Coin Metrics’ State of the Network: Issue 68 – Measuring Bitcoin’s Decentralization

Weekly Feature

Measuring Bitcoin’s Decentralization

By Karim Helmy and the Coin Metrics Team

The following is an excerpt from a full-length report, which has been truncated due to space limitations. Read the full report here.

Over the last eleven years, Bitcoin has managed to function relatively seamlessly in the face of a large number of threats, largely due to its lack of a single controlling entity. This trait, known as decentralization, encompasses a large number of loosely-coupled characteristics. Some of these traits are difficult to describe and measure, but others lend themselves well to direct analysis. 

One directly observable feature is the dispersion of funds across addresses. The distribution of wealth is a critical factor in any economy, roughly coinciding to the distribution of economic influence. For cryptoassets, which often grant large token allocations to the founding team, it’s also a severely underexplored one.

Another characteristic, the distribution of hashpower, is arguably even more important. Bitcoin relies on decentralization at this level in order to meet its goals of sustaining a secure, censorship-resistant payments and savings system. 

Bitcoin is also highly exposed to the market share distribution of exchanges, which exercise an outsized influence on the network’s economy. The distribution of volume on fiat-quoted spot pairs is particularly important, since these represent on- and off-ramps to and from the world at large.

In this week’s feature, we’ll quantify Bitcoin’s decentralization along these three verticals and track how it’s progressed over time. 

Dispersion

The presence of whales, or users with large quantities of funds held in the asset, is a concern for the viability of many cryptocurrencies. A particularly unequal distribution of funds could grant a small set of users significant influence over the direction of an asset’s markets and protocol development and call into question the asset’s viability as a store of value or medium of exchange.

Since Bitcoin balances are easily auditable, dispersion can be assessed with on-chain data. Because funds held by custodians in omnibus accounts cannot be attributed to their owner and address reuse is generally discouraged, these estimates are imperfect. However, the degree of transparency afforded is still unprecedented when compared to the legacy financial system.

Bitcoin still has whales, but since the network’s inception, its supply has become more evenly distributed, with smaller accounts comprising an increasing proportion of the aggregate supply.

Source: Coin Metrics Network Data Pro

In addition to controlling an increasing proportion of supply, addresses with smaller balances continue to represent the majority of accounts. In the face of a fluctuating dollar-denominated price, most addresses still control less than $100 worth of Bitcoin.

Mining

In addition to on-chain dispersion and activity, Bitcoin’s effective decentralization depends on the distribution of computational power, or hashpower, among miners.

Bitcoin relies on miners to secure the network and add new blocks to the blockchain. These miners compete to find the next block by computing a large number of energy-intensive hashes, and often aggregate into loose coalitions known as mining pools.

The amount of hashpower securing the Bitcoin network has generally grown exponentially throughout the network’s history.

Source: Coin Metrics Network Data Pro

In addition to the amount of raw hashpower securing the network, the distribution of hashpower is also important. A malicious actor who controls more than half of the network’s hashpower could 51%-attack the network and perform a double-spend, and an attacker with considerably less resources could censor transactions through feather forks.

An attacker would need to double-spend a large amount of money in order to make a 51%-attack profitable. In majority-hashpower ASIC-mined coins like Bitcoin, which require significant capital expenditure by miners, it would be difficult for a rational miner to perform a 51% attack, though these attacks are made somewhat more feasible by the presence of hashpower marketplaces.

Today, Bitcoin’s mining industry is competitive. The plot below, which is subject to a degree of survivorship bias, shows mining to be a thriving, distributed ecosystem.

Continue reading Measuring Bitcoin’s Decentralization…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Network metrics were mostly down this past week as Bitcoin (BTC) and Ethereum (ETH) market caps tumbled over the first half of the week. ETH had bigger downturns in most categories as DeFi enthusiasm temporarily waned following the latest food related controversy. ETH active addresses dropped to about 356K on September 11th, which is the lowest daily total since May.  

Network Highlights

USDC supply has nearly doubled since the beginning of August. It took almost two years for USDC supply to go from zero to 1 billion. It only took about two months to go from 1 billion to 2 billion. 

Source: Coin Metrics Network Data Charts

Tether supply exploded after the March 12th market crash. But since July, USDC supply has been growing at a faster rate. Fueled by the rapid rise of decentralized finance (DeFi), USDC is increasingly being used in liquidity pools on Uniswap and Curve Finance. Uniswap clone SushiSwap has also added to USDC’s rise, as USDC is one of the main underlying tokens that is staked to earn SUSHI. USDC’s lead has grown in September, as USDC supply issuance continues to accelerate. The following chart shows growth since March 1st. 

Source: Coin Metrics Formula Builder

Tether still has a large lead in terms of total supply. As of September 13th, the total supply of Tether is approaching 15 billion, compared to about 3 billion for all other stablecoins combined. But USDC’s sudden surge might finally start to threaten Tether’s market dominance. Tether’s share of the total stablecoin supply peaked at about 87% on August 10th. Since then, it has dropped down to about 83%, its lowest level since April. 

Source: Coin Metrics Formula Builder

USDC’s median transfer value has also started to rise in August and September. DAI’s median transfer value has risen as well compared to Paxos (PAX) and Ethereum-issued Tether (USDT_ETH). This is also likely a result of DeFi, as USDC and DAI are increasingly used for staking. 

Source: Coin Metrics Network Data Charts

Market Data Insights

As the summer of DeFi rages on price action around Bitcoin has been relatively subdued. Realized volatility remains around 50%. This is interesting because in the past when Bitcoin broke out of this range into more volatile trading this measure reached levels over 100%. However, this past breakout did not reach nearly as elevated levels with the rolling 30 day average not surpassing the 60% mark. This is potentially due to a reduction in leveraged Bitcoin positions relative to the market size or a growing efficiency in the price action of the markets.

Source: Coin Metrics Market Data Feed

Another sign of growing efficiencies in the market is the reduction of offset seen between the market value of Tether and the U.S. Dollar. This chart below shows a rolling 30 day average price of Tether since 2018. You can observe that in 2018 and 2019 there were periods with large differences between the two and that this offset has been reduced over time.

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

This week, CMBI Indexes recovered a fraction of last week’s market wash, all closing the week in the green. After last week’s big move, most indexes experienced a reduction in volatility this week, trading within a relatively tight range. The CMBI Bitcoin Index only finished slightly up, closing at $10,302.48 (up 0.4%), whilst the CMBI Ethereum Index performed slightly better closing at $362.63 (up 2.4%).

As has been a trend through most of Q3, the small cap (Bletchley 40) and mid cap (Bletchley 20) indexes were the best performers of the week. 

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index continues to reach new weekly highs, closing the week at 142,275 Petahashes per second, up 13%. This led to miners doing an observed 81,057 Zettahashes over the last week, 10.5% more than expected based on the previous week’s performance.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

Measuring Bitcoin’s Decentralization

By Karim Helmy and the Coin Metrics Team

Key Takeaways

  • Bitcoin’s decentralization can be quantified in terms of supply dispersion, hashpower distribution, and exchange consolidation, among other metrics.
  • Key metrics like the number of active addresses and the network’s hashrate continue to rise.
  • Bitcoin’s supply is becoming more evenly dispersed, and the mining and exchange markets remain competitive.

Introduction

Over the last eleven years, Bitcoin has managed to function relatively seamlessly in the face of a large number of threats, largely due to its lack of a single controlling entity. This trait, known as decentralization, encompasses a large number of loosely-coupled characteristics. Some of these traits are difficult to describe and measure, but others lend themselves well to direct analysis. 

One directly observable feature is the dispersion of funds across addresses. The distribution of wealth is a critical factor in any economy, roughly coinciding to the distribution of economic influence. For cryptoassets, which often grant large token allocations to the founding team, it’s also a severely underexplored one.

Another characteristic, the distribution of hashpower, is arguably even more important. Bitcoin relies on decentralization at this level in order to meet its goals of sustaining a secure, censorship-resistant payments and savings system. 

Bitcoin is also highly exposed to the market share distribution of exchanges, which exercise an outsized influence on the network’s economy. The distribution of volume on fiat-quoted spot pairs is particularly important, since these represent on- and off-ramps to and from the world at large.

In this week’s feature, we’ll quantify Bitcoin’s decentralization along these three verticals and track how it’s progressed over time. 

Dispersion

The presence of whales, or users with large quantities of funds held in the asset, is a concern for the viability of many cryptocurrencies. A particularly unequal distribution of funds could grant a small set of users significant influence over the direction of an asset’s markets and protocol development and call into question the asset’s viability as a store of value or medium of exchange.

Since Bitcoin balances are easily auditable, dispersion can be assessed with on-chain data. Because funds held by custodians in omnibus accounts cannot be attributed to their owner and address reuse is generally discouraged, these estimates are imperfect. However, the degree of transparency afforded is still unprecedented when compared to the legacy financial system.

Bitcoin still has whales, but since the network’s inception, its supply has become more evenly distributed, with smaller accounts comprising an increasing proportion of the aggregate supply.

Source: Coin Metrics Network Data Pro

In addition to controlling an increasing proportion of supply, addresses with smaller balances continue to represent the majority of accounts. In the face of a fluctuating dollar-denominated price, most addresses still control less than $100 worth of Bitcoin.

A closely related metric, the number of unique active addresses, also hints at usage by a broader set of network participants. Because a single user can control multiple addresses, this metric is not a perfect proxy for the number of participants, but is generally considered to be correlated. Recently, Bitcoin’s active address count has begun to approach all-time highs.

Mining

In addition to on-chain dispersion and activity, Bitcoin’s effective decentralization depends on the distribution of computational power, or hashpower, among miners.

Bitcoin relies on miners to secure the network and add new blocks to the blockchain. These miners compete to find the next block by computing a large number of energy-intensive hashes, and often aggregate into loose coalitions known as mining pools.

The amount of hashpower securing the Bitcoin network has generally grown exponentially throughout the network’s history.

Source: Coin Metrics Network Data Pro

In addition to the amount of raw hashpower securing the network, the distribution of hashpower is also important. A malicious actor who controls more than half of the network’s hashpower could 51%-attack the network and perform a double-spend, and an attacker with considerably less resources could censor transactions through feather forks.

An attacker would need to double-spend a large amount of money in order to make a 51%-attack profitable. In majority-hashpower ASIC-mined coins like Bitcoin, which require significant capital expenditure by miners, it would be difficult for a rational miner to perform a 51% attack, though these attacks are made somewhat more feasible by the presence of hashpower marketplaces.

Today, Bitcoin’s mining industry is competitive. The plot below, which is subject to a degree of survivorship bias, shows mining to be a thriving, distributed ecosystem.

While Bitcoin mining is distributed, it’s still at risk of centralization through state-level coercion and vertical and horizontal integration. Several exchanges, including Binance, OKEx, and Huobi, operate mining pools. BitMAIN, a hardware manufacturer, owns both BTC.com and AntPool, and is the only investor in ViaBTC.

Even a rational, well-resourced mining pool could have difficulty coordinating a 51% attack, since miners could leave the pool if the operator decided to attack the network. New coordination protocols like Stratum V2 may significantly increase the network’s decentralization by shifting control over block composition from pool operators to miners. 

One useful metric for gauging the decentralization of hashpower is the Nakamoto coefficient, which measures the number of pools that would need to collude in order to 51%-attack a network.  While Bitcoin has never been successfully 51%-attacked, in 2014 the mining pool GHash.io controlled over half of the network’s hashpower for about a day. During this time period, Bitcoin had a Nakamoto coefficient of 1.

Today, Bitcoin has a Nakamoto coefficient of 4, indicating a significant degree of decentralization.

Exchanges

Exchanges have a less direct impact on Bitcoin’s decentralization than miners, whose role is embedded in the protocol. As the primary markets on which Bitcoin is acquired and used, however, their influence on the network is significant.

Excessive centralization among exchanges exposes the market to systemic risks in case of insolvency. In the cryptocurrency space, the most well-known example of this is the 2013 Mt. Gox crisis, discussed in depth in SOTN Issue 35.

Consolidation would also increase the potential for censorship, negating one of the primary benefits of using Bitcoin. As the primary on-ramp from fiat to Bitcoin, the BTC/USD market is particularly important in this regard. While stablecoins have recently emerged as an alternative quote asset, fiat gateways remain a crucial way for new capital to enter the market.

While several exchanges offer trading on the BTC/USD market, the field is generally dominated by a few large players.

Source: Coin Metrics Market Data Feed

A useful metric for analyzing market concentration is the Herfindahl-Hirschman Index (HHI), which increases as a market becomes more monopolistic. While our estimates are subject to survivorship bias, the HHI of the BTC/USD spot market across Coin Metrics’ coverage universe has remained flat over the last year, having dropped significantly prior to that. Currently, the market is considered moderately consolidated according to this metric.

In addition to reported volumes, on-chain holdings offer another glimpse into the state of the industry. The comparative balances of the spot exchanges tracked by Coin Metrics’ exchange flows are shown below. Coinbase is notably excluded from these estimates due to the company’s avoidance of hot-wallet address reuse.

Source: Coin Metrics Network Data Pro

In a similar vein, tracking exchanges’ on-chain flows enables us to form a more complete view of the market and confirm reported activity. These metrics also paint the picture of a relatively competitive marketplace. Inflows for the spot exchanges tracked by Coin Metrics’ exchange flows are shown below; the behavior of outflows is very similar.

Conclusion

Bitcoin is meaningfully decentralized in terms of miner and exchange concentration, and its supply is increasingly evenly-dispersed. This analysis of Bitcoin’s decentralization is far from comprehensive, and various other metrics, such as node count and hardware manufacturer market share, should also be considered in assessing network’s health. On the whole, however, the network’s performance in these key verticals gives reason for cautious optimism.

Improving your Futures Roll: An Overview of the Basis Trade

by Jon Geenty and the Coin Metrics Team

Key Takeaways

  • As futures volume balloons we take a look at the basis trade, which is when traders build a strategy around the difference between the spot price and futures contract price of a commodity.
  • Unsurprisingly, volume shifts from the front contract to the next, flipping about 10 days out from front contract expiry.
  • The additional difference in basis from the perpetual is less consistent, showing relative peaks around 50-60 days out from front contract expiration.

The ‘Basis’ Trade

One of the most popular trades for any commodity futures is the basis trade. This is when traders build a strategy around the difference between the spot price and futures contract price of a commodity. This exists in corn, soybean, oil and of course, Bitcoin.

There are a few different approaches you can take. If you expect that the difference between the spot and futures price will grow then you are long the basis, and inversely if you believe it will shrink then you are short the basis. 

As a contract gets closer to expiration the uncertainty around it’s settlement price is reduced and theoretically should converge with spot. On the futures market in crypto this is generally measured as the difference between the perpetual or ‘perp’ contract and the futures contract. The perpetual contract is generally priced similar to spot with slight variations due to aspects such as the collateral allowed on the exchange and the funding rate which can vary in magnitude and direction based on the difference between the exchange’s mark price and underlying index price. For an overview of the Bitcoin perpetual swap market check out State of the Network Issue 62.

Why does this trade matter to the average crypto investor or market participant? As shown by the recent volatility and selloff over the Labor Day weekend, a lot of the volatility in the space can be exaggerated by changes in open interest of the futures contract. For example, if a trader has a long Bitcoin futures position with Bitcoin as collateral, a swift downturn in the market can force them out of their position (read: liquidate) and create additional selling pressure. The basis trade is one way to hedge that risk by taking an asset neutral approach. 

The premium/discount that the front contract has traded to the perpetual

Source: Coin Metrics Market Data Feed

Improving the Roll

For the purposes of this research we are going to look at the historical data from the Bitcoin futures on BitMEX due to the longer timeline and historical majority of volume.  Similar futures are also listed on Deribit, FTX, Huobi, and OKEx. There are many futures contracts that currently exist and Bitcoin is one of many. As always, this is not investment advice. 

A significant consideration about putting on a futures position is dealing with the expiry or settlement. You may recall the jokes earlier this year about oil futures going negative during the shock to demand and lack of parties wanting to take delivery. While traders of Bitcoin don’t have to worry about barrels showing up at their homes since all Bitcoin futures are cash-settled, they may want to roll their basis trade onto the next contract to avoid closing it out altogether. 

From here on, when we refer to the “front” contract we are referring to the contract with the soonest expiration date. When we refer to the “next” contract, we are referring to the contract with the expiration date following the front contract. For example, if the date was September 1, 2020 and there was a contract with a Sept. 25 expiration, Dec 25 expiration and March 25 expiration, these could be referred to as the “front”, “belly”, and “back” contracts. For our purposes, the “next” contract would be the December 25th tenor. Below is a look at the spread between the perpetual and front month contract with the data points colored by days to expiration.

As the expiration date approaches traders will want to open the position on the next up contract and close their position on the front contract. In this analysis we are using a scenario in which a trader is short the basis. Here we take a look at the best times to do that. The main consideration that we want to take into account is when the following expiration contract trades at a relatively larger spread than the front contract. We will also want to consider when volume shifts from the front to the following contract as an approximation for liquidity. Liquidity is the measure of how easy it is to move in and out of an order, measured by things such as order book depth and elasticity. Volume is not equivalent to liquidity, however it can generally be considered a downstream measurement. 

Above is a look at the next contract spread less the front contract spread as the front contract moves toward expiration. There is a lot of noise towards the tail and expiry of the contract due to the historical volatility of Bitcoin. To reduce this we will look at the same data within two standard deviations. 

With the data reduced to within two standard deviations, the mean and median would lead us to believe that the largest spread difference between the two contracts exists between 50 and 60 days out, or if you would like to wait longer, around 25 days out from expiration.

The ratio of the volume between the two contracts may also be an important aspect to the roll. Again, we are using these metrics as an approximation for liquidity. The importance being that if the position is larger than liquidity can support it will have negative consequences for the execution costs and potentially reduce the spread at time of opening. 

Below we show a similar analysis with the ratio of the volume of the two contracts, again looking at the data within two standard deviations. The best time to roll a position between the two contracts appears to be around 10 days out, when volume on the contract you are exiting is approaching roughly equal to the one you are entering.

Below we have taken the median of the data within the two standard deviations and plotted the difference between the basis of the contract by the offset in the ratio of the trading volume. The dots are colored by days to expiration of the front month. This scatterplot shows a general “U” shape relationship between volume imbalance and additional spread in the later contract. 

The data above shows that traders face a tradeoff between additional basis and volume equilibrium. They should take this into account and try to roll at the points closest to the top border within their comfort zone of liquidity.

Conclusion

There is no perfect answer on when to roll over your positions in a basis trade but this information should help to give you a better understanding of some of the dynamics at play. Another large factor is the funding rate and whether or not you are using the perpetual or actual spot asset as collateral. Bitcoin is just one of many futures contracts traded but we hope that this provides a good framework for better analyzing the overall market place. 

Coin Metrics’ State of the Network: Issue 67 – An Overview of the Basis Trade

Weekly Feature

Improving your Futures Roll: An Overview of the Basis Trade

by Jon Geenty and the Coin Metrics Team

The following is an excerpt from a full-length report, which has been truncated due to space limitations. Read the full report here.

The ‘Basis’ Trade

One of the most popular trades for any commodity futures is the basis trade. This is when traders build a strategy around the difference between the spot price and futures contract price of a commodity. This exists in corn, soybean, oil and of course, Bitcoin.

There are a few different approaches you can take. If you expect that the difference between the spot and futures price will grow then you are long the basis, and inversely if you believe it will shrink then you are short the basis. 

As a contract gets closer to expiration the uncertainty around its settlement price is reduced and theoretically should converge with spot. On the futures market in crypto this is generally measured as the difference between the perpetual or ‘perp’ contract and the futures contract. The perpetual contract is generally priced similar to spot with slight variations due to aspects such as the collateral allowed on the exchange and the funding rate which can vary in magnitude and direction based on the difference between the exchange’s mark price and underlying index price. For an overview of the Bitcoin perpetual swap market check out State of the Network Issue 62.

Why does this trade matter to the average crypto investor or market participant? As shown by the recent volatility and selloff over the Labor Day weekend, a lot of the volatility in the space can be exaggerated by changes in open interest of the futures contract. For example, if a trader has a long Bitcoin futures position with Bitcoin as collateral, a swift downturn in the market can force them out of their position (read: liquidate) and create additional selling pressure. The basis trade is one way to hedge that risk by taking an asset neutral approach. 

The premium/discount that the front contract has traded to the perpetual

Source: Coin Metrics Market Data Feed

Improving the Roll

For the purposes of this research we are going to look at the historical data from the Bitcoin futures on BitMEX due to the longer timeline and historical majority of volume.  Similar futures are also listed on Deribit, FTX, Huobi, and OKEx. There are many futures contracts that currently exist and Bitcoin is one of many. As always, this is not investment advice. 

A significant consideration about putting on a futures position is dealing with the expiry or settlement. You may recall the jokes earlier this year about oil futures going negative during the shock to demand and lack of parties wanting to take delivery. While traders of Bitcoin don’t have to worry about barrels showing up at their homes since all Bitcoin futures are cash-settled, they may want to roll their basis trade onto the next contract to avoid closing it out altogether. 

From here on, when we refer to the “front” contract we are referring to the contract with the soonest expiration date. When we refer to the “next” contract, we are referring to the contract with the expiration date following the front contract. For example, if the date was September 1, 2020 and there was a contract with a Sept. 25 expiration, Dec 25 expiration and March 25 expiration, these could be referred to as the “front”, “belly”, and “back” contracts. For our purposes, the “next” contract would be the December 25th tenor. Below is a look at the spread between the perpetual and front month contract with the data points colored by days to expiration.

Source: Coin Metrics Market Data Feed

As you can see in the visual above, the premium or discount of the front contract to the perpetual is reduced as we get closer to the front contract’s expiration date.

Continue reading “Improving Your Futures Roll” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) network fundamentals continue to look strong despite a drop in market cap. Daily transaction fees continue to grow across the board, with ETH fees reaching a new all-time high on September 1st. Increased fees lead to higher profits for miners and as a result hash rate is on the rise. BTC hash rate grew another 4.2% week-over-week and is on pace to once again reach new all-time highs. ETH hash rate also showed strong growth, rising 7% week-over-week. 

Network Highlights

ETH’s 7-day average adjusted transfer value has flipped BTC’s. 

On September 5th, ETH’s 7-day average adjusted transfer value reached $3.08B, compared to $3.01B for BTC. ETH’s average transfer value also remained above BTC’s for the following two days.

Source: Coin Metrics Network Data Charts

This is the first time since early 2018 that ETH’s 7-day average adjusted transfer value has topped BTC’s. ETH is increasingly being transferred between decentralized finance (DeFi) applications as DeFi apps built on top of Ethereum continue their rapid rise. Adding fuel to the fire, yearn.finance recently launched their yETH vault which allows users to earn interest on locked ETH. At time of writing over 200,000 ETH has been locked into the yETH vault. 

Source: Coin Metrics Network Data Charts

Similarly, USDC 7-day average adjusted transfer value soared to a new all-time high this past week. USDC is used heavily in DeFi applications like Uniswap and Curve Finance.

Source: Coin Metrics Network Data Charts

Market Data Insights

After months of positive growth the major crypto markets fell back to late July levels this past week. As tech stocks came crashing back down to earth on September 2nd and 3rd, BTC and the rest of crypto began to drop as well. 

Fueled by DeFi, ETH led the way over much of the summer. But the fast paced DeFi ethos has also led to some major implosions. Following in YAM’s footsteps, Uniswap clone SushiSwap gained over $1B of locked value in less than two weeks. But over the weekend SushiSwap’s pseudonymous founder cashed out their 2.5M SUSHI for about $13M worth of ETH, blindsiding the community and leaving the project in disarray. As a result, ETH fell harder than BTC this past week, dropping by 18% compared to a 12% decline for BTC.

Source: Coin Metrics Reference Rates

After selling out, SushiSwap’s founder transferred control of the project to FTX. FTX SUSHI-PERP open interest fell after the founder sold out, but has since somewhat rebounded, as seen in the below chart.  

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

It was a tough week for all cryptoassets, demonstrated through the poor performance of all CMBI and Bletchley Indexes. As has historically been the case during deep market sell-offs, Bitcoin has been one of the most consistent outperforming assets. This was demonstrated this past week by the returns of the CMBI Bitcoin Index, which only fell 11.9% relative to the CMBI Ethereum Index which fell 16.9% during the period. 

The Bletchley 40, which has been the star performer throughout 2020 and is still up almost 150% YTD, had a week to forget. It was the worst performer of the indexes, falling 23.8%.

Source: Coin Metrics CMBI

Despite the weak performance of the price indexes, the CMBI Bitcoin Hash Rate Index and CMBI Bitcoin Observed Work Index, which measure the performance of miners, continued to trade near all-time highs. At least in the short term, this demonstrates that miners remain unphased by the recent market price action.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

Coin Metrics’ State of the Network: Issue 66 – The Privacy Issue

Weekly Feature

The Privacy Issue

By Antoine Le Calvez and the Coin Metrics Team

The early 1990’s saw the dissemination of two great forces that would come to shape the next decades: the Internet, and strong cryptography.

In a seminal manifesto written in 1993, Eric Hughes condensed the ethos of a young movement born at the intersection of these two technologies: the Cypherpunk. Determined to defend privacy in an age of already ever-growing surveillance, their tools would be cryptography and software: cypher + cyberpunk.

“We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.”

Satoshi Nakamoto provided the cypherpunks with lasting electronic money 15 years later. In its wake, many other anonymous electronic money systems would be created, incorporating the latest developments in cryptography.

In this feature, we’ll look into how the current anonymous transactions systems, aka crypto-currencies, compare to the privacy hopes of their cypherpunk forefathers.

Selectively revealing oneself

“Privacy is the power to selectively reveal oneself to the world.” – “A Cypherpunk’s Manifesto”

Compared to traditional transaction systems involving fiat currencies, crypto-currencies offer a lot of privacy. Freed from the need of proving the identities of those involved and the source and usage of funds, crypto-currencies only require its participants to reveal very little, if any, information about themselves. Yet, over time, even this proved to be too much as many attacks that de-anonymize Bitcoin transactions have been found.

Some of these shortcomings were foreseen by its creator, like the need to never reuse public keys, or the information that multi-inputs transactions leak, making it possible to associate many public keys to the same owner.

Over time, techniques that improve the privacy of Bitcoin users were developed, most notably CoinJoin, which allows users to “mix” their bitcoins together, making tracing their transaction history nigh impossible.

Quantifying CoinJoin is not easy since it is beneficial for its users to conceal it, but so far its usage is far from generalized.

These issues, making Bitcoin a good-enough-but-not-ideal anonymous transactions system, led some Cypherpunks to do what they do best: write code. Many new crypto-currencies, focused on better privacy, have been created over the years. In this feature, we’ll focus on three:

Zcash

Zcash was created in 2016 as a codebase fork of Bitcoin. It integrated a recent development in cryptography: zk-SNARKs (Zero Knowledge Succinct Non-Interactive Arguments of Knowledge), which enables nodes to validate transactions without knowing their contents. Private Zcash transactions therefore do not reveal anything about who transacts or what amounts are exchanged. The protocol, however, allows for so-called transparent transactions which are identical to Bitcoin’s. This makes Zcash’s strong privacy features opt-in.

Zcash’s supply can be broken down into two types: shielded and transparent. The transparent supply is similar to Bitcoin’s and is fully auditable.  Zcash held in the shielded supply can be exchanged privately using zk-SNARKs. As of writing, only around 5% of all issued ZEC is currently shielded.

Since Zcash’s privacy features are opt-in, we can also measure what percentage of transactions make use of them:

Zcash’s transactions can be further divided into three categories:

  • Transparent transactions which only interact with transparent supply
  • Partially-private transactions which exchange ZEC between the shielded and transparent supplies
  • Fully-private transactions which only interact with the shielded supply

Less than 2% of transactions belong to the last category, despite a recent surge in activity.

Monero

Monero was created in 2014 and uses the CryptoNote technology built on top of ring signatures and Confidential Transactions. These allow someone to prove they belong to a group without revealing which member they are. Therefore, compared to Bitcoin, it is impossible to determine the sender of a Monero transaction: the multi-inputs transaction information leak is fixed. In 2017, Monero also adopted Bulletproofs, an even more recent cryptography advancement which hides (blinds) the amounts received. 

Grin

Grin is the youngest of these new crypto-currencies. It is an implementation of a 2016 innovation called MimbleWimble which leverages new advancements in cryptography to allow its users to conceal not only the amounts and public keys used, but also obfuscate the transaction graph: if Alice sends Bob money and Bob sends it to Charlie, the transaction can be rewritten as Alice -> Charlie without Bob’s intervention being visible on-chain.

On paper, these alternatives offer stronger privacy than Bitcoin, yet their combined daily transaction count only reaches around 6% of Bitcoin’s. For every transaction on one of these privacy assets there are 16 done on Bitcoin and countless more on assets that offer even less privacy.

Conclusion

“For privacy to be widespread it must be part of a social contract.” – “A Cypherpunk’s Manifesto”

User apathy towards privacy is probably the biggest shortcoming of the current anonymous transactions systems. Despite great technological advancements in crypto-currency privacy, uptake of privacy features and assets has been slow. As crypto-currencies continue to be adopted by the wider public, its original privacy-oriented ethos must be transmitted in order for it to survive.

Failing to do so could result in the original idea of anonymous transactions systems fading away and being superseded by other conceptions of what crypto-currencies are useful for.

On the bright side of things, the advent of Bitcoin renewed interest in research on the topic of cryptography, leading to new innovations like Bulletproofs and Mimblewimble. We can also note a renewed interest in CoinJoin with providers like Wasabi and Samurai’s Whirlpool which, despite representing a very small proportion of Bitcoin’s transaction volume, are growing quickly.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum’s (ETH) activity continued to  moderate as average daily transactions fees decreased for the second week in row to $3.58M.   Bitcoin’s (BTC) average daily transaction fees saw an even more dramatic decrease (24%) to $1.04M.

Network Highlights

Bitcoin (BTC) age distribution bands, also known as “HODL waves,” show BTC’s supply grouped by the age it was last moved on-chain – or in other words, the age that it was last sent as part of a transaction. Introduced by Unchained Capital in 2018, HODL waves give a macroscopic view of how BTC’s supply has shifted over the years.  

Reading from the bottom of the chart up, the red and orange colored bands show the percent of supply that has been active relatively recently, ranging from less than 1 day to 30-90 days. This short-term supply tends to peak during market tops. For example, in December 2017 as BTC price neared $20,000 over 32% of BTC supply had moved on-chain within the previous 90 days. By August 2018 the amount of BTC supply moved within 90 days had dropped to about 15%. 

Conversely, reading from the top of the chart down shows the supply that has not moved for relatively long periods. These long-term bands tend to grow wider during bear markets and contract during bull periods when long-terms holders begin to sell. The purple band at the top represents coins that have never been moved on-chain other than the initial coinbase transaction.

The lower bands spiked following the crypto crash of March 12th, 2020. But since then the larger bands have been regaining ground. The 1-2 year band has grown from about 16.3% on March 12th to 19.1% on August 12th. 

Ethereum (ETH) HODL waves show that ETH short-term bands have been increasingly active in July and August. ETH’s 7-30 day band accounted for about 7.6% of total ETH supply on March 12th. Since then it has grown to over 9.7% in late August. Simultaneously, ETH’s 180 day-1 year band has decreased from about 11% on March 12th to less than 7.3% in late August. 

Market Data Insights

This past week was one of many impressive milestones for the FTX team. There is a lot going on in the space at the moment, so we won’t blame you if you missed it. The highlights include launching the Project Serum DEX, all-time high prices for FTT (FTX’s exchange token), over $1B in monthly volume for the OTC desk, listing a Uniswap 100 Index Future and, of course, the reported $150M deal to acquire the portfolio tracking app Blockfolio. 

Serum DEX Launch

Over the weekend the Project Serum (https://projectserum.com/) DEX went live. The decentralized exchange is unique from others in that it is built on the Solana blockchain as opposed to Ethereum, which the team touts as better in terms of processing, as well as having much lower transaction fees while allowing for cross-chain tokenization. The DEX has its own tokens, Serum (SRM) and MegaSerum (MSRM), the latter of which is 1M locked SRM tokens, which can be used for trading discounts on the DEX, staking, and on-chain governance.

FTT Pushing All Time Highs

It should not be a surprise that FTX’s exchange token, FTT, has hit new highs following the news of the Blockfolio acquisition. However, there may be more involved than just pure speculation on the synergies between the portfolio tracking application and the exchange. The exchange has offered airdrops equalling 5% of the total SRM supply to token holders who hold 500 FTT or more on the FTX exchange at a rate of 3 locked SRM per week for every 500 FTT held. At the current market value as of writing (SRM at $3.25 with a total supply of 10B tokens), the airdrop would be worth $1.625B which is roughly equivalent to ~4.06 times the total Market Capitalization of FTT ($400M). Those who are bullish on the team are likely to be putting on this trade, further driving market demand. FTT is breaching its all time highs at roughly $4.23 as of time of writing according to our CM Reference Rates.

CM Bletchley Indexes (CMBI) Insights

This week was a relatively uneventful week for most of the CMBI and Bletchley Indexes, with choppy trading and low volatility resulting in returns of < 2% for all market cap weighted indexes. The CMBI Bitcoin Index also had an uneventful week, finishing the week at $11,644.80 (down 0.3%). However, the CMBI Ethereum Index managed to significantly outperform all other indexes this week, returning 8.2% to close at $425.72. 

The CMBI Bitcoin Hash Rate Index again reached all time highs during the week, closing as high as 135,722. With the Chinese wet season well underway, the hash rate continues to reach for ATH levels despite the Bitcoin block subsidy halving back in May.

Important Note: Bletchley Index pricing is being transitioned to CM Reference Rates which will result in three major changes:

  1. Future levels will utilize CM Real-Time Reference Rates
  2. Historical levels will be recalculated to reflect CM Real-Time Reference Rates
  3. The Bletchley Universe will be increased to include more assets from September 1, 2020

For more information please read the recent announcement.

More performance information can be found here:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Next week’s issue of State of the Network will be published on Wednesday (September 9th) instead of Tuesday due to Labor Day. State of the Network will return to its regular publication schedule the following week.
  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

Coin Metrics’ State of the Network: Issue 65 – The Business Trends of Crypto Exchanges

Weekly Feature

The Business Trends of Crypto Exchanges 

By Huyette Spring and the Coin Metrics Team

The following is an excerpt from the full piece, which has been truncated due to space limitations. Read the full report here..

Overview

State of the Network has predominantly focused on the network and market data happenings of the crypto industry. In this issue, we zoom out a bit to discuss the business trends and strategies of the exchanges building atop these decentralized protocols.

From a standing start in October 2008, the cryptocurrency exchange industry has matured at an astonishing pace. But there is no guarantee that this maturation is sufficient for cryptocurrency exchanges to remain independent indefinitely. 

Below, we explore the maturation of the crypto exchanges through the years.

Satoshi to ~2017

The first challenge for crypto exchanges was how to gain traction in a basically non-existent market. Simply put, could they build a product that early adopters would actually use?

In the early days of crypto centralized exchanges began to emerge, horrifying the hardcore decentralization-focused cypherpunks. Trust is a luxury of optionality and there was almost no competition for any given job-to-be-done. These conditions allowed MtGox to simultaneously have 70% of the Bitcoin market and absolutely no controls upon which users could place their trust. It’s no surprise, then, that the inevitable MtGox hack was a significant event in the history of crypto exchange development and threatened the future of the industry.

MtGox 7-day avg. trading volume before the exchange was abruptly taken offline on February 25th, 2014 

But the hot air gushing into the balloon during the 2017 price run-up brought with it more users, employees, business models, and competition. Users of these crypto exchanges had now been given the Promethean fire of business: choice, and with it, expectations. Those expectations meant that exchanges needed to do more than just build a product which early adopters would use. They also needed to make a product that people would trust. 

~2017 to 2020

Here’s the challenge with trust: it’s expensive and it mainly accrues to the brand, not the product. Thus, exchange’s point of focus shifted from the product to the company: Can you build a going concern; i.e. an actual run rate business?

There are two distinct but interconnected trends occurring today which demonstrate exchange’s strive to capture the hearts and minds (read, trust) of the ever fickle customer: Professionalization and Strategy Optimization. 

Professionalization

The first trend is to win the minds of customers through Professionalization. Regardless of the segment, customers now expect exchanges to act like they’ve been there before

The quickest way to do this is hiring. Visionaries started the crypto industry from whole cloth but the theme now seems to be “professional businesses require professional managers”. And while a first principles re-imagining of the social contract of money has always attracted top talent, now the talent is operating professionals coming in at the top of the org chart, with “traditional world” experience. To name just a few recent examples: Coinbase has hired executives from BarclaysGoogleLyft; BlockFi has hired executives from AmEx and Credit Suisse; Gemini hired a former Goldman Sachs executive to lead their Asia expansion. 

The second approach to Professionalization is acceptance of regulation. True, this was a hand forced by regulators, especially in the U.S., but much of the industry has, in one form or another, turned this into a trust-building competitive advantage. Regulation, and accompanying attestations like SOC audits, appears to have become a marketing positive rather than a negative. Despite it’s well documented flaws, the number of BitLicense approvals is accelerating. International companies such as Binance.US and FTX.US have cleared the regulatory hurdles necessary to enter the U.S. market, typically by registering as an MSB. Luxembourg-based Bitstamp went a step further and got a full BitLicense. BitMEX has announced a User Verticiation (read KYC) program. And unlike many crypto “exchanges” which aren’t, ErisX sought and received a DCO and DCM license from the CFTC, enabling it to fulfill its business model of targeting the institutional market. 

Continue reading “The Business Trends of Crypto Exchanges”…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) transaction fees came back down to earth this week after reaching new all-time highs last week due to the rapid rise and fall of YAM. But despite a 28.4% drop week-over-week, ETH total daily fees still remain relatively high. Over the past week, ETH average daily transaction fees were over $3.8M, compared to about $1.4M for Bitcoin (BTC). 

Network Highlights

After months of rapid growth, Tether’s 7-day average adjusted transfer value has finally flipped Bitcoin’s. 

On August 20th, Tether’s 7-day average adjusted transfer value reached over $3.55B compared to Bitcoin’s $2.94B. This is a big milestone for stablecoins as Tether continues to take more and more of the market share of on-chain transfers. Stablecoins are increasingly being used in popular DeFi applications like Uniswap and Curve, both of which likely played a role in Tether’s recent surge. 

Source: Coin Metrics Formula Builder

Simultaneously, total Tether supply crossed another milestone reaching over 13B on August 21st. Tether’s supply has grown at a rapid rate – it was less than 10B on June 1st, 2020, and less than 5B on March 1st. The following chart shows the total supply of the Ethereum, Tron, and Omni versions of USDT.

Source: Coin Metrics Formula Builder

And Tether continues to expand to more networks. Tether recently announced that USDT would be expanding to yet another platform in addition to Ethereum, Tron, the Omni protocol, and others. On August 19th a new USDT integration went live on the OMG Network, an Ethereum-based layer 2 protocol. As a result OMG’s daily active addresses have already shot up to their highest levels since August 2018. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Current market sentiment surrounding certain DeFi projects evokes memories of the ICO-fueled market of late 2017. In light of this situation, we examine where the crypto market is in its current market cycle compared to previous cycles. 

Bitcoin has experienced multiple bubble-and-crash cycles in its history and here we identify three major cycles with cycle tops and cycle bottoms. With the benefit of hindsight, we identify the beginning of our current cycle when the price of Bitcoin briefly fell to the low $3,000s in late 2018. 

We are currently over 600 days in the current cycle and are closely tracking the performance of the previous cycle which began in 2015. Although there is no guarantee that the market will follow the patterns established by previous cycles, financial history has shown us that the formation of asset bubbles appear to be linked to deeply rooted aspects of human behavior. 

The market has significantly changed over the past several years, particularly with respect to the ability for market participants to express short market views. The market has also grown to a point where further increases are more difficult than before, so there are good arguments to be made that this cycle will be different. Nonetheless, if this cycle evolves similarly to the previous cycles, there appears to be at least several hundred days remaining. 

In DeFi news, the $BASED (based.money) project reached some major milestones. The protocol is the product of an anonymous group and follows a distribution mechanism similar to Ampleforth where the supply is rebased periodically in an attempt to have 1 $BASED equal $1. 

Following the release of its Pool 1 on Uniswap it had over $38m of staked liquidity in less than 24 hours and had traded at an all time high price of $941.13. It currently trades at $152.72 as of the time of writing. The creators state it is designed as “game of chicken designed to shake out weak hands and yield the highest gains for those who understand the rules”.  The activity surrounding it so far makes it appear an interesting aspect of the DeFi ecosystem to watch over the next few weeks

CM Bletchley Indexes (CMBI) Insights

Update to the Bletchley Indexes: As of the 1st of September, Coin Metrics will take the next step to integrate the Bletchley Indexes into Coin Metrics, transitioning all infrastructure over to Coin Metrics owned systems and updating all pricing sources to Coin Metrics Reference Rates. As part of the transition, Coin Metrics will be updating the history of the Bletchley Indexes to reflect Coin Metrics historical reference rates. Further, going forward, we will also be expanding the universe of assets available for selection which will result in a significant turnover in the index during the September Rebalance.

This is an exciting step for Coin Metrics that allows the company to wholly own, manage and have transparency into the current and historical pricing data as well as overcoming anomalies that currently existed from methodologies that are not administered and calculated by Coin Metrics. 

After a few weeks of across the board growth, this week most CMBI and Bletchley Indexes experience a pull back. The CMBI Bitcoin Index fell a modest 1.7%, ending the week at $11,680.64 after twice closing the daily above $12,000 for the first time since July 2019. The CMBI Ethereum Index, which has recently been more volatile on the up and downside, closed the week at $393.49 (down 8.4%) after reaching intra-week highs of $437.78. The only Index to close the week higher was the Bletchley 40 (small caps) which grew 3.3%. 

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index reached all time highs of 136,060 terahashes during the week, but ended closing at 117,947 terahashes, remaining in the range it has been in since the start of June (100,000 TH – 140,000 TH).

More performance information can be found here:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.