Risk of Cryptocurrency Investment in 5 Charts

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The probability of a profitable cryptocurrency investment is less than 15%

April 2022. Reading Time: 10 Minutes. Author: Kaushik Ganesan.

Introduction

In March 2022, 616 tokens and 47 coins were launched, which brings the total number of cryptocurrencies close to 10,000. As a comparison, there are only about 3,000 tradable stocks in the US, although that number increases significantly when illiquid stocks traded over the counter are included. However, given that the US stock market is more than 100 years old, it is interesting that the cryptocurrency space has eclipsed equities despite being less than 10 years old.

Although cryptocurrencies are unregulated, financial crime is prosecuted with regulated products. Last month two 20-year-old non-fungible token (NFT) creators were arrested for stealing $1.1 million from investors. They have been charged on accounts of money laundering and fraud, which carries a 20-year sentence in the US.

Investing in tokens, coins, NFTs, etc., has never been easier, but the number of frauds, hacks and similar malicious activities have increased accordingly. Given that the cryptocurrency space is unregulated, technologically complex, and awash with inexperienced investors, making it a perfect place for bad actors.

In this article, we will explore the risks of investing in cryptocurrencies.

Cryptocurrencies Trading Above or Below the First Trading Price

First, we take the entire universe of cryptocurrencies that have been trading since 2013, which includes 10,000 cryptocurrencies as of April 2022. We distinguish between tokens and coins, then calculate how many of these are trading above and below their first trading price. We observe that investors have lost money on 80% of the tokens and 65% on coin investments, which highlights the risks of cryptocurrencies.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image016-1.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”Cryptocurrencies: Current Price versus the First Trading Price” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (April 2022)

The Rise of Dead Cryptocurrencies

Our analysis only includes cryptocurrencies that are still trading and ignores ones that have died, i.e. our data is subject to survivorship bias. Coinospy provides data on tokens and coins that have died due to various reasons. As of April 2022, there were approximately 2,400 failed projects.

Somewhat unusual, the number of dead projects has hardly increased between 2019 and 2022, despite several thousand new cryptocurrencies having launched, which is unlikely. Token launches, like the IPOs of public companies, fail all the time. We believe there is a data or reporting issue and assume a 40% default rate, which is in line with previous years. This would increase the number of dead projects to more than 6,000.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image036.png” alt=”Cryptocurrencies: Number of Dead Coins and Tokens” title_text=”Cryptocurrencies: Number of Dead Coins and Tokens” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Coinospy, CoinMarketCap (April 2022)

Breakdown by Scam Types

Coinospy provides various reasons why cryptocurrency projects fail. The key reason is that the developers fail to execute an initial offering or simply abandon the project, which raises the question of what happens with any capital that was raised in earlier private rounds. A recent example is the Squid Game token (symbol: SQUID), where the SQUID developers abandoned the project once it hit a price of $2,861, profiting over $2 million.

The second key reason for projects to fail is that they are simple scams, which can take various forms. Projects like OneCoin, PlusToken, BitConnect, etc relied on gullible investors hoping to make quick money. These projects used money from new investors to pay returns to existing holders – much like Bernie Medoff’s Ponzi scheme.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image020.png” alt=”Dead Coins and Tokens: Breakdown by Scam Types” title_text=”Dead Coins and Tokens: Breakdown by Scam Types” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Coinospy

Reported Cryptocurrency Crimes

Although the cryptocurrency space is largely unregulated, investors still file cases when they believe illegal activities have occurred. Given that the number of tokens and coins has increased rapidly in the last few years, so has the number of reported crimes.

In the US, there were more than 100,000 reported crimes related to cryptocurrencies in 2020, compared to about 25,000 in the UK. However, the true number of crimes is likely to be much higher as most investors do not report crimes, simply because most of their cryptocurrency holdings have not been declared to tax authorities, which creates a reluctance to report crimes.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image006.png” alt=”Reported Cryptocurrency Crimes Across Regions” title_text=”Reported Cryptocurrency Crimes Across Regions” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Crypto Head

Probability of Winning in the Cryptocurrency Market

The large number of failed projects implies that the likelihood of picking a profitable cryptocurrency investment is likely less than 20%. We take the universe of tokens and coins still trading today, and adjust that for the number of dead cryptocurrencies, once using the original and adjusted data from Coinospy. Essentially, we correct the dataset for the survivorship bias.

This analysis shows that only 15% of the tokens and coins end up being profitable from the day of their initial offering. Stated differently, the odds of making money in the cryptocurrency space are less than winning in Blackjack (42%).

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image033.png” alt=”Probability of Making Money with Cryptocurrencies” title_text=”Probability of Making Money with Cryptocurrencies” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Coinospy, CoinMarketCap (April 2022)

Further Thoughts

Between 2011 and 2021 almost $20 billion worth of crypto offenses have been committed. The most notable scams are OneCoin ($4 billion), PlusToken ($3 billion), and BitConnect ($3 billion). Last year the Federal Trade Commission (FTC) warned that cryptocurrency fraud and scams are on the rise as more investors see the cryptocurrency space as a get-rich-quick scheme. Although the magnitude of the crimes are staggering, many crypto investors have become more careful and authorities are also becoming better at uncovering illegal activities. The nature of the blockchain, where transactions can be traced given public ledgers, facilitates detective work.

Furthermore, the probability of finding a winning investment only decreased from 20% to 15% when including failed projects, whereof many are scams.

The majority of losses are simply from cryptocurrencies decreasing in value, which raises the question of what is driving prices. Theoretically, it is their utilization as they represent currencies, but this relationship is difficult to quantify. Given all this, most investors are better off accepting the evidence from trading stocks, i.e. stock picking is a fools’ game, and are better served by simply buying an index. Although there are only a few indices in the cryptocurrency space, it likely represents the best way to capture exposure to blockchain for self-directed investors.

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About the Author

Kaushik Ramnath Ganesan is a Technology Investment Analyst at Jackdaw Capital. He comes from a computer science background and completed the CQF (Certificate in Quantitative Finance) program. At Jackdaw Capital he applies computer science, finance, and mathematics to bring blockchain technology mainstream.

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Axie Infinity: The Shattered Dream of Playing for a Living

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A case study on the first major play-to-earn blockchain game

April 2022. Reading Time: 10 Minutes. Author: Himank Agrawal.

Introduction

Axie Infinity is a play-to-earn game based on blockchain with more than 2 million active players around the world. It had a reputation of being a potential source of living for people in countries like the Philippines, Indonesia, and Vietnam.

However, its recent game updates uncovered the flaws of the Axie Infinity economy and shattered the dream of millions of people that aspired to play for a living.

In this article, we will highlight the past and present of the Axie Infinity game.

Rebooting the Game

In March 2022, the Axie Infinity developer Sky Mavis completely restructured the game reward systems citing reasons of an unsustainable economy in their previous design of the game.

The entry into the game has been made easier with free starter Axies, which is a digital pet that is required to start playing and competing. In the earlier version of the game, a player had to spend more than $300 for buying an Axies, which was a substantial amount of money for players from emerging markets. However, the free Axies have limited powers and cannot be used to earn rewards.

Further changes are that the circulation of SLP, the utility token of the game, will be decreased via a reduction in minting and more focus on burning activities. Previously, gaining SLPs was the major focus of players as these could be converted into fiat currencies and essentially represented a way to generate daily income. In contrast, the volume of AXS, the governance token of the game, will be increased in order to capture a larger player base and improve player retention.

This shift of focus from SLP to AXS depicts the change from a play-to-earn to a leaderboard-based reward system.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/Screenshot-2022-04-08-at-3.38.24-PM.png” alt=”Axie Infinity: Rebooting the game” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital

Reason for restructuring: improvement or sustainability?

The SLP token was being rewarded to users in a significant quantity through various versions of daily games to ensure a high number of daily active users, which worked but led to a consistent increase in the token supply in the Axie Infinity ecosystem.

Furthermore, since the SLP token acted as a source of income for most players, users were primarily focused on selling SLP instead of burning them into breeding and other activities. This constant increase in supply led to a significant fall in the SLP price from above $0.35 to below $0.022 currently.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/Axie-Infinity-DAU-Chart_14483_image004.png” alt=”SLP Token Price” title_text=”Axie Infinity DAU Chart_14483_image004″ force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Coinmarketcap

The rise and fall of Axie Infinity popularity

Axie Infinity saw a rapid growth in active users in early 2021 when the price of the SLP token was high and allowed players to generate significant income from the game. However, the growth started slowing by the end of 2021 and from February 2022, when the price of the token began to decline given the excessive supply. The overall number of monthly active users started to decline as the earnings potential become too low for most players.

Essentially, Axie Infinity represented a Ponzi scheme that required an ever-increasing number of players to join and buy Axies, which would push up the price of the SLP token and motivate even more players to start playing. As with all Ponzi schemes, there is a limit to how far these can run, and eventually, they implode. In the case of Axie Infinity, a decreasing number of users means less demand for the SLP token, which became a vicious downward cycle with existing players wanting to sell their token for preserving their income, thus creating more selling pressure.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/Axie-Infinity-Monthly-Active-Users.png” alt=”Axie Infinity_Monthly Active Users” title_text=”Axie Infinity Monthly Active Users” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Activeplayer.io

Shattering the dream of providing a source of living

In the previous game version, Axie Infinity allows players to earn up to 75 SLP tokens by completing daily tasks that included mini-games and player-vs-player battles. Considering an average SLP token price of $0.1 as of November 2021, a person solely dedicated to playing Axie Infinity as his main activity could have earned around $2,700 in one year, which would have been equivalent to the GDP per capita of countries like the Philippines or Vietnam.

However, with the reduction in the number of SLP token rewards in the new game version and an 80% decline in the price of the SLP token, Axie Infinity stopped being a potential source of living.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/Screenshot-2022-04-08-at-3.50.25-PM.png” alt=”SLP Earnings vs Per Capita GDP” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Dappradar

Further Thoughts

Axie Infinity is among the first games around the world that made millions of people believe that a living can be earned via online gaming. And for a short period, players in countries like the Philippines, Indonesia, and Vietnam indeed were earning above-average incomes.

However, when things seem too good to be true, like allowing millions of players to play for a living, then they usually are not true. The current version of the game does allow some players to generate attractive income, but this is expected to be only 15% of the gamers. Like in most games and sports, the winners are few and losers are many.

Related Research

The Evolution of the Gaming Industry from 1970 to 2022

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About the Author

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Stablecoins 101

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How stable are stablecoins?

April 2022. Reading Time: 10 Minutes. Author: Dilsher Singh Dhingra

Introduction to Stablecoins

Cryptocurrencies have struggled to gain traction for payments by the general population because of the lack of ease of use and price volatility. Trying to pay for coffee with Bitcoin is not easy when the price can jump up or down by 15% in few minutes. As a result, cryptocurrencies are mostly regarded as speculative investments rather than a medium of exchange.

Although cryptocurrencies might not be an ideal payment method for groceries currently, many still believe that the underlying blockchain technology has plenty of potential — especially when it comes to eliminating reliance on centralised financial institutions such as banks and regulators. The speed of fiat bank transactions also comes in for frequent criticism, not to mention the exorbitant fees charged to those who need to send money internationally.

For years, crypto enthusiasts have been seeking a compromise — a digital currency that minimizes volatility, is practical for daily use, and addresses fiat industry flaws that hit consumers in the wallet. Stablecoins have been touted as the answer, and they have exploded in popularity over recent years.

In this article, we are going to provide a brief overview on what stablecoins are and how they work.

Stablecoins explained

So how do stablecoins work? Well, the value of these cryptocurrencies is pegged to another asset. Usually, this is a fiat currency such as the US Dollar, Euro, or British Pound. As a result, one unit of the stablecoin may be equal to $1, €1 or £1.

Stability is achieved through collateralization — with a reserve fund ensuring that every stablecoin is backed by an equivalent amount of the pegged asset. So, if there are two million units of a stablecoin pegged to the US Dollar out in circulation, there should be US$2 million deposited in a bank account.

The USDC stablecoin, for example, is backed by US Dollar-denominated assets of at least equal fair value to the USDC in circulation via segregated accounts with US regulated financial institutions. USDC provides comfort to investors by having the accounts and its values verified by an independent accounting firm. Such a type of a stablecoin is referred to as a fiat-collateralised stablecoin.

[/et_pb_text][et_pb_image alt=”Top 10 Cryptocurrencies Market Capitalization ($ bn)” title_text=”Screenshot 2022-04-08 172144″ align=”center” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” src__hover_enabled=”on|hover” src__hover=”https://jackdawcapital.com/wp-content/uploads/2022/04/Screenshot-2022-04-08-172144.png” sticky_enabled=”0″ src=”https://jackdawcapital.com/wp-content/uploads/2022/04/Screenshot-2022-04-08-172144.png”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital

Different types of stablecoins

Although they are less common, there are other types of stablecoins that use different types of collateral. There are three other key categories of stablecoins other than fiat-collateralised stablecoins, as follows:

  1. Commodity-backed stablecoins: These are backed by a commodity like gold and are structured the same way as stablecoins backed by fiat currencies work. Instead of having USD reserves, these own gold. Digix (DGD) is a stablecoin backed by gold that gives investors the ability to invest in the precious metal without the difficulties of transporting and storing it. PAX Gold (PAXG) and Tether Gold (XAUT) are a few other gold-backed stablecoins
  2. Crypto-backed stablecoins: These are backed by other crypto assets that tend to be volatile, so are overcollateralized to ensure the stablecoins value. For example, a $1 crypto-backed stablecoin may be tied to an underlying crypto asset worth $2, so if the underlying crypto loses value, the stablecoin has a built-in cushion and its price can remain at $1. Havven (HAV) and Wrapped Bitcoin (WBTC) are examples of crypto backed stablecoins
  3. Algorithmic stablecoins: These do not have any associated assets as collateral and use algorithms to keep the coin’s value from fluctuating too much. If the price of an algorithmic stablecoin is pegged to $1, but the stablecoin rises higher, the algorithm would automatically release more tokens into the supply to bring the price down. If it falls below $1, it will reduce the supply to bring the price back up. The longest-running algorithmic stablecoin is currently Ampleforth (AMPL), which is currently priced at $1.07. An algorithmic stablecoin is a representation of what true decentralization looks like, without any regulatory bodies to maintain or watch over the proceedings, as the code is what is responsible for both the supply as well as the demand, alongside the target price.

Top 10 stablecoins

As per the CoinMarketCap database, there are currently 75 stablecoins. Tether (USDT) and USD Coin (USDC) dominate the stablecoins space as measured by market capitalization. Not surprisingly, they both are fiat-collateralised to the US Dollar, i.e. they are backed by an equal amount of US Dollars.

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Source: CoinMarketCap (1st April 2022)

Price stability of stablecoins

Critics of stablecoins argue that they undermine what crypto was designed for in the first place: to achieve independence from central banks and fiat currencies.

A bigger concern surrounds collateralization. One of the biggest stablecoin operators, Tether, has faced allegations that it doesn’t have enough dollars in reserve to back the coins it has in circulation — despite saying it is “100% backed” by the US Dollar. The SEC has investigated Tether multiple times, but nothing conclusive has come from these investigations.

More recently Neutrino USD (USDN), an algorithmic coin that is collateralized by Waves tokens, has failed to provide a stable price. USDN can be minted with and redeemed for Waves token that serves as its main source of demand. Once the price of Waves token tumbled, USDN broke its US Dollar peg and is about 20% off its original price

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image016.png” alt=”Top 10 Cryptocurrencies Market Capitalization ($ bn)” title_text=”image016″ _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: CoinMarketCap (5th April 2022)

Aside from Neutrino USD, the prices of the other stablecoins of the top 10 by market capitalization have been trading at 1 or close to it.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/04/image014.png” title_text=”image014″ _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: CoinMarketCap (1st April 2022)

Stablecoins backed by other cryptos face another risk, which is the equivalent of a margin call. Given the volatility of cryptos these stablecoins overcollatorize, but that requires assumptions on the price volatility. If that is larger than expected and a significant downside move occurs, then the stablecoin might not be fully collateralized. Five-sigma moves happen in financial markets more frequently than expected.

Conclusion

The use case for stable coins is obvious: make payments fast and cheap. Naturally, there are many large players like Visa or Western Union that see this as a threat to their business.

However, the real concern is how central banks view stablecoins as it also undermines their powers, which they are unlikely to accept in the medium to long-term. Given this, they are working on central bank digital currency (CDBCs), which potentially makes stablecoins redundant.

Related Research

Cryptocurrencies Coins versus Token

Crypto 101: A Dictionary

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About the Author

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Dilsher Singh Dhingra, is a finance professional working in the investment team of Jackdaw Capital. He has previously worked in private equity with CX Partners focusing on the healthcare, technology, financial services and consumer sector. Prior to this, he worked with Deloitte (India) in the investment banking team across the fmcg, industrials and hospitality sector.

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Ethereum vs Binance Smart Chain in 6 Charts

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85% of all the tokens in the world are based on Ethereum and BNB Smart Chain

March 2022. Reading Time: 10 Minutes. Author: Kaushik Ganesan.

Introduction

First, there was Bitcoin. The original idea was to serve as a medium of exchange that was digitally native, immutable, and not controlled by any institution. However, aside from considering it as a store of value, inflation hedge, or payment option, its utility was limited. Other developers quickly realized that the underlying technology, ie blockchain, had great potential, which gave rise to other protocols. From there it was a rapid evolution from smart contracts to decentralized applications (DApps), non-fungible tokens (NFTs), and so on.

Today, developers primarily consider two protocols – Ethereum and BNB Smart Chain (BSC) – when considering building applications. We will contrast these two protocols in this article.

Token Blockchain Utilization

In the cryptocurrency space, we need to differentiate between cryptocurrency coins and tokens. The first is native on its underlying protocol, eg ETH on Ethereum, while the latter are built on existing protocols, eg USDT on Ethereum. Given this, the number of tokens vastly outnumbers the number of coins.

Any developer or entrepreneur considering building a blockchain application must decide on which protocol it is based on. Although we frequently read about protocols like Solona, Avalanche, or Polygon in the newsflow of the cryptocurrency space, these have a less than 10% combined market share. 85% of the tokens (6,948) are based on just two protocols: Ethereum and BSC.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image087-1.png” alt=”Tokens: Breakdown by Blockchain Utilization” title_text=”Tokens: Breakdown by Blockchain Utilization” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

The Rise of the BNB Smart Chain 

Ethereum is old for the cryptocurrency space as it was launched in 2013. BSC is like the new kid on the block and has only been around since September 2020. However, within a few months of its launch, the number of tokens started to rise significantly. In 2021 and 2022 year-to-date, more tokens were created using BSC than Ethereum, which highlights the rapid evolution and constant change of the cryptocurrency space.

We observe that there were tokens based on BSC before 2019, but these were launched elsewhere and migrated to BSC after 2020.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image005-1.png” alt=”Rise of BNB Smart Chain Tokens” title_text=”Rise of BNB Smart Chain Tokens” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Market Capitalization of Top Cryptocurrency Coins

Although the total number of tokens based on Ethereum and BSC is about the same, the market capitalization of Ethereum is almost 5 times that of BSC. Naturally the number of tokens is one characteristic to measure the success of a protocol, but the size of the tokens and resulting blockchain utilization is another one. For example, USDT (Tether) is based on ETH and is a very popular token given its central role in moving money through the cryptocurrency space.

Bitcoin’s total market capitalization is higher than Ethereum and BSC (native coin and token) put together, which is somewhat surprising. The role of Bitcoin is largely diminished as its unsuitable for tokens, and also does not serve as a great store of value given its price volatility. It retains the supremacy as being the largest cryptocurrency, but that is based on its first-mover advantage rather than utility.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image003-1.png” alt=”Market Capitalization ($ Billions)” title_text=”Market Capitalization ($ Billions)” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Average Gas Limit

Gas refers to the unit that measures the amount of computational effort required to execute a specific operation. Gas limit refers to the maximum amount of gas units the user is willing to pay for a transaction. For e.g., each block in Ethereum has a target size of 15 million units of gas and depending on the network demand the size can go up to 30 million units of gas. BSC increased the gas limit to reduce the fees to compete with Ethereum. Basically, by increasing the gas limit, more transactions can be processed in a block for lower fees.

After London Hard Fork, Ethereum’s gas limit doubled from 15 million units to 30 million units, but BSC’s gas limit is still more than three times higher than Ethereum’s gas limit.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image010.png” alt=”Average Gas Limit (millions) – Ethereum versus BNB Smart Chain” title_text=”Average Gas Limit (millions) – Ethereum versus BNB Smart Chain” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, Etherscan.io, Bscscan.io

Average Gas Price

The product of gas units required for the transaction and gas price is the total transaction fee. The sudden growth of BSC can be explained by the transaction costs, which are called gas price in the cryptocurrency space, and transaction time. The gas price of BSC is 5 times less than Ethereum’s gas price. The gas price of Ethereum is high because of the demand which leads to bidding wars where people are willing to pay more to move up their transaction in the confirmation queue.

After the upgrade of London Hard Fork, the Ethereum network now automatically calculates the gas price based on demand for a block space instead of the auction model. This makes the gas price more predictable and less volatile. Unfortunately, this upgrade didn’t lead to a decrease in gas price.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image092.png” alt=”Average Gas Price (in Gwei) – Ethereum versus BNB Smart Chain” title_text=”Average Gas Price (in Gwei) – Ethereum versus BNB Smart Chain” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, Etherscan.io, Bscscan.io

Transaction Time

On average, BSC takes ~3 seconds to verify a block compared to 10-14 seconds in Ethereum. This means that a typical BSC transaction is likely to be executed 4 times faster than an Ethereum transaction. PoSA allows BSC to validate the blocks faster than Ethereum’s Proof of Work (PoW).

Somewhat unusual, during May 2021, the block time shot up to 800 seconds for a couple of days. Either it was a data error or some network-level issue in the mainnet of BSC.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image008.png” alt=”Average Block Time (in secs) – Ethereum vs BNB Smart Chain” title_text=”Average Block Time (in secs) – Ethereum vs BNB Smart Chain” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, Etherscan.io, Bscscan.io

Further Thoughts

BSC has been able to challenge Ethereum because of the higher gas limit that reduces the gas price. It is worth highlighting that BSC can be considered a cheaper clone of Ethereum. If needed, Ethereum can easily increase the gas limit to lower the fees, but it comes at a cost of sacrificing decentralization and security.

Binance, the parent company of BSC, has divided its architecture into two different token standards: one for handling cryptocurrency transactions (BEP2 or Binance Chain) and another one for interacting with DApps (BEP20 or BNB Smart Chain). This dual architecture reduces the computational load on one single blockchain, especially with BEP2 which handles a large volume of transactions each day. Ethereum developers are working on solutions like “sharding” that are expected to come with Ethereum 2.0. It is speculated that the sharding could boost the scalability of the Ethereum network by over 64 times.

Both protocols have their pros and cons. On one hand, Ethereum is expected to receive a fundamental upgrade soon, which changes the consensus mechanism from PoW to PoS, making transactions on Ethereum quicker and cheaper. On the other hand, BSC is offering cheap gas prices by sacrificing decentralization and security. Overall either protocol requires to finetune the balance between decentralization, security, and scalability to be a dominant player in the long run.

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About the Author

Kaushik Ramnath Ganesan is a Technology Investment Analyst at Jackdaw Capital. He comes from a computer science background and completed the CQF (Certificate in Quantitative Finance) program. At Jackdaw Capital he applies computer science, finance, and mathematics to bring blockchain technology mainstream.

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Crypto vs Tokens in 5 Charts

[et_pb_section fb_built=”1″ admin_label=”Are crypto tokens taking over the world?” _builder_version=”4.14.8″ custom_padding=”0px|||||” collapsed=”off” global_colors_info=”{}”][et_pb_row admin_label=”Current statistics of coins and tokens” _builder_version=”4.14.8″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]There are more tokens than stocks in the US

March 2022. Reading Time: 10 Minutes. Author: Kaushik Ganesan.

Introduction

In February 2022, the Prime Minister of Canada, Justin Trudeau, invoked the Emergencies Act for the first time in Canadian history to freeze the bank accounts of protesting truckers. This event made people start questioning the power of centralization and how one persons’ decision can affect a lot of people. Are democratic countries really democratic in nature?

As people see the power of centralization being misused, the adoption of bitcoin and other cryptocurrencies is likely going to increase as keeping some portion of your money out of the government’s control may seem sensible going forward.

However, the world of cryptocurrencies is a complex one. There are coins and tokens, and only a few like Bitcoin or Ethereum are well-known.

In this article, we will provide some data points for comparing cryptocurrency coins versus tokens.

Tokens are increasing

Let’s get the terminology clear first: A coin is a native token of a blockchain. For example, “ETH” is the native token of the Ethereum blockchain. A non-native token is built on top of an existing blockchain, e.g. “USDT” or Tether is a token that is built on Ethereum. Anyone can issue a token and try to convince people to become investors in the token by buying it.

In the early years of the cryptocurrency space, there were only coins. However, during the first digital asset boom in 2017, this changed as many tokens came to the market via an initial coin offering (ICO). The number of tokens has been increasing rapidly since then and today there are significantly more tokens than the roughly 3,000 US stocks.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image087.png” alt=”Cryptocurrencies: Number of Coins versus Token” title_text=”Cryptocurrencies: Number of Coins versus Token” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Breakdown by Market Capitalization

Although the number of tokens multiples is higher than the number of coins, the latter dominates in terms of value. The combined market capitalization of coins is $1.8 trillion, compared to a mere $480 billion for tokens. It is worth highlighting that Bitcoin and Ethereum contribute 42% respectively 18% of the total coin market capitalization.

Could a token have a larger market capitalization than the native coin of a blockchain? Theoretically yes, but there is no token in the top 30 by market capitalization that has achieved that.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image089.png” alt=”Coins versus Tokens: Aggregate Market Capitalization ($ Trillions)” title_text=”Coins versus Tokens: Aggregate Market Capitalization ($ Trillions)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Breakdown by Token Blockchains

Next, we analyze which blockchains are most frequently used for token projects. We observe that Ethereum and BNB Smart Chain dominate with 45% and 40% utilization. Other blockchains like Solana or Flow are frequently mentioned in the media, but have a fairly small market share, despite offering quicker transaction speed and lower transaction costs than Ethereum. BNB Smart Chain is not well known in the Western world, but is the dominant chain in China.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image009-1.png” alt=”Tokens: Breakdown by Blockchain Utilization” title_text=”Tokens: Breakdown by Blockchain Utilization” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Number of Market Pairs

Trading a coin or token is different from trading a stock as it is trading pairs, eg Bitcoin against the USD. Given this, the number of market token pairs traded across all exchanges is larger than those of coins pairs. Unsurprisingly  Bitcoin (9,234) has the largest number of pairs, followed by Ethereum (5,560), and Binance Coin (749). Tether leads the number of token pairs with 29,164, more than thrice the Bitcoin pairs. But why?

Tether is a stable coin and its price is pegged to the USD, ie one USDT is one USD. Compared to Bitcoin, USDT has practically zero volatility and is used by most crypto investors for holding the equivalent of cash. It forms the base currency for any cryptocurrency speculation and is reflected in Tether having twice the 24h-trading volume of Bitcoin. Stated differently, Tether is the backbone of liquidity in the crypto market.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image007.png” alt=”Total Market Pairs Across All Exchanges” title_text=”Total Market Pairs Across All Exchanges” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Maximum Supply of Coins and Tokens

Unlimited supply means that theoretically an infinite amount of coins or tokens can be created, which should be inflationary over the long term. Ethereum has an infinite supply and should decrease if we assume constant demand. Limited supply, like for Bitcoin, implies the inverse and should be deflationary.

However, the goal of all coins and tokens is an increasing demand, so an unlimited supply is not negative per se. Furthermore, coins and tokens can be taken off the market and burned, which acts deflationary.

The majority of coins and tokens have limited rather than unlimited supply. Although this is not strictly required for an increasing price, most investors view this as a favorable characteristic when considering a coin or token investment.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/image005.png” alt=”Coins versus Tokens: Maximum Supply” title_text=”Coins versus Tokens: Maximum Supply” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, CoinMarketCap (March 2022)

Further Thoughts

Although the blockchain space is new and rapidly evolving, there are a lot of similarities to traditional asset classes. Similar to a few companies like Apple or Amazon dominating the performance of stock markets, a handful of coins drive the performance of the cryptocurrencies.

Considering this also provides a roadmap for cryptocurrency investors. One implication is that alpha might still be available, but will ultimately be arbitraged away. A second one is that most investors are likely better off to pursue an indexing rather than active management strategy. A third one is that fees matter. The wild west of the investing world may not be so wild after all.

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About the Author

Kaushik Ramnath Ganesan is a Technology Investment Analyst at Jackdaw Capital. He comes from a computer science background and completed the CQF (Certificate in Quantitative Finance) program. At Jackdaw Capital he applies computer science, finance, and mathematics to bring blockchain technology mainstream.

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The Evolution of the Gaming Industry from 1970 to 2022

[et_pb_section fb_built=”1″ admin_label=”The Evolution of the Gaming Industry from 1970 to 2022″ _builder_version=”4.9.4″ custom_padding=”0px|||||” collapsed=”off” global_colors_info=”{}”][et_pb_row admin_label=”From pay-to-play to play-to-earn” _builder_version=”4.14.8″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

From Pay-to-Play to Play-to-Earn

March 2022. Reading Time: 10 Minutes. Author: Himank Agrawal.

Introduction

Gaming is an integral part of human life that starts at an early age as toddlers and children play games to prepare for life. Playing games for leisure, however, has become only prominent as agricultural and technological revolutions made life less hard and gave us more free time.

The game Go has been referenced in Chinese literature as early as 548 BC, although it likely is much older. As the technology evolved, games moved from tables to screens, and most recently from consoles to the blockchain.

In this article, we will explore the evolution of gaming over the last few decades.

Snapshot of the Global Gaming Industry

Gaming has become an industry with a market size of $180 billion. The growth has been cyclical between 1970 and 1995, but thereafter the global gaming market grew relatively consistently.

It is worth highlighting that the gaming market is considered the fastest growing form of entertainment globally and has become larger than the movies business.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Global-Game-Market-Revenue-.png” alt=”General Model of blockchain based gaming” title_text=”General Model of blockchain based game” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Gamingscan

Evolution of Gaming

Gaming has evolved dramatically over the years and games have consistently become more pocket friendly, which leads to increased adoption of games. The evolution can be broadly categorized in the following five phases:

  1. Buy software: Consumer goes to a shop and buys a game for a price. The game developer has highly cyclical revenues that peak with new game launches.
  2. Rent software: Consumer rents a game, which makes it more affordable. The game developer has more stable revenues given steady subscriptions.
  3. Free-to-play: Consumer plays the game without paying anything upfront, but tends to purchase items like weapons within the game. The game developer makes money by selling in-game items or transaction fees, which are relatively stable revenues.
  4. Play-to-earn: Consumer plays the game with the aim of winning money or awards by beating other players. Participating in games may require upfront payments. The game developer makes money by selling access to the game or charging transaction fees.
  5. Blockchain-based gaming: Consumer is an integral part of the game ecosystem and blockchain is used for facilitating transactions as well as for voting to make changes to the game. The role of the game developer lessens over time as the community takes over the game development.

The diagram below outlines the evolution of gaming.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Screenshot-2022-03-04-at-12.25.01-PM.png” alt=”Evolution of Gaming” title_text=”Evolution of Gaming” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw

Analysis of Blockchain-based Gaming

With blockchain-based gaming, the dynamics of the game have changed. Traditionally, players used to buy games from the game developer and receive entertainment by spending their time in the game.

Play-to-earn is the latest gaming evolution and empowers a skilled player to make a living by playing games, similar to how a talented footballer can live off the sport.

Moreover, the gaming ecosystem has widened with the tokenization of in-game items. This tokenization aims to increase the interoperability of in-game items into other games, thus increasing the utility of in-game items and their value.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Screenshot-2022-03-04-at-1.25.44-PM-1.png” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw

The most important aspect in the latest evolution of using blockchain in games is the shift from power from the game development company to its users. The gaming economies have become more inclusive wherein players and content creators share revenues and enjoy decision-making power along with the game developers, which is typically structured via a decentralized autonomous organization (DAO) for governance. The aim is to create an ecosystem that is beneficial for all the parties involved.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Screenshot-2022-03-04-at-1.27.34-PM.png” alt=”Power Shift in Player Owned Economies” title_text=”Power Shift in Player Owned Economies” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Sensorium

However, the downside of blockchain-based games is the complexity as the number of parties involved has increased compared to the old way of game developers simply selling games to players via one-off transactions.

For example, guilds have emerged that select and provide funds to players that compete in play-to-earn games. Finding the right guild for a player is as challenging as finding the right players for a guild.

Managing such an ecosystem is challenging as the parties have different incentives, eg the game developer wants to maximize their revenues while the community might want to develop new features that decrease revenues.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Screenshot-2022-03-04-at-1.31.06-PM-1.png” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: The Block Research

Snapshot of the P2E industry

Play-to-earn and blockchain-based gaming are still evolving and will likely look dramatically different in five years’ time.

However, it is worth highlighting that some of the play-to-earn games have grown significantly in recent years. Alien World, Axie Infinity, Splinter Lands, and Bomb Crypto each have more than 500,000 monthly users.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/03/Top-p2e-games.png” alt=”Top p2e games” title_text=”Top p2e games” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Statista (10 Jan 2022)

Further Thoughts

The rapid evolution of play-to-earn and blockchain-based games are fascinating to observe and these can still be considered in their infancy. There will be many iterations of the current business models, ecosystems, and communities, where most concepts will fail and only a few will succeed, but that is simply the nature of the gaming industry and commerce in general.

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About the Author

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