Not far to go – NEAR leads the crypto pack into 2022

The start of 2022 has been difficult for crypto investors. Since the beginning of December 2021, the two largest digital assets, Bitcoin (BTC), and Ethereum (ETH), have dipped ~26%, and ~28% respectively.

After a blockbuster first 11 months of 2021, crypto markets have consolidated with investors now choosing to take profits and reduce positions. Risk markets like crypto have faced a number of bearish macro headwinds during this winter season including the partial collapse of the Chinese property development market, the emergence of the Omicron variant of the Coronavirus, and signals of a flip by the Federal Reserve to a hawkish monetary policy.

In the last few days, announcements of record inflation rates in the US, and signs that the Fed will be ‘soft’ with the short term rate and not pursue a fast aggressive rates hike, has created some macro momentum for risk markets like crypto. The wider macro trends suggest volatility across financial markets.

NEAR, the native token of the smart contract platform Near Protocol, has bucked this bearish trend. Since the beginning of December, the price of NEAR is up ~130% and has touched all-time highs in the last day. Over this period, NEAR has rapidly risen from 40th on the Market Cap table to 20th. The market cap of the token has more than doubled, ignoring market trends during a period when money has been rapidly flowing out of the rest of the crypto space.

Source: Footprint analytics

The Near Protocol is the latest smart contract platform to capture the imagination of the crypto community.

A key narrative throughout 2021 bullrun was the eye-popping growth of platform blockchains. The native tokens of platform blockchains like Ethereum (ETH), Binance Coin (BNB), Solana (SOL), Terra (LUNA), and Avalanche (AVAX) experienced triple and quadruple-digit gains in 2021.

The smart contract-based Web3.0 and non-fungible token (NFT) sectors hit a point of maturity in 2021 where they were no longer strangled by issues like UI and high capital barriers to entry. The platforms above delivered working blockchain-based solutions that have allowed users to exchange artwork, access financial services, and play games. The gains of the tokens have been backed by sharp increases in the activity of the native platforms they support.

Near pitches itself as a fast, cheap, developer-friendly smart contract and decentralized application platform with easily accessible bridging tools to port stablecoins, fungible and non-fungible tokens from other blockchains to Near. It makes accessing solutions like DeFi and NFTs a fast, seamless, experience when compared to popular existing smart contract platforms like Ethereum.

Source: Google Trends

Since early October worldwide search interest for the term ‘NEAR crypto’ has picked up, and while volatile, it continues to be popular. The term is most often searched for in the United States, Australia, and the United Arab Emirates (U.A.E).

What is the Near protocol?

The Near protocol is a proof-of-stake blockchain that is conceptualized as a community-run, sharded, developer-friendly network with strong interoperability and scalability capabilities.

The Near mainnet went live in April 2020. The project was founded by Illia Polosukhin,a former Google engineer, and Alexander Skidanov, a former Microsoft engineer. The Near project has received two rounds of fundraising. The first for US$21.6 million in May 2020 and the second a few months later for US$30 million in August 2020. Venture Capital participants in these rounds included major investors in the space like Coinbase Ventures, Andreessen Horowitz, and Pantera Capital.

On January 14th 2022, the Near foundation announced that it had just completed the close of a $150 million funding round. The round which was conducted as a private token sales was led by Three Arrows Capital and included many other high profile crypto investors including Mechanism Capital, Dragonfly Capital, Andreessen Horowitz (a16z), Jump, Alameda, Zee Prime and Amber Group.

Discussing the round with great excitement Dragonfly General Partner Ashwin Ramachandran said, "Near has done a great job from a technology standpoint, and we want to help them achieve a level of developer, user, ecosystem adoption which reflects their current level of technology innovation,” with Ramachandran also noting that the raise was an oppurtunity native firms involved.

The announcement of the raise has had an immediate on the price of NEAR tokens.

A sharded blockchain

Near’s proposed solution for the blockchain scalability challenge is sharding. Sharding splits the computational load of a blockchain network into shards or fragments. On the Near blockchain, tasks are split so that each node doesn’t need to carry all of the network’s code, as would be the case in a traditional blockchain like Bitcoin or Ethereum.

Nodes within the shards or fragments of Near conduct specific tasks like processing transactions, communicating validated transactions, and storing the history and state of the network. Shards conduct transactions in parallel with each other. This means the network can scale effectively as more users and more nodes can handle the growth in transaction activity.

The Near protocol uses Nightshade, a protocol built for the network that addresses sharding issues including state validity and data availability.

Source: explorer.near.org

Source: explorer.near.org

Currently the Near protocol averages around 8.2 transactions per second, however, it claims it can process up to 100,000 transactions per second at maximum capacity. Its rapid 1.7 block compares favorably with the fastest platform blockchains in the space including Fantom and Avalanche. The gas prices of the network are also competitive. Most transactions on the network cost about 0.05 NEAR or ~US$0.81.

Performance of popular smart contract platforms. Source: Twitter user @rareliquid

Consensus on the Near protocol is achieved through Proof-of-Stake (PoS). With PoS, nodes that wish to become transaction validators and earn fees for working for the network must stake NEAR tokens to be considered for a role within the network. Near uses an auction system to determine which validators will participate in each 12-hour epoch and this means that stakers who lock in larger amounts of NEAR have a higher chance of earning participation rights.

There are different types of validators in the Near protocol. Some validators are responsible for validating aggregations of transactions from shards called chunks. Other nodes produce blocks that contain the chunks of transactions emerging from Near’s shards. There are also ‘Fisherman’ nodes that watch the network and identify malicious activity like downtime or double signing transactions. Nodes who conduct this sort of behavior are slashed and lose their staked NEAR.

Dapp ecosystem

DeFillama reports that there is currently ~US$153.3 million worth of tokens locked (TVL) into the Near protocol DeFi ecosystem. Since September 1st, the TVL of the platform has risen by ~3639%.

Source: DeFillama

The Near protocol is the 29th largest smart contract platform in the world and lags well behind market leaders like Ethereum, Solana, and Binance Smart Chain.

The market cap over TVL of the Near protocol is a high 71.43. This suggests that the token may be overvalued in comparison to its fundamentals. When the native token of a platform’s value is much higher than the amount of value of assets deposited on the platform, a proxy for usage and faith in the network, it suggests that the token price is being driven by speculation as opposed to utility.

In comparison, the Market cap/TVL of the largest smart contract platform by TVL, Ethereum, is 2.64 (Market Cap = US$387.8 billion/ TVL= US$146.6 billion). The Terra blockchain, the next largest protocol in the space by Total Value locked has a market cap/TVL ratio of 1.53 (Market Cap = US$26.34 billion/TVL = US$17.27 billion).

67.8% of the TVL on the Near protocol is from one Dapp, Ref Finance. There appears, however, to only be two Dapps live on the ecosystem. Ref Finance is the native AMM-based decentralized exchange of the Near protocol. It has similar functionality to other popular AMM-based Dapps on other smart contract platforms like Uniswap on Ethereum, and Pancakeswap on the Binance Smart chain.

Ref Finance lets users swap and farm tokens by providing liquidity, and access the latest tokens launched on the Near ecosystem. Thanks to Near’s rapid finality, low costs, and Ref Finance’s familiar packaging it has grown quickly in popularity. Since launching in August 2021, the TVL of Near has grown rapidly and currently sits at US$103.3 million.

Source: Ref Finance

Metapool, the other active Dapp on Near, allows users to stake their NEAR tokens to the network and receive stNEAR (staked-NEAR) in return. This allows Metapool users to easily participate in Near protocol consensus as delegators and receive staking rewards. The advantage of staking through Metapool is that stNEAR is liquid and can be easily traded for other tokens with the Near ecosystem. Metapool offers a 10% return for depositors.

Source: https://metapool.app/

The Near token and a rapid rise in value

The NEAR token is used for paying transaction fees and for rewarding stakeholders on the network. Transaction validators on the network earn NEAR rewards every epoch. Validators receive 90% of the approximately 5% of total annualized inflation. The other 10% goes to the Protocol Treasury and will be used for developing the ecosystem.

The inflation rate of NEAR varies based on the number of transactions executed. More transactions on the network, mean a higher rate of inflation and more rewards for validators. A small portion of every near protocol transaction fee is also burnt.

There is no maximum number of tokens per validator, no bond requirement, and no maximum number of tokens that need to be staked. All validators, however, earn the same inflation reward irrespective of the size of their stake.

Source: Bison Trails

Developers also receive a share of fees generated from the applications and smart contracts they deploy in the form NEAR tokens.

One of the biggest price drivers in the recent history of NEAR has been updates to the network’s interoperability and cross-chain capabilities. In late December the price of NEAR shot up after an announcement that an integration with the Terra protocol had just been launched.

The integration would allow Terra’s popular UST stablecoin to be used seamlessly for payment within the NEAR ecosystem. This means it is straightforward for Terra users to trial the Near protocol. UST will also launch on Aurora, a bridge ecosystem that allows assets to move between Ethereum and NEAR.

The launch of UST on Near was enabled by DeFi protocols NearPad and Rose. NearPad is a Near-based decentralized exchange and market maker, while Rose is an Aurora-based stablecoin and wrapped assets swap product. The easier movement of assets and stablecoin between smart contract platforms is a boon for both ecosystems.

Near also uses the Rainbow Bridge, a connection that facilitates the project’s interoperability with Ethereum.

The popularity of Near has also been boosted by the launch of incentive programs. In October 2021, Proximity Labs, a newly formed DeFi DAO, which recently raised a large amount of resources for a development fund. The group says it will distribute 40 Million NEAR tokens to users over the next four years across Near’s various Defi protocols.

Near has cross-chain capabilities enabled through the wrapping. Tokens from other chains can be wrapped. Wrapping tokens refers to storing assets in a digital vault, so that equivalent versions of the assets (same price) can be used by other chains. Various wrapped assets from other blockchain’s are accessible for trading on Ref Finance.

Conclusion

The Near protocol is pitched as a cheaper, faster version of Ethereum. It joins a growing group of Ethereum alternatives that offer similar smart contract and decentralized application solutions with tweaks added to infrastructure to allow them to keep transactions faster and cheaper at scale.

While Near is joining the market well after projects like Solana, Terra, and Fantom, its tremendous growth in the last two months, during a bearish period for crypto, indicates that there is still an appetite for new layer 1 projects.

The network has big-name VC backers and is enticing developers thanks to its transaction fee model that offers an extra reward for incoming builders. Its sharding model makes it unique from some other direct competitors and its origin, being founded by two former engineers previously employed by tech giants, gives it instant credibility.

A question does arise: ‘Do we really need twenty different versions of Ethereum?’ In the long run, the answer is probably no. In the short term, however, Near offered another opportunity for crypto investors and DeFi natives, in late 2021, to jump on a ship as it approached warp speed.

The question for crypto investors in 2022 is how many more Near-esque investment opportunities will there be during the current layer 1 bull cycle?