Crypto Market Commentary
6 October 2019
Doc's Daily Commentary
The 10/2 ReadySetLive session with Doc and Mav is listed below.
DECRED: FOLLOWING IN BITCOINS FOOTSTEPS
In my opinion, Decred is one of the most promising cryptocurrency projects in the industry and a sound competitor with Bitcoin in the free market for digital money.
I previously explored a comparison between Alt-coins and Bitcoin in regards to their Monetary Premiums considering a simple methodology relating scarcity, as measured by stock-to-flow ratio, to market value inspired by a methodology proposed by Plan B for Bitcoin). This study established the existence of a fundamental power law relationship for Bitcoin that acts as a valuable baseline against which fixed supply cryptoassets may be compared.
An outcome of my study was an observation that Decred has developed and maintained a convincing monetary premium. Not only is Decreds monetary premium more convincing than that of all competing alt-coins considered, but in fact even more so than Bitcoin in its early days.
What I explore further in this article, is the depth to which Decred’s market valuation and performance to date is comparable to that of Bitcoin in its early history. An apples to apples comparison.
Decred is founded on the same core sound money principles as Bitcoin yet differentiates significantly in three very meaningful ways, namely:
Decred’s Security and consensus utilises an innovative and elegant Hybrid PoW/PoS mechanism. This system can reasonably provide superior ledger assurances (Permabull Nino, 2019) and a higher cost of attack (between 20x and 40x) per unit of market capitalisation in comparison to Bitcoin (Zubair Zia, 2018 and Fiach_Dubh, 2019).
Pre-established Governance Mechanism that allocates decision making capacity and risk ownership to DCR holders. The governance system is comprised of off-chain signaling via Politeia, social media channels (Matrix, Twitter, Reddit etc.) and binding on-chain voting for consensus level changes via the Decred ticket system. Decred governance is underpinned by a remarkably strong social contract (Haon, 2019) that to date has proven its capacity for retaining community integity and mindshare.
Distribution of block rewards allocated as 60% to Proof-of-work miners in return for CAPEX and OPEX costs, 30% to DCR ticket holders to incentivise governance participation and security and a final 10% to the Decred Treasury which is owned (and soon to be operated by) Decred stakeholders. Decred effectively incentivises participation of Miners, Stakeholders and Builders in contrast to Bitcoin’s 100% allocation to Proof-of-Work Miners.
In this light, Decred has a uniquely differentiated value proposition amongst the landscape of crypto-assets and represents a strong candidate for a long-term digital monetary asset. As such, Decred represents a valuable opportunity to study the early age performance of a strong contender for digital money with the benefit of Bitcoin hindsight.
A comparative Study
This is the first part of a multi-part series I am developing looking at comparing the actual performance of Decred compared to Bitcoin in its younger years. It is my opinion that if we are to perform a true apples to apples comparison, we must compare 3 year old Decred to 3 year old Bitcoin. In order to compare these networks in full, we need to assess:
1) Monetary Policy = Scarcity and Supply side
2) Cost to attack Security and Consensus = immutability and unforgeable costliness
3) Userbase and activity on-chain = Demand side
This first part in the series will compare the Monetary Policy between the two blockchains.
Part 1 – Monetary Policy
The core value proposition of Decred is near identical to Bitcoin in that it presents an opt-in, self-sovereign and immutable digital store of value.
Decred has thus retained the core sound money principles of Bitcoin including:
*21 million maximum unit supply of DCR
*100,000,000 divisible units (atoms) per DCR, equivalent to satoshis of Bitcoin
*Deterministic supply schedule by block height
Decred’s overall supply curve actually approaches that of Bitcoin with near identical circulating supply estimated around Mar 2038 (Bitcoin Block 1,534,712 ~ Decred Block 2,272,240).
Material differences between Decred and Bitcoin monetary policies can be summarised as:
*Decred launched with an 8% premine (1.68 million DCR) with 4% airdropped free to early community members and 4% purchased by the team at a rate of $0.50/DCR. Bitcoin launched without a pre-mine however its existence was initially known only to a small collective of cypherpunks with an estimated 1 million BTC still held by Satoshi Nakamoto.
*The Decredblock reward starts at 31.19582664 DCR per ~5min block time and the reward is distributed at a rate of 60% / 30% / 10% to Proof-of-Work miners, Proof-of-Stake Stakeholders and the Decred Treasury Fund, respectively. This compares to Bitcoin that starts at 50 BTC per block issued every ~10mins allocated in full to Proof-of-Work miners.
*Decred’smonetary policy does not include a significant supply shock ‘halving’ event as Bitcoin does every 210,000 blocks (~4 years). Instead, its block reward follows a smooth reduction by 100/101 every 6,144 blocks, equating to a reduction of approximately 0.99% to the total block reward every 21.33days.
To illustrate the similarity between monetary policies, we can superimpose Decred launching at the block-height when Bitcoins circulating supply reached 1.68million BTC (equivalent to Decreds initial pre-mine = BTC block 33,600) to compare progression of the stock-to-flow ratios and supply curves.
What is immediately observable is that Decreds stock-to-flow development approximates the mean trajectory of Bitcoin and traverse the same set of stock-to-flow values. As such, if the fundamental relationship between stock-to-flow and value developed by Plan B is proven valid only for Bitcoin, it must be reasonably attributed to the combined influence of Satoshi’s immaculate conception, first mover advantage and halving events.
On the Decred Pre-mine
It is not uncommon for Bitcoin maximalists to point fingers at Decred’s pre-mine as the initiation of a ‘scam’ shitcoin. No doubt, the topic of pre-mines is somewhat taboo in this industry largely as a result of this stigma.
There is a delicate balance as we cannot expect alt-coins to replicate the immaculate conception of Satoshi Nakamoto. We need to be rational and expect that these crypto networks provide some incentive for teams to build useful technology whilst not indeed scamming the public by having a pre-mine so large it results in Ripple style dumping.
Therefore I have taken the estimated hashrate of Bitcoin up to a total of 2Million BTC mined to analyze how many potential miners were on the network in the early days. Given the Decred premine of 1.68M was split 50% to founders and 50% airdropped to the community, the real founder pre-mine is 840k DCR. Taking a top of the line CPU processor in 2008, the Intel i7 920, we can establish the maximum hashrate for a single PC miner.
What this chart shows is that it is highly likely that one maybe two miners at most with a combined hashpower less than a single i7 920 CPU were active up until Jan 2010, a full 1 year of mining. As a result, it is possible that Satoshi has the lions share of 2M bitcoin, not the 1M commonly quoted. This is not dissimilar to BitMEX analysis on the Satoshi coins that suggest he mined at least 700 to 800k BTC before another miner joined the network.
As such, whilst Bitcoin has the ‘immaculate conception’ concept in its favour, I do not believe that Decred’s pre-mine has an appreciable impact on its unforgeable costliness as it is very much commensurate with the ‘founders reward’ of Bitcoin.
Given the monetary policies and initial reward are arguable equivalent between these two coins, we need to formalize the actual market perception of value over time. In order to perform a fair comparison, I have plotted the Market Cap of BTC, DCR and LTC against the percentage of total supply mined. This effectively normalizes for each project considering its stage in life
What we can see in this chart is the fascinating feature that BTC, LTC and DCR all converge to a market cap of $180Million at the point of 50% coins mined…very strange.
What is also notable is that Decred and Bitcoin have retained a strong correlation to the S2F model proposed by Plan B. Litecoin did up until its first halving however ever since has shown much less promise remaining well below the model at the majority of times since.
As I mentioned, this is the first part of an ongoing research venture. The next stage will be looking at the unforgeable costliness of Security. I will be analysing the miner income as well as a Decred specific metric that is the amount of capital which has been locked up in Proof od Stake to secure the chain.
What is also quite cool is that as I build out these python tools, they may be easily adapted for any other blockchain relatively quickly. Once full operational, we can work through a number of blockchains to help filter out which ones we can safely discount and perhaps find some hidden gems that are performing under the radar.
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