Large-cap Tokens and DeFi Lead Crypto Rally

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Large-caps tokens led digital assets prices higher in July as Bitcoin (BTC, mkt cap $457B) and Ethereum (ETH, mkt cap $209B) rose 19% and 58%, respectively vs. the Nasdaq, which rose 10%. Multiple bankruptcies across the crypto lending ecosystem, including Voyager, Vauld, Zipmex, Three Arrows Capital and Celsius, punched an estimated $5B hole in corporate crypto balance sheets. However, the pain prompted consolidation, led by buyers FTX and Nexo, giving investors some confidence that a buyable bottom has formed. Meanwhile alongside falling commodity prices and improving risk appetite generally, we observed significant crypto collateral posted on-chain to leveraged BTC and ETH positions in DeFi, bringing the levels at which material liquidations might occur down substantially. Specifically, on June 24 we counted ~$500M in DeFi positions at risk of liquidation should Bitcoin fall to $10K; by July 26, that amount was roughly $200M. The borrowers today are currently in much better shape to handle another drawdown.

Among crypto sectors we track, July saw DeFi leaders up 58%, infrastructure applications up 40%, smart contract leaders up 30%, and metaverse leaders up 23%.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

Layer 1 Smart Contract Platforms

Smart contract platforms paced crypto gains in July, led by Ethereum, up 58%, which made significant progress in its transition to proof-of-stake (“the merge”) and was the best-performing smart contract protocol in our index. The Ethereum protocol is in the final stages of a crucial change in network architecture, requiring a series of dress rehearsals across the three “testnets” that the Ethereum protocol maintains. Two of these testnets, Ropsten and Sepolia, successfully completed their merges in July; the third test will be on the Goerli network, scheduled for August 4. Assuming no bugs, the tentative date for the mainnet merge is now September 19, according to Ethereum lead developers. Reflecting the success of these testnets and the better macro tape, staked ETH (stETH) rallied from a low of 0.94 ETH in mid-June to 0.98 ETH by mid-July, alleviating the widespread duration mismatch that prompted June’s deleveraging. Once the merge is complete, we expect Ethereum’s inflation rate may fall from the current ~1% annual rate to a net deflationary rate as gross emissions decline from 12,000 ETH/day to ~1,280. This may lead to an all-in staking APR of between 6% and 7%, depending on variables including 1) the amount staked at merge, 2) daily fees at the time of merge and 3) the fee burn percentage. This APY is considerably better than the current ~4% yield being earned on staked Ethereum.

Cosmos (ATOM, mkt cap $3B) was the second best-performing token in the smart contract leaders index, rising 42% and reaching $3B in market cap. Cosmos presents a modular framework for developers to create proof-of-stake blockchains, adopting components from the Cosmos SDK (software development kit) and communicating across chains with the protocol’s inter-blockchain communications module. We believe that the ease of use of the Cosmos SDK and the seamless communication of IBC will enable 10,000 Cosmos blockchains to spawn by the year 2030. Consequently, there will be an ample market for the Cosmos Hub’s B2B model to secure customers. Because the Cosmos Hub will offer greater security at a more affordable rate than most bootstrapping chains can supply themselves, many Cosmos Chains will lease security from the Cosmos Hub. In late June Cosmos contributors released a document that indicated interchain security would go live in August-September 2022. The same report estimates ATOM token holders could earn ~25% of the fees generated from consumer app-chains for providing security. That said, ATOM is currently a highly inflationary token and the core development team is somewhat fragmented, leading to a high level of uncertainty. You’ll soon be seeing an ATOM initiation from the VanEck research team, which lays out our price target and rationale in more detail.

Among laggards, Polkadot (DOT, mkt cap $8B) rose only 21% reversing, June’s outperformance as investors took profits following the long-awaited release in June of Polkadot’s cross chain messaging functionality and a new “Gov2” governance structure promising a more decentralized and inclusive model. Whereas the current system uses a public proposal queue, the new governance model will allow anyone to start a referendum at any time, as often as they wish. This means that under the new Gov2 structure, there can be multiple referendums covering a wide range of issues happening simultaneously, and no limit to the number of referendums that are open to voting at any time.

Cardano (ADA, mkt cap $17B) was another underperformer, up only 14% as the largest proof-of-stake blockchain by market cap failed to execute its Vasil hard fork as promised on July 1. Then, Cardano’s director of architecture engineering decamped for the CTO role at Algorand. Lastly, Cardano’s decentralized exchange Cardax was supposed to have launched already. Instead, the CEO announced in July that the project is not ready and needs more capital to execute its vision. Despite the negative newsflow, Cardano continues to see a high level of developer activity. We look forward to seeing Cardano execute on its multi-chain vision, noting that the omnichain DEX project Sifchain recently applied for a grant to build a bridge connecting the Cosmos ecosystem to Cardano. This would allow Cosmos assets like ATOM and OSMO to bridge to Cardano, and ADA to flow through to the Cosmos ecosystem. The Cosmos bridge follows on the Cardano-EVM (Ethereum virtual machine) sidechain announced in June, which will be the first sidechain built and released by IOG, with the goal of opening Cardano up to Solidity developers.

Lastly, we highlight NEAR (NEAR, mkt cap $3.2B), up 36% in the month. NEAR is a proof-of-stake smart contract platform with an innovative tooling suite that leverages WebAssembly to enable the use of standard programming languages such as Java, Go, rust and others. This should make it easier for Web2 developers to create apps rather than having to learn a very specific language like Solidity, Ethereum’s preferred language, to start coding. WebAssembly also allows developers to more easily port their legacy applications to Web3. NEAR’s tokenomics appear attractive with a 5% annual inflation rate that rewards 90% of new issuance to validators and 10% to the NEAR treasury. In addition, the NEAR network charges and burns network fees similar to Ethereum post EIP-1559, so inflation can be much lower depending on network activity. Overall inflation approaches 0% currently. NEAR announced partnerships with both BitGo and Fireblocks in July, allowing more institutional ownership. We would expect other custodians to add support for NEAR in coming months.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

Metaverse & NFTs

The MVIS CryptoCompare Media and Entertainment Leaders Index (MVMELE) rose 23% in July, and the sector no longer stands out as the highest volatility category we track, falling to the middle of the pack amidst continuing VC fundraising activity and a broader array of higher quality web3 games in the market.

Sandbox (SAND) outperformed, up 33%, as the largest metaverse platform by market cap announced it will deploy on the Polygon network and also revealed an MOU (memorandum of understanding) with Hana Bank (004940 KS, mkt cap $8B) for cooperation in new business lines. Unfortunately, the fundamentals didn’t quite match the price action as the number of units of land sold fell by 47% amidst a 19% gain in the average sale (in USD terms), lagging the rally in the coin. Metaverse competition is heated and platforms like Sandbox may have to take market share from OpenSea, which still has 90% share of NFT sales, in order to outperform consistently.

Some other notable headlines in the month:

• OpenSea co-founder Alex Atallah announced he will be stepping down in August to focus on new ventures after the #1 NFT marketplace hired a new CTO and director of engineering to replace him.
• The former head of short video giant TikTok's gaming unit, Jason Fung, is launching a blockchain gaming startup. "Right now, if you look at any developer when they implement NFTs or blockchain in their games, they have to choose a single blockchain, be it Polygon or Solana or Binance Smart Chain. But imagine a more interoperable option," he told Reuters in Hong Kong, referring to popular existing blockchains.
• Klang Games raised $41M to build its "Seed" virtual world with AI beings. Seed is a player-built online universe. The company also announced Electronic Arts veteran Isabelle Henriques has joined as co-CEO.
• Reddit launched a new NFT-based avatar marketplace that allows users to purchase blockchain-based profile pictures for a fixed rate. The company said that a crypto wallet is not needed to buy them. A credit or debit card should be enough, and users can store them with Reddit’s own wallet product. Reddit has partnered with Polygon to mint these avatars on-chain.
• GameStop’s NFT Marketplace launched in July and quickly surpassed Coinbase’s NFT marketplace by volumes sold.
• Animoca Brands, one of the leading Web3 game developers and investors, raised $75M at a $5.9B valuation.
• Konvoy Ventures, backer of Axie Infinity, launched a new $150M fund for Web3 gaming.
• Web3 music streaming service Audius is offering a new feature for creators to monetize their content by allowing listeners to send tips to artists, the company said Tuesday. Audius later revealed a $6M hack due to an undiscovered bug that was exploited despite past security audits.
• The Brave (BAT, mkt cap $500M) Browser released updated numbers that look impressive: 2.5 billion queries in the past 365 days with a high of 14.1 million queries per day (For comparison, it took Google more than a year to reach 2.5 billion queries, and DuckDuckGo more than 4 years); 62M DAU; 10M Brave rewards users opted-in to earn BAT; 2M+ creators verified and accepting BAT token. Brave also announced integration with Filecoin (FIL, mkt cap $7B) and more preloaded EVM chains integrated with the new Brave Wallet, including Aurora, an EVM on the NEAR protocol.
• Snap is exploring plans to allow users to showcase non-fungible tokens on its app, the Financial Times reported.
• Square Enix (9884 JP, mkt cap $6B) will release Final Fantasy NFTs thanks to their new partnership with NFT ecosystem Enjin (ENJ, mkt cap $500M), which will release in 2023. The partnership will see Enjin releasing a digital collection of cards that celebrate Final Fantasy 7 on the cross-chain network Efinity, a substrate-based Polkadot parachain.
• Revuto introduced its Revulution NFTs product with a limited edition launch of NFTs providing lifetime subscriptions to Netflix and Spotify. Users will be able to put up their NFTs for sale if they no longer want to use the subscription. The Revulution NFTs work through digital debit cards provided by Revuto in partnership with fintech company Railsr (formerly known as Railsbank). If the user decides to sell their NFT to another user, the digital debit card will be deactivated and a new one will be created for the new owner. We see this model as applicable for a wide range of subscription services, including enterprise SAAS (software as a service).

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research.

Infrastructure Applications

Reversing months of underperformance, the MVIS CryptoCompare Infrastructure Applications Leaders Index (MVIALE) rose 40% in July. According to a Q2 2022 Revenue Report by Messari, Web3 Infrastructure revenue declined only 10% year over year in Q2 despite the deepening bear market, indicating strong demand for decentralized computing, indexing and scaling solutions.

Polygon (MATIC, mkt cap $9B) outperformed, up 90% in July. On July 20, Polygon introduced zkEVM, a scaling solution that utilizes Zero-Knowledge (ZK) Technology to process transactions with speed and low cost. This technology batches transactions and uses a Zero Knowledge Proof (ZKP) to validate them on Ethereum. The solution prides itself on EVM compatibility, which allows developers to seamlessly deploy Ethereum smart contracts on zkEVM. Previous beliefs including Vitalik Burterin’s has held that a performant and compatible ZK rollup would take years to develop. Polygon’s zkEVM release provided a major breakthrough in Ethereum Layer-2 scaling problem. For more on this topic, we recommend listening to the VanEck webinar, Scaling Ethereum, with Polygon co-founder Sandeep Nailwal here.

Quant Network (QNT, mkt cap $1.3B), another notable performer in the Infrastructure category, was up 110% in July. On July 22, the Network released an update on its Overledger, a blockchain-agnostic API gateway that enables interoperability between businesses and distributed ledger networks. This update connects Overledger to Hyperledger Fabric, an enterprise-grade, permissioned blockchain platform that suits a wide range of industry use cases, especially in supply chain management and financial services. Since 2021, Quant Network has collaborated with Oracle to drive financial inclusion and digitization in Latin America with blockchain technology.

Ethereum Name Service (ENS, mkt cap $300M), a decentralized domain name protocol that provides users with an easily readable name on the Ethereum network, witnessed another spike in both domain registrations and trading in secondary markets this month. The ENS smart contract consumed as much as 10% of total gas consumption on Ethereum over the first weekends of July. Powered by the heated Ethereum domain market, which reached 23K names registered per day on July 5, ENS protocol revenues rose 100% in July. Meanwhile, the ENS token’s valuation probably got a boost from news that competitor Unstoppable Domains just raised a $65M series A at a $1B valuation. We explored ENS in a previous blog: The ENS Airdrop and the Future of DAOs.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

DeFi

The MVIS CryptoCompare DeFi Leaders Index rose 58% in July, making it the best performing sector by a wide margin after underperforming dramatically over the last year.

Uniswap (UNI, mkt cap $7B) was the star large-cap performer, rising 90% in the month. Uniswap is the dominant decentralized exchange in the Ethereum ecosystem with 50-80% market share depending on the day. Uniswap has expanded to layer 2s and other EVM-compatible chains and now controls the majority of the DEX volume on Polygon, for example. However, since launch, all UNI trading fees went to liquidity providers, while the token could only be used for governance. The smart contract itself contains a “fee switch” that could be turned on by token holders to accrue a portion of revenue. A pilot test of this fee switch is currently underway. We should note that Uniswap sees far more volume as a percentage of TVL (total value locked) than any other DEX, which means that even if the fee switch was set at 25%, say, the organic APYs on Uniswap might still be higher than other DEXs. We also note the possibility that Uniswap’s price feed could act as the data “oracle” supporting other dApps, thus taking market share from Chainlink (LINK, mkt cap $3.7B) which has struggled to gain momentum after announcing its staking model in June.

Aave (AAVE, mkt cap $1.3B) was another DeFi star this month, rising 69%, as lending/borrowing activity returned and Aave Companies proposed to the DAO the introduction of a native, decentralized, collateral-backed stablecoin GHO, which will be pegged to USD. We have repeatedly noted the strong investor demand for a censorship-resistant stablecoin that can be used in DeFi and expect the crypto community to have a more favorable bias to a project administered by an OG operator like Aave. Meanwhile, smaller stablecoin DEX Curve (CRV, mkt cap $749B) also announced a decentralized stablecoin, sending CRV up 120% in the month.

Lastly, we want to highlight that with Sushi’s (SUSHI, mkt cap $192M) launch on top of bridging solution Stargate (STG, mkt cap $50M), the first true omnichain decentralized exchange is now live. SushiXSwap lets users swap from DAI on Ethereum to AAVE on Polygon in one transaction from the source chain, without ever leaving Sushi’s interface. Users can pay source and destination chain gas fees once, and provision additional assets for future gas fees on the destination chain all in one transaction. The protocol is currently limited to EVM chains.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

Exchange Tokens

Exchange tokens rose 33% this month, led by bankrupt Celsius (CEL, mkt cap $275M), which gained 60% as collateral values rose and retail depositors were prevented from making withdrawals. This gave Celsius more time to optimize the value of its remaining holdings. Binance (BNB, mkt cap $47B) rose 34% as Binance introduced no-fee Bitcoin trading, in contrast to smaller platforms like Bitstamp, which announced plans to charge a monthly “inactivity fee” of 10 euros for some users before backtracking due to community outrage. Overall exchange tokens lagged somewhat in July but exhibit much lower volatility than any sector we track, making the category full of interesting opportunities, including BNB and FTX (FTT, mkt cap $4B), in our view.

Source: Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 7/29/2022.

Source: Messari, DefiLlama, Bloomberg, blockchain explorers, VanEck research as of 7/29/2022.

All data as of 7/29, one month returns cover 6/30 through 7/29.

Market cap refers to circulating market cap.

Sources: TheTie, Messari, Glassnode, IntoTheBlock, Dune Analytics, Santiment, DefiPrime, Defilama, Parsec, Bloomberg, Decrypt, Sanford C. Bernstein, TokenTerminal, project twitter accounts.

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