ON–034: L1s & L2s

This is issue #34 of the on-chain analytics newsletter that reaches almost 3500 crypto investors every week.

This week our contributors cover L1 and L2 projects: SKALE Network, Decred, Bitcoin, and Tezos.

Daily Transaction Volumes: In August 2019, Decred released a privacy CoinJoin implementation using the CoinShuffle++ protocol which integrated mixing with its Proof-of-Stake ticket system. Users may opt to mix their funds prior to purchasing a ticket, or just participate in the mix taking advantage of consistent liquidity.

After 1 year of operation, the CoinShuffle++ mixer anonymizes an average of 100k DCR per day (red). Compared to the 200k DCR on average spent purchasing tickets (green), this represents a significant relative volume onchain. The mixer is currently accessed via command line only at this stage with the GUI set for released in the main Decrediton wallet in Q3 which is expected to further increase mix liquidity and volume.

Miner Performance: Decred miners have experience extremely challenging financial conditions with ASIC hardware launching at the peak of the 2018 bull run. Difficuly increased by three orders of magnitude at the same time as price fell an order of magnitude, from $120 to $15.

The market value of DCR has finally broken above (and retested) the cumulative PoW-USD block reward curve (also known as the thermo-cap, or cumulative cost of production). This observation was supported by a 31% boost in network hashrate from lows of 320PH/s to around 420PH/s today, as well as an unfurling of the difficulty ribbon to the upside.

Miner Pulse: Decred difficulty adjusts every 12hrs making it extremely reflexive to changes in hashpower coming on and off the network. A powerful metric developed by @permabullnino to monitor the response of miners to dynamic conditions is the Miner Pulse.

This metric constructs an oscillator (in seconds) by measuring the delta between actual block-time, and the target block-time of 300 seconds. Where miners are coming online, hash increases, blocktime speeds up and the Miner Pulse goes green (and vice-versa). After a long and challenging bear, the first sign of green shoots are starting to show up, supporting the increased hashrate, valuation break above the thermocap and the unfurling of the difficulty ribbon. Using this combination of metrics, one can start building a thesis of miner profitability and likely break even prices.

Ticket Funding Rate: Another metric developed by @permabullnino is the Ticket Funding Rate. Decred PoS rewards decrease over time as the protocol issuance approaches the 21M cap. Simultaneously, the price of tickets has increased as more coins enter circulation. This creates a dynamic supply and demand market for tickets as stakeholders gauge the risk-reward of sacrificing coin liquidity in exchange for the PoS reward and voting rights.

The ticket funding rate attempts to measure this change in sentiment. In particular, the 56-day period (2x the average vote time of 28-days) measures stakeholder willingness to re-bind 'just voted' coins for a second ticket. A strong willingness shows up as low oscillator values (green) and vice-versa (red).

Treasury Vote Power: Finally, the Decred market cap is once again attacking the underside of the realized cap. Historically, the realized cap is the strongest of support in bullish conditions and strong resistance in a bear market. Given the importance of on-chain transactions for stakeholder voting rights, the realized cap is the purest form of stakeholder recency bias and sentiment printed on-chain.

The Unrealized Profit and Loss metric captures the aggregate mood by taking the normalized difference between market and realized valuation. Since the March lows, Decred holders have progressed into a period of Anxiety as the realized cap is challenged from the underside for the ninth significant test of the bear.

• Mainnet Launch: The SKALE Network is in the midst of a 3-phase launch for its public mainnet. Phase 1 began in June and consists of over 25 smart contracts running on the Ethereum mainnet. These contracts control critical network functions for SKALE such as chain creation, validator registration and management, node selection, node rotation, staking, bounty payment, slashing, and more. Therefore, SKALE serves as an Ethereum-based execution layer that is deeply rooted on L1.

• Incentivized Testnet: Prior to mainnet, SKALE ran a comprehensive testnet with 20 initial validators. The goals of the testnet were to test and verify the setup of validator nodes and confirm the proper performance of validator and delegator operations, node operations, and network monitoring. The testnet ran at an accelerated epoch time set at 2 hours, and has been running with no downtime since May 20th having lived through over 1000 epochs, which equates to over “80 years” of network life.

• Development: The SKALE Network contains a number of critical components:

  1. SKALE Manager which is an extensive set of smart contracts that live and run on the public Ethereum mainnet

  2. The SKALE Consensus algorithm which runs in the subnodes and validates the SKALE chain blocks

  3. The SKALE Admin Docker container that orchestrates the other SKALE Docker containers used within the nodes and subnodes

  4. The skaled daemon that is the primary process that runs on the node and controls node operations

  5. The SGX Wallet which is a key enabler for secure validator and delegator operations

  6. libBLS which is a fundamental library for the cryptography algorithms and signature schemes used within the network.

  Below is a chart of the code commits from April 2019 to present day. This chart only includes commits made during this period but does include the ~2x number of commits in the 1.5 years prior to open sourcing the code.

Ecosystem: Finally, earlier this week, SKALE announced over 40 integration partners and validators, in addition to the dApps that are currently building on the platform. Partners include major wallets and auth providers, data storage solutions, data explorers, oracles, validators, and blockchain API connectors, along with support for the most commonly used token standards and developer tools used by the Ethereum community.

SKALE is well on its way to becoming fully operational and serving as the high-throughput execution scaling layer for Ethereum that dApp developers, protocol designers, and other crypto-based builders critically need for lower gas fees and fast finality.

• As DeFi continues its rapid rise on Ethereum, Bitcoin has also seen a surge in usage throughout July and August. Bitcoin has had an average of about 1 million active addresses per day since July 27th. If growth continues at this rate, Bitcoin should soon approach its all-time high of 1.29 million daily active addresses set in December 2017. The following chart is smoothed using a 7 day rolling average (Source).

One of the most often cited metrics for measuring DeFi adoption is total value locked. Although Bitcoin does not have the exact same concept, an interesting comparison is the amount of BTC locked in Pay-to-Script Hash (P2SH) addresses. While standard Pay-to-PubKey Hash (P2PKH) addresses are unlocked using a private key signature, P2SH addresses can have more complex unlocking requirements. P2SH scripts can be relatively simple, like a 2 out of 3 multisignature script, or completely unique and custom.

The amount of BTC stored in P2SH addresses has grown steadily over the last 6 months, peaking in early August. As of August 11th there’s over 5.9 million BTC stored in P2SH addresses, about 32.1% of total supply (Source).

• The Lightning Network, a layer 2 payments system, has also been growing since the beginning of 2020. As of August 12th, there’s over 1K BTC held in Lightning channels, and over 13.5K open channels (Source).

• Overall, BTC supply is increasingly being held for longer periods. Over 63% of total BTC supply has been held for at least 1 year as of August 11th, the highest amount since 2012 (Source).

• Growth: Tezos recently passed its 2nd anniversary shortly after historic block 1,000,000. Looking back at the past year we see a steady trend of growth emerging over time. Until today, Tezos is still in its first phase of development, but technology and community have already proven to be reliable and robust. Tezos successfully completed three network upgrades governed by on-chain voting, became the first supported and most traded staking platform on top exchanges (number 3 in terms of daily USD trading volume in Aug 2020) and is now on its way into a forth upgrade cycle that will introduce zk-snarks (Sapling), validator and governance extensions.