Decred Price Analysis – A sustained increase in mining activity

Decred (DCR) is a Bitcoin fork launched in 2016. The project incorporates governance functions by using a hybrid Proof of Work (PoW) and Proof of Stake (PoS) consensus system. The cryptocurrency is down 77% from the record high of US$118, established in early May 2018. The market cap currently stands at US$295 million with US$547,000 traded over the past 24 hours.

The hybrid consensus system in DCR attempts to shore the vulnerabilities of both PoW and PoS. PoW miners create the blockchain and earn a portion of the block reward. PoS stakeholders purchase tickets, which earn a portion of the block reward and can also be used to vote on whether a block is permanently added to the blockchain.

A classic PoW model favors entities with access to cheap electricity and the capital to invest in mining infrastructure. This model is subject to mining centralization and the 51% attack, where a miner or pool with more than half of the hash rate can control the blockchain and the transactions.

A classic PoS model favors early adopters who accumulated coins, typically during an initial distribution. The benefits of PoS include decreased infrastructure costs as well as the ability for any user to directly participate in network governance decisions. PoS only blockchains are subject to stake grinding vulnerabilities, which effectively allows a majority PoS miner to control the blockchain.

DCR PoS stakeholders can vote on code updates and budget proposals through a blockchain-anchored public proposal system, dubbed Politeia, which went live in October 2018. If an update or proposal is approved by ticket holders there is a period of time for amendments or reversals, followed by the implementation process.

Source: proposals.decred.org

Stakeholders can purchase tickets using a DCR client. Five tickets are then chosen randomly from the total ticket pool and, if at least three of the tickets vote ‘yes,’ the block is permanently added to the blockchain. Ticket prices, which have continued to increase over the past year, are based on supply and demand and have no direct correlation to DCR exchange prices. If more people stake their DCR, then the ticket price will continue to rise.

Source: dcrstats

The PoW component uses the BLAKE-256 hash function, which is similar to Bitcoin’s SHA-256. The network has five minute block times and the difficulty adjusts every 12 hours, approximately. There are currently 213 network nodes, most of which reside in the United States.

Over the past year, network hash rate and difficulty have increased substantially, with both reaching for record highs in the past few days. This is largely in part due to the 17 BLAKE-256 ASIC mining hardware having been released since January 2018. The two most profitable ASICs are currently the StrongU STU-U1++, released this month, and the MicroBT Whatsminer D1, released in November 2018. Eight of the 17 applicable ASICs are currently profitable at US$0.04 per KWh.

Source: dcrstats

Block rewards are split, with 60% to PoW miners, 30% to PoS stakeholders, and 10% to developers. The current block reward breakdown is 10.406 DCR for PoW, 1.0406 DCR per ticket for stakeholders, and 1.7343 DCR for the developer subsidy. Of the total 21 million capped supply, 48.1% has been mined thus far, which includes an 8% pre-mine at launch, or 1.68 million DCR.

According to a December 2015 blog post, all pre-mined coins owned by developers were either purchased at a rate of US$0.49 per coin or earned for work performed. Of the total 10.116 million DCR in circulation, 25% of the coins are being held in the PoS pool. The developer fund address currently holds 611,287 DCR, or US$17.83 million at current prices, and is the largest single account on the network, accounting for 6.27% of the total circulating supply.

Source: dcrstats

The DCR annual inflation rate clocks in at the higher end among crypto assets that are more than one year and use PoW, and is currently 16.39%. Dash (DASH) also uses a hybrid PoW/PoS consensus mechanism and includes a governance engine. In contrast, DASH has masternodes to gain increased staking rewards and governance functions, whereas DCR uses the ticket system approach. For both DASH and DCR, the inflation rates do not include staking rewards, which are currently 9.62% and 6.38%, respectively.

Annual inflation rate

Turning to the health of the network, the current number of transactions per day on the network (line, chart below) entered a downward trend in the beginning of 2018. The record high for transactions per day stands at 6,290 on August 2017. The average transaction value per day has ranged from US$750 to US$3,500 since October 2017. Transactions fees, all of which are collected by the PoW miners, are currently averaging 0.00017 DCR per transaction, or US$0.005 (not shown).

Source: coinmetrics

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has ranged from 120 to 185 since October 2017. Inflection points in NVT can be leading indicators of a reversal in an asset’s value. A clear uptrend in NVT suggests a coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator, whereas a downtrend in NVT suggests the opposite.

Monthly active addresses (fill, chart below) have continued to decline since January 2018 and are currently 8,600. Active and unique addresses are important to consider when determining the fundamental value of the network using Metcalfe’s law. A steep and persistent drop off in active addresses paints a bearish picture as it indicates a sharp drop in on-chain use.

Source: coinmetrics

Turning to developer activity, DCR has 69 GitHub repos with 536 commits on the main repo (chart below) over the past year. Most crypto projects use the developer community of GitHub, where files are saved in folders called "repositories," or "repos." Changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

Dave Collins, the lead DCR developer, optimized the master branch earlier this year, introducing a significant spike in commits. Decred v1.4.0 was released in early February and included; a new consensus vote agenda, Trezor support, and advanced Politeia integration.

Source: github

In the markets, DCR exchange traded volume in the past 24 hours has predominantly been led by Bitcoin (BTC) and Tether (USDT) pairs on Binance, Huobi, and Bittrex. In March, OkCoin listed DCR/USD, DRC/BTC, and DCR/ETH pairs. In May, Poloniex disabled DCR pairs for US citizens, along with eight other other coins, suggesting that they believe DCR may represent an unregistered security in the eyes of US law. DCR is not currently available for trading on Coinbase.

Google Trends data for the term "Decred" has dropped substantially since the start of 2018, and is currently sitting near multi-year lows. A slow rise in searches for "Decred" preceded the bull runs in 2016 and 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between google trends data and BTC price whereas a 2017 study concluded that when U.S. Google "Bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

DCR has been trading within a relatively tight but rising range over the past 111 days. As the high timeframe bear trend may be coming to an end, a price roadmap for a new bull trend can be determined using Exponential Moving Averages, Volume Profile of the Visible Range, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50-day Exponential Moving Average (EMA) and 200-day EMA have been bullish crossed since May 30th, suggesting an end to the 309-day bear market. The Volume Profile of the Visible Range (VPVR, horizontal bars chart below) shows some resistance above the current price, with strong support at US$16. If the December low of US$13.80 does not hold, there is negligible historic support until US$3.50. There are no active RSI or volume divergences.

Turning to the Ichimoku Cloud, four metrics are used to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bearish and the Lagging Span is above the Cloud and near the current spot price. The trend will remain bullish as long as the current spot price is above the Cloud. A long re-entry signal will trigger with a bullish TK cross.

On the two-day DCR/BTC pair, trend indicators are leaning heavily bearish. The 50-day and 200-day EMAs have been bearishly crossed since September 2018 and the current spot price has been below the Cloud since July 2018. VPVR shows significant historic support at the current local low. The most prudent long entries will be placed after a bullish 50/200 EMA cross and bullish kumo breakout. However, price may complete a mean reversion move towards the 200-day EMA at 0.005 BTC in the near term. There are no active RSI or volume divergences.

Conclusion

Network fundamentals show a sustained increase in mining activity over the past year, largely due to a number of BLAKE-256 ASICs entering the market. Declining on-chain activity over the past year suggests very little organic on-chain activity beyond mining and speculation. Fortunately, DCR’s treasury system for blockchain proposals and dev funding will likely sustain the coin for many years to come. DCR is very similar to DASH in this regard.

Technicals for the DCR/USD pair are bullish based on trend metrics, with a near-term target of US$40 if bullish momentum is sustained. Technicals for the DCR/BTC pair are currently heavily bearish, but the current distance from the 200-day EMA, and the current local low at a high volume support level, suggests an increased possibility of mean reversion towards the 0.005 BTC zone. If the current low does not hold, the next historic support zone is around 0.0017. A Coinbase listing, if it should occur, may bump the market higher.