Crypto Predictions 2019: Alt-Coin Contenders — DECRED

From an investment perspective, valuing businesses is typically done using time honored formulas like price to earnings and price to book ratios, PEG calculations and dividend yields. In the crypto space, none of these methods apply directly — and investors continue to wrestle with how best to assign a value to digital assets in a nascent industry that is sentiment driven and characterized by wild volatility

To that end, the purpose of this ‘Alt-Coin Contenders’ series is to identify specific assets that BNC analysts have identified as having fundamental characteristics that at the very least, justify investors including them in a ‘ones to watch’ list.

The selections are made based on a range of criteria – things like hashrate or an increase in on-chain transactions. Or staking metrics for Proof-of-Stake blockchains and the size and enthusiasm of an asset’s ‘community’. Or apparent liquidity — significant exchange listings and fiat on-ramps. Exposure to potential legislative action is also important, as are the people behind the scenes — inspiring leaders with ‘rock star’ social media status, or alternatively, big-time financial backers with deep pockets and a track record of success.

No single asset will tick every box, and some will tick more than others, but what this series aims to do is move readers beyond simplistic FUD, FOMO and speculation — and introduce the range of fundamental token attributes that should become recognized value indicators as the industry matures.

Decred: Challenging the traditional blockchain governance model

Decred (DCR) is a hybrid Proof-of-work/Proof-of-stake blockchain notable for providing a unique solution to network governance & decision making. Decred can be categorized as a ‘cryptocurrency’ in a similar vein to Bitcoin and Litecoin, capable of supporting an ecosystem of peer-to-peer payments secured over an immutable blockchain. The DCR token has generally been considered as a token for technology focused investors—rather than traders—because of its unique value proposition and an initial lack of presence on popular exchanges.

The unique technology backing the network, active development roadmap and value derived from diverse token utility, also makes DCR an appealing store-of-value investment.

At a base level it is built with PoW mining and block production occurs similar to Bitcoin, using a Blake-256 algorithm that was designed as a natural evolution from SHA-256.

For every block, a randomly selected group of users vote on its validity. To have this right users stake their DCR tokens in exchange for voting tickets. This is the core of the Decred blockchain’s Proof-of-stake solution. Every time a block is produced, 5 random tickets are chosen from the ticket pool to vote on the block’s validity. At least 3 of 5 selected stakers must approve the given block for it to be added to the chain. If this requirement isn’t met the block is vetoed and discarded.

Tickets are also used to vote on potential upgrades to the Decred protocol. Votes are tallied every 8,064 blocks,~30 days, to give an opportunity for the entire ticket pool to participate.

This is Decred’s onchain governance solution. Any user wishing to participate in decision making and influence the network’s future can do so by joining the ticket pool and voting on protocol changes.

To stake, users purchase tickets using the internal Decred client. If more than 75% of the voting pool approves a change by the end of a given 30 day cycle, it is enforced into Decred’s code, no backing out.

A market internal to the blockchain determines the price of tickets using a staking difficulty algorithm which calibrates the price of new tickets to ensure that a target pool size of 40,960 tickets is retained.

Figure 1: Decred Proof-of-stake statistics

Figure 2: Decred ticket price has risen over the last year in DCR terms, but fallen in USD terms.

After voting, tickets are destroyed and owners receive their purchase price back plus a share of the block reward as compensation for participating in the consensus process.

Decred’s blockchain design creates a system of checks between miners, users and developers that ensures that there are fewer invalid transactions slipping between cracks, and there is an opportunity for any stakeholder if interested, to have a say in big picture network decisions.

The monetary incentives built into consensus participation should ensure a steady stream of willing users looking to be paid for services towards governing the network.

For DCR investors there is security knowing that token value cannot be evaporated by a few bad actors in a situation such as 51% attack, or a network power struggle.

Decred is known as a ‘hard fork resistant’ blockchain because forks, when they occur, are controlled, pre-confirmed, and agreed upon. Governance battles like 2018’s Bitcoin Cash drama, are avoided by the baked-in, open participation voting protocol of the Decred blockchain. Social media threats by influencers become empty and the potential for a single consortium to dominate network hashrate become irrelevant.

For users intimidated by the process of PoS participation (it requires a constantly unlocked wallet and low latency internet) tickets can be allocated to a staking pool which may act as a token holder’s representative.

The largest staking consortium in Decred, Stakeminer, represents 1585 users and 16% of the total network staking pool (figure 3). There are a number of different stake pool fee structures, Stakeminer lets users pick a percentage fee above 1%, while alternative Stake Pool Bravo offers a flat 2% fee for its services.

At this stage, despite a number of staking pools acting as proxy decision makers for large user groups, governance on the network appears to be relatively decentralized and drama-free.

If Decred ever chooses to transition away from its current staking model because pools accumulate too much power, the network’s Proof-of-stake voting mechanism can enforce a change.

Figure 3: Network tickets accumulated by Stakeminer

Recent developments and updates

Since April 11th 2018, the hashrate for the Decred blockchain has risen over 2000% (figure 4), despite the DCR token price struggles. Over the same period DCR’s price has fallen by ~70%.

Figure 4: Decred network hashrate

A higher hashrate for a blockchain means greater immutability, and security against potential bad actors such as 51% attackers.

The primary factor for this surge has been the development and usage of ASIC capable Decred mining units built by companies like Micro BT.

Generally the hashrate of PoW blockchain follows the price of its rewarded token. If the price of the token is falling then it means that miners are earning less per block reward, diminishing margins.

Figure 5: Data from: Asicminervalue.com, Profits per day for most SHA-256 ASICs sits between $0.50 – $2.00

The fact that Decred’s miners are willing to continue competing with each other for tokens that are losing value in the short term, indicates strong long term belief in the value of the DCR token and the Decred blockchain.

Figure 6: Large, cost efficient miners dominate the Decred network hashrate given they can now allocate ASIC’s to the Blockchain

New token utility in 2019

Expected to launch some time in 2019, Politeia is a platform being developed to support Decred’s governance. It facilitates the submission, tracking, and discussion of Decred governance proposals by the stakeholder community.

Proposals can either be made around generating support for a network update like a software development, or towards requesting the usage of DCR, that has been accumulated in the Decred treasury, towards a proposal’s aims.

The launch of Politeia is attractive to the Decred community because it means access to funds that have been locked away in the Decred treasury, which currently owns the largest wallet on the Decred network (figure 7).

The implementation of a new governance protocol adds value and utility to the DCR token. Depending on the proposals put forward by the community as part of Politeia, the evolution of Decred is likely to be significantly influenced.

Figure 7: DCR rich list at at December 11th 2018

Network fundamentals and price signals

Figure 8: DCR NVT signal and price. NVT signal calculated with data from Coinmetrics.io. Adjusted onchain transaction volume used for NVT signal

Derived from the NVT ratio, the NVT signal is a responsive blockchain valuation metric developed by Willy Woo and Dmitriy Kalichkin. Crypto markets are prone to bubbles of speculative purchasing not backed up by underlying network performance and activity. The NVT signal provides some insight into what stage of this price cycle a token may be in.

A high NVT signal is indicative of a network that is going through one of these bubble periods, and may move towards a position of becoming overbought/overvalued, because of the market’s speculative assessments running out of steam.

There are indications that Decred may be approaching a short term bottom having fallen ~69% since October 23rd. NVT signal (adjusted tx volume used) has begun reverting after it has a hit a temporary floor assessed to be ~55 (figure 8).

Organic fundamental activity on the network may be driven by transactions triggered by onchain governance operations, mining rewards or usage of DCR for payments and atomic swaps.

At one point in 2018 the Bittrex exchange processed 35% of all DCR trading. This changed on October 24th when Binance began listing DCR pairs with BTC and BNB, giving the token liquidity from the world’s most popular and voluminous exchange. Currently the DCR/BTC pair on Binance makes up 10% of total exchange volume of DCR. Speculation around the listing’s effect were key drivers of DCR’s upward price run in October.

Going forward into 2019, NVT signal assessment may be affected by the increased speculation driven by activity on mega exchanges like Binance. However, DCR is likely to remain a token defined by its ‘within ecosystem’ activity – particularly if major updates like Politeia prove popular in the Decred community.

An additional consideration is that the user base and liquidity provided by an exchange like Binance could help add fuel to a price surge when sentiments reverse in overarching crypto markets.

Price-to-Metcalfe ratio signal

Metcalfe’s law is a measure of connections in a network, as established by Robert Metcalfe the founder of Ethernet. It has subsequently been used to analyze the true value of network-based financial products like Facebook and Bitcoin, and by comparing it to price, can provide a useful tool to assess whether a token is over or under valued.

It is also a more straightforward metric to implement versus onchain transaction volume, which can be challenging to measure accurately in USD terms. Addresses are measured as the number of unique sending and receiving addresses participating in transactions daily. However, there may be a question of the granularity of the data, and who controls these addresses.

Figure 9: DCR PMR signal and price. NVT signal calculated with data from Coinmetrics.io. Active addresses^2 used to reflect Metcalfe value. PMR values in natural log form.

As a blockchain defined by creating wider network participation through monetary and responsibility incentives, Decred has much lower historical Kalichkin PMR signal value (figure 9) than a number of competitors. It has a recently been trending downwards slightly – most likely caused by falling prices, and is far from reverting based on historically indicated inflection points.

As a long term indicator, Decred’s high Metcalfe ratio vs token value is indicative of a blockchain that is being used for organic blockchain activity, rather than interacted with as a tool for speculators to trade on exchanges.

Conclusions

Decred, like a number of other altcoin options, has shown indications of retained fundamental strength and long term stability despite 2018’s bear market. Incidents like the recent Bitcoin Cash hardfork have brought to light the issues of informal blockchain governance and Decred’s alternative solution theoretically provides hard fork resistance by allocating key network decision making to a blockchain operation.

With hashrate showing strong long term growth and a key protocol release scheduled for the near future, DCR may be a token primed to survive through the current crypto winter, and emerge as a stronger project with added value propositions when the overall market reverts.