The Crypto Insider Report #17: Developers and users offer the real value in the long run
Disclaimer: Everything we write in "The Crypto Insider Report" is an x-ray of the industry as we see it, through the lens of publicly available information. We are not financial advisors.
If you haven't already watched the episode with Paul Brody, don't miss it!
I was writing in one of the previous newsletters about how we should relate to layer 1s and how we could structure our investments in that sense. The following graph then passed in front of my eyes:
It's DPI/ETH and as you can easily see, last year, Ethereum took all the air out of the room just by talking about Ethereum 2.0 and launching EIP 1559 in the summer. I expect the same thing to happen with the other layer 1s that are now competing to provide incentives in order for developers to start building dapps in their backyard.
I think more and more that the value of an infrastructure protocol is given by the number of developers cumulated with the number of users. Electric Capital has made public a report that I have gone through several times in the last few days -
https://medium.com/electric-capital/electric-capital-developer-report-2021-f37874efea6d
A few conclusions that caught my attention:
Solana, Polkadot, NEAR, BSC, Avalanche, and Terra grow faster than Ethereum did at the same point in its history. There are some obvious variables here in the sense that they benefit from a much higher crypto awareness than Ethereum did a few years ago.
The number of new developers entering web3 grows exponentially, and as long as this trend continues, the industry will become more attractive and will implicitly grow in terms of market cap. In the case of layer 1s, the real value in the long term does not come from potential and price-related speculations.
700 new devs come to build on Ethereum every month. By comparison, projects like Helium, Elrond, and Harmony have under 80 each. Entirely.
Infrastructure projects, in their early stages, think will tend to become fat protocols and accumulate in the value of their own token the hype generated by the dapps, especially since there are quite a few cases where the token of the dapp either has a poorly-thought-out utility, is non-existent, or there are no ways of capturing and preserving value with the help of communities that are increasingly difficult to build and implicitly increasingly ignored.
Of course, there is also the version enunciated by Paul in the discussion mentioned at the beginning of this article, namely that the use of a layer 1 (Ethereum in his example) may lead to an increase in the value of the token, but this seems to me less likely than the variant in which most of the benefits generated by the actors in the network translate into the price of the token of that infrastructure.
It will be years before we see the winner between Ethereum, Polkadot, Cardano, Avalanche & Co., and we don't even know if it will be a winner-takes-all situation (as is the case in web2 with Google and Amazon). Precisely because things are not clear, it is our duty to diversify our portfolio. With the update that we will make on the site to the team page, you will see how I projected, in my own portfolio, the entire theory exposed above.
Take care,
Vlad
An important tweet:
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The first steps in crypto: What Is Cryptocurrency Difficulty?
To understand cryptocurrency difficulty, we must first take a quick look at how Proof-of-Work blockchains function.
Such systems are maintained through mining, with miners competing against each other for limited block rewards. They must solve a cryptographic problem whose difficulty increases as the power of the network increases.
As a cryptocurrency becomes more popular, the number of computers that participate in its network increases. This further leads to a rise in the network’s hash power, which is the combined computational power that is used to mine and process the transactions on the blockchain.
Cryptocurrency difficulty is a measure of how much time it takes and how difficult it is to solve a complex cryptographic puzzle and thus mine a block. The mining difficulty is essential because it ensures that the rate of coin issuance remains constant.
A high difficulty means that more computing power is needed to mine the same number of blocks. This also means that the network is more secure against attacks.
Difficulty Adjustment
Each block within a blockchain is generated at a rate that is determined by the blockchain protocol. This rhythm must remain steady. That’s why Bitcoin and other cryptocurrencies use this parameter to keep the average time between blocks steady as the hash power of the network in question changes. A network’s mining difficulty increases and decreases over time since it depends on the number of participating miners.
In the case of Bitcoin, it is automatically adjusted in order to maintain the time it takes to process one block at around 10 minutes. Such adjustments may be upwards or downwards, depending on the number of participating miners and their combined hash power.
Miners with a lot of computing power can break the average time of 10 minutes. Without this readjustment, a miner with enough computing power could mine a high number of blocks. To avoid this, the complexity of the mathematical problem to be solved is increased, and the block time is stabilized to 10 minutes on average.
For example, if the Bitcoin network generates new blocks in less than 10 minutes, the difficulty will be automatically adjusted to a higher degree. If, on the contrary, it generates blocks more slowly than desired, that is, in more than 10 minutes, then the mining difficulty is reduced.
Advantages and Disadvantages of Cryptocurrency Difficulty
The major benefits of cryptocurrency difficulty include the following:
A steady production of new blocks – by automatically adjusting the target hash up or down and thus increasing or decreasing the difficulty, a network ensures that a new block is generated at a stable average rate.
Higher network security – a higher difficulty level means that more hashes are needed to meet the target hash requirement. This means that it is more difficult for bad actors or fraudsters to overcome the network’s total hash power and thus gain the majority control of the blockchain network.
However, some may argue that this system tends to lead to centralization. Crypto mining is done for profits. As long as a miner can profit from this activity, they will keep it going.
When the difficulty increases, though, so does the electricity needed for mining. So, when the costs to cover the electricity consumption are higher than the rewards, the miner is forced to stop mining.
This enables bigger miners, that is mining farms and pools, to remain active and mine more, which translates into centralization. Moreover, large mining farms can further take advantage of this to run attacks against a network.
Conclusion
Cryptocurrency difficulty is a measure of how difficult it is to mine a new block for a particular cryptocurrency blockchain. Its importance lies in the fact that it helps maintain the integrity and stability of the blockchain network.
This parameter is adjusted according to network conditions and varies from one blockchain to another. Therefore, blocks are generated at a predetermined speed, which helps the network remain resilient even as more miners join it.
Animation of the day: What is Web 3.0
For more animations: Cryptomatics
Tania
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The Altcoin Pulse
1. Samsung has opened a virtual store in Decentraland for a limited time. The Australian Open has also created several visiting and viewing facilities for those interested in the same digital space.
https://www.theblockcrypto.com/post/129380/samsung-metaverse-flagship-837-store-decentraland
2. The Hedera Hashgraph blockchain is used in a pilot test to track drones by the UK air traffic control authority.
https://cryptopotato.com/hedera-hashgraph-partnered-with-uk-air-traffic-company-to-track-drones/
3. After MuesliSwap, another DEX is preparing for the launch on Cardano.
https://sundaeswap-finance.medium.com/expectations-congestion-mainnet-launch-e9da5abfd819
4. Terra is launching a proposal in the governance forum to put to the community vote its intention to allocate $139m of UST in DeFi projects on Ethereum, Solana, and Polygon. These include: Tokemak, OlympusDAO, Convex, Rari Fuse or InvictusDAO.
https://cryptopotato.com/terra-to-deploy-139-million-in-defi-projects-to-enhance-ust-use-cases/
5. As part of the regular rebalancing, Grayscale DeFi Fund adds AMP, a token used as a collateral tool, and gives up UMA and Bancor.
https://www.theblockcrypto.com/linked/129055/grayscale-reshuffles-its-defi-index-adds-flexas-amp
6. An organization led by the Serum community raised $75m in funds (target: $100m) through a token sale for the development of the ecosystem through DeFi, NFTs, gaming, metaverse, and DAO tooling. Tiger Global among investors.
https://blockworks.co/incentive-ecosystem-foundation-is-raising-100m-to-support-solana-based-serum/
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Interesting Headlines
1. PayPal confirms that it is exploring the option to launch its own stablecoin after the action was revealed by a developer in the source code of the application on iPhone.
https://decrypt.co/90009/paypal-says-exploring-stablecoin
2. $33 billion invested by VCs in crypto and blockchain in 2021, approximately 5% of the capital invested in all sectors.
https://blockworks.co/report-vcs-invested-33b-in-crypto-and-blockchain-startups-in-2021/
3. Bividends: a company that offers services in the crypto space, including staking services, becomes the first company to enable investors to receive dividends in Bitcoin.
https://finance.yahoo.com/news/btcs-first-ever-nasdaq-listed-133100447.html
4. A possible way for Disney to enter the metaverse by building a virtual theme park.
https://cointelegraph.com/news/disney-patents-technology-for-a-theme-park-metaverse
5. A start-up has launched Meritverse, the Web 3.0 version of LinkedIn.
https://blockworks.co/this-startup-is-building-a-crypto-friendly-linkedin-heres-how/
6. GameStop continues its march towards the launch of an NFT marketplace.
https://decrypt.co/89912/gamestop-hires-20-person-team-gaming-nft-marketplace-stock-surges
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Tweet of the week: I started to spend many hours a day on Twitter and I'm surprised to see how much quality content you can read if you follow the right accounts. An example:
Business book of the week: Swim with the Sharks without being eaten by Harvey Mackay. A book that seems to have been written for crypto people.
Youtube clip of the week: Bankless' podcast with Cooper Turley aka @Cooopahtroopa