto, 81% of respondents replied “yes” to the question of whether a “highly adopted decentralized stablecoin is important for the crypto industry, whether it’s UST or not”. In fact, highlighting this continued strong demand for decentralized stablecoins, TRON stands out as the only major outperformer among “layer 1” tokens, up 14% in May. Market participants have crowded into Tron’s new algorithmic stablecoin USDD, which currently pays 11% on deposits. TRON also launched a $10M incentive fund to attract Terra developers looking to move applications to Tron, and to pay staking rewards. While 11% yields are certainly more sustainable than the 20% that LUNA’s Anchor protocol was paying, we still find the mechanism to be unsustainable and prone to a “run on the bank” during a tricky macro period. We are on the sidelines for now.

Cardano (ADA), a 14% index weight in MVSCLE, was another outperformer in May down only 20% in the month. Although the total value locked (TVL) on Cardano’s decentralized lending and borrowing protocols remains very low in absolute levels, at less than $200M, down 25% in the month, on 30 May the largest stablecoin USDC announced a new bridge enabling the conversion of USDC from the Ethereum network to Cardano. Iagon, the cross-chain bridge protocol powering the integration, plans to add support for additional ERC-20 tokens in the future. These developments come ahead of Cardano’s “Vasil” hard fork public testnet scheduled for early June, which promises faster throughput and an enhanced range of DeFi apps and smart contract functionality. That said, VanEck’s research continues to surface little developer or investor traction for Cardano’s Haskell-based programming environment and we expect the project to struggle to retain talent as the funding environment tightens somewhat.

Among the laggards in the MVSCLE index, Avalanche fell 54% in the month. We have highlighted in previous research that Avalanche’s “subnet” architecture may lead to weakness in gas prices and fees on the network until Avalanche achieves a critical mass. In addition, LUNA’s treasury continues to hold AVAX tokens which the market worries will act as an overhang on price should they come up for sale. We remain optimistic on Avalanche’s long term prospects, but await more clarity on a re-acceleration of fees which have stalled somewhat as we highlighted in recent research.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

Metaverse

The MVIS CryptoCompare Media and Entertainment Leaders Index (MVMELE) fell 42% in May highlighting the continued underperformance of “metaverse”-exposed assets, both stocks and coins. For example, the Ball Metaverse Index, upon which the largest metaverse equity ETF is based, is now down 42% YTD.

Still, there has been considerable innovation in open-source, on-chain social media applications in recent months. AAVE’s social media project Lens Protocol debuted its first apps on the Polygon blockchain. Lens is a software stack that enables developers to create decentralized competitors to social media platforms such as Twitter and Facebook. In addition, Robinhood and Gamestop both announced the launch of self-custody wallets by the end of the year. Gamestop had previously announced a plan to launch an NFT marketplace in partnership with Immutable X, a L2 scaling solution for Ethereum. Lastly, in addition to its new $4B blockchain fund, A16z launched a separate $600M fund dedicated to gaming startups with a focus on Web3.

Within gaming, STEPN has seen the most growth in terms of user activity. This “exercise to earn” NFT platform’s monthly active user base doubled from 2.3 to 4.7 million in May despite the macro downtrend. The platform allows users to earn rewards when they walk, jog, or run outside. Users are rewarded with Green Satoshi Token (GST) and Green Metaverse Token (GMT), the project’s utility and governance tokens. Users have to buy a sneaker NFT that tracks usage and can be upgraded by burning GST to boost rewards. STEPN’s daily active user base and daily transaction count grew 23x and 17x respectively from March to May. In an interview with CoinDesk, STEPN Co-Founder, Yawn Rong claimed that 30% of STEPN’s new users have never interacted with a blockchain before. The platform has traction but its tokens are following the “playbook” of the average play-to-earn token, meaning constant sell pressure. GMT lost 60% of its value this month from $2.1B in late April to $740M as of 30 May. This decline was due to a high correlation with the broader market and the decision to block users from mainland China. The latter was in response to the crypto-related regulations introduced by the country’s authorities. For such a project to create sustainable value, the user base must coordinate to create a business model that re-invests the accumulated capital. Perhaps this is a media venture or branded exercise gear. We await such a business model from the sidelines.

Other developments:

• Yield Guild Games (YGG), the largest Web3 gaming guild, has released its Community Update for Q1 2022, revealing that total scholarships rose 39% overall to 30K scholars as the guild continues to farm copious amounts of the Axie breeding Smooth Love Potion (SLP) token despite a downturn in the market. The play-to-earn scholarships allow new players to borrow a team of Axie NFTs from the Guild. Their in-game earnings are then split between the player, the community manager and the YGG DAO.
• Solana NFTs heat up as monthly volume and transaction count hit all-time highs in May. Per data from CryptoSlam on 25 May, Solana’s secondary market sales generated nearly $24.3M in daily volume, while Ethereum sales added up to $24M during the same span across all of the marketplaces. It’s a modest difference between the platforms, but this is the first known instance of the smaller Solana market overtaking Ethereum in terms of dollar amount generated via sales during a 24-hour span.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

Infrastructure Applications

The MVIS CryptoCompare Infrastructure Applications Leaders index (MVIALE) fell 40% in May. REN was the biggest loser in the category down 55%. Filecoin, the second biggest loser in the category, fell 53%. Filecoin is a decentralized data storage network built by Protocol Labs that allows users to sell their excess storage on an open platform. It acts as the incentive and security layer for IPFS (InterPlanetary File System), a peer-to-peer network for storing and sharing data files. In May, defense contractor Lockheed Martin and the Filecoin Foundation announced a partnership to make an open-source blockchain network accessible in space at an event hosted by the Filecoin Foundation on the sidelines of the World Economic Forum's annual meeting. According to Joe Landon, VP of advanced programs development at Lockheed, the cooperation is meant to prepare for a future when “we’ll have one satellite refueling another…a transaction that takes place entirely in space that doesn’t really have a nexus back on Earth. Decentralization makes sense for that,” he explained.

In aggregate, the infrastructure category is now the worst performing sector over the last one-year, down 78%, as the scaling solutions and decentralized cloud computing protocols that characterize the space are not yet producing much cash flow for investors.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

DeFi

The MVIS CryptoCompare DeFi Leaders Index fell 23% in May. DeFi TVL (total value locked) fell 42% to $110B as of 31/5/2022. Here again, TRON is in an awkward spotlight with a 33% increase in its TVL currently at $5.68B. Most (if not all) of the influx went to “JustLend”, a lending and borrowing protocol on TRON offering 11% on USDD with a similar mechanism to the Anchor protocol on Terra, which eventually proved unsustainable. While the 11% yield (previously 30%) is a more realistic level, we question the durability given that Bitcoin futures have recently tipped into backwardation and DeFi yields have fallen more generally to well below 11%.

Still, despite the token rout, we note that overall DeFi trading volumes across all decentralized exchanges still surpassed $115B in May, 12.5% of the volumes on centralized exchanges, up from 10.7% in April.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.

Exchange Tokens

Overall, exchange tokens fell 49% this month. KuCoin was the best performer in the category down only 5%. Earlier this month, KuCoin raised $150 million in pre-Series B funding at a valuation of $10 billion. The round, which was led by Jump Crypto, also saw participation from Circle Ventures, IDG Capital and Matrix Partners. KuCoin will use the funds to expand its product offerings, going beyond its current centralized trading services and increasing its presence in the broader Web3 market, by building out crypto wallets, as well as DeFi and NFT platforms, through its investment arms like KuCoin Labs and KuCoin Ventures.

Among laggards, Celsius (CEL) fell 60% in May as market participants anticipated fallout from Terra’s collapse, given that Celsius had offered among the highest interest rates on borrowed crypto among larger centralized exchanges. Indeed Celsius’ total customer assets fell from $16.9B on 6 May to $11.8B on 17 May, according to the company’s website. CEO Alex Mashinsky tried to reassure the market on 11 May, tweeting that “Celsius has not experienced any significant losses,” but the market remained in “sell first, ask questions later” mode throughout May. CEL market cap is down from a peak of $3B in Summer 2001 to $326M as of May.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 31/5/2022.

Past performance is not indicative of future results. Gross returns exclude management fee. Net returns are inclusive of management fee of 1.00%.