Decred Price Analysis: Alterations to blockchain governance

Decred (DCR) was founded in 2016 by a group of former Bitcoin developers. The project is designed is designed to correct some of the inefficient governance and mining practices of PoW blockchains, and put structure and power into the hands of the Decred network’s token holding community.

DCR currently trades at ~$37.50, down ~71% from an all time high of $121.02 achieved in January 2018. Daily trading volumes are down ~58% from date of the price high. While these drops are severe, other alts such as LSK and IOTA have had much deeper falls.

This comparative resilience may be tied to factors such as Decred’s improving network fundamentals in 2018, and its relatively low maximum token supply of 21,000,000 tokens.

In its roadmap, Decred outlines lightning network integration, improvements the blockhains proposal system and added wallet support, as innovations to Decred that will be implemented in the near future.

The graph shows the normalized USD price, and volume, of 5 different DCR trading pairs over the last 90 days. DCR/BTC, DCR/KRW, DCR/ETH, DCR/USDT and DCR/DOGE. The orange line represents an Index of the prices, blue is DCR/BTC, yellow is DCR/KRW, green is DCR/ETH, navy is DCR/USDT and DCR/DOGE is turquoise. The bar charts below represent total trading volume in USD.

Exchanges and trading Pairs

The most popular trading pair for Decred is the crypto-to-crypto DCR/BTC which account for over 26,000 tokens daily worth over USD1 million. The next most popular pair is the fiat-to-crypto DCR/KRW pair which makes up over 30% of Decred’s daily trading volume. The DCR/KRW pair is offered exclusively by Upbit and has reemerged in popularity in recent weeks.

The most popular exchange for trading DCR/BTC is Seattle based Bittrex, which is a top 25 exchange by trading volume. Volume of the DCR/BTC pair is spread out relatively evenly amongst an eclectic group of exchanges including Australia based Fex, OooBtc, an exchange that is an offshoot of the Digitex futures, and popular Singaporean exchange Huobi.

Problems Decred is trying to solve

The primary selling point of the Decred blockchain is the use of a dual PoW/PoS that proposes to correct some of the inevitable governance issues that have occurred within networks like Bitcoin, and which lead to hard forks, while retaining the robustness and immutability of PoW networks.

In Proof-of-work, miners are gatekeepers of the blockchain, competing against each other to solve hashes and publish blocks. They do this by running continuous mathematical computations that require processing power and in the case high hashrate proof-of work networks like Bitcoin and Ethereum, a large amount of it.

At a point, mining can become some so processor intensive that only large, resource rich players can participate in the market.

While energy usage and the significant power in the hands of centralized mining pools in large PoW networks is an issue, enforcing upgrades and improving code on traditional PoW may be an even greater challenge.

Governance challenges on networks like bitcoin can stem from how developments and code updates are enforced on these blockchains. Generally, community recognized developers volunteer to manage and make decisions to improve the network, carrying out public discussions and suggesting code improvements on platforms like Github, reddit, Bitcointalk forums and Medium.

In situations where there is no clear choice for network direction, and multiple opposing views, such as the recent EIP proposals regarding the nature of the Constantinople hard fork, decisions are made based on some form of off-chain voting or a judgement call based on community sentiment. This style of governance inevitably leads to some within these communities feeling short changed.

In some cases, reaching communal agreement & harmony is so muddled that networks have to be split apart to appease respective parties. During crossroads like the Bitcoin scaling debates, multiple sides (i.e. bigger block size and Segwit protocol) can gain traction, providing solutions that are difficult to fully refute. The nature of the public governance carried out on public internet forums can lead to pride, ideology and subjective preference being the key factors in group decision making, and potentially to messy resolutions and hard forks.

Untenable situations like the bitcoin hard forks become the only clear direction that the PoW blockchain can take, with each camp operating on its new network using its preferred code.

Hard forks also expose newly forked networks to security risks, given forked networks lose the hashrate of parent networks. This makes it easier to accumulate the processing power needed for a 51% attack, as was the case when Bitcoin gold forked from Bitcoin.

With existing debatable issues lingering in large PoW networks, like energy consumption, potentially leading to similar public disagreements in the future, blockchains like Decred seek to offer structural alternatives to the Bitcoin & Ethereum governance mode, that streamlines network decision making using onchain voting.

The dual PoW/PoS model

In Decred, network users can stake their DCR tokens in order to have voting rights on two decisions, the validity of a block and an update to the blockchain’s code.

Initially, blocks of transactions are published and a chain is built in much the same way as a traditional PoW chain, with miners competing to solve a block’s problem below a target threshold. Decred uses the unique BLAKE-256 hashing function.

User who wish to vote, and participate in network decision making, purchase tickets for rights. It currently costs 98.57 DCR per ticket, with 3,881,665 DCR sitting in the staking pool or 46.18% of the total token supply. This indicates that more than 50% of the Decred in circulation is not being used for voting. At ~$4277 for a single ticket/vote, this may seem steep for some, but given that there are only five tickets per block, each vote appears to be a worth a great deal. Tokens can also be put into staking pools for shared decision making.

With each block produced by Proof-of-work miners on the Decred blockchain, five tickets are allocated to it. First, they vote on the validity of the previous block (acting as an additional check for invalid transactions or empty blocks), and secondly they vote on suggestions to code updates which are built into the blocks using a unique Decred feature, Politeia, that timestamps ‘gits’ onto the Decred blockchain.

If the code suggestion built into the block is approved by the ticket holders, with time allowed to suggest amendments or reversals, it is then implemented and the process of hard coding it into the network begins.

A form of onchain governance like Decred’s, while more streamlined, is likely far more centralized than traditional PoW governance.

The large paywall in front of network decision making will probably be off-putting for some. However, investing in the network requires token holders to expose themselves to significant risk given the size of the investment needed to acquire tickets and the volatility of crypto markets. This means they are typically faithful believers in the network, willing to put themselves on the line to make difficult decisions regarding the network’s code.

Additionally, while hard forks can occur on Decred, they are challenging to push through. Before a suggested fork can occur it has to go through a number of rounds of block voting, where the decision can be reversed, before being finalized, meaning some form of irreversible staker unanimity needs to be achieved for the hard fork to be confirmed.

Stakeholders also earn a portion of block rewards. Block production rewards are allocated 60/30/10, with the PoW miner who produces the nonce that results in the hash value lower than the target, 30% going to the staking pool, and 10% going to the developers, akin to the founders reward in Zcash.

Decred’s network fundamentals indicate that the network has grown significantly in popularity since its inception. Hash rate and difficulty have respectively risen ~265% and ~231% in the last three months. This indicates a sizeable growth in the energy being used by the network, which indicates more transactions and activity — despite bearish price movements.

Hashrate generally follows price, because a lower price means miners earn less per block then they did before, in real terms. In this sense the rising hashrate despite downward price movement may feed into Decred’s narrative of a community driven blockchain, with miners and users willing to participate in the network despite falling profits.

While the network’s recent fundamental performance has been admirable, bitcoin’s hash rate is still 578 times greater than Decred’s (~46.44 Ehash/s compared to ~70 Phash/s). While this suggests that Decred is far less secure than Bitcoin, its Proof-of-Stake element adds a significant security layer.

The monetary cost to carrying out a double spend attack would be prohibitive, as an attacker would need to accumulate enough DCR to game the voting system and enable their otherwise invalid blocks to be published.

Technical analysis

Exponential Moving Averages (EMA) with Long Term Trends

On the 1D chart, the death cross, using the 50 and 200 day EMAs, remains intact despite DCR’s strong support level of ~$37. Additionally, price is currently experiencing a sharp decline, which is currently testing the $37 support level.

Also, throughout 2018, despite resilient price bounces, DCR has been confined within a slight downtrend (black arrow) with a Pearson R Correlation between time and price of 0.49. Additionally, the most recent top back in mid-May appears to have formed a double top pattern, which may lead to the inevitable break of DCR’s long-term support level of $37 (currently being tested). Furthermore, the volume flow indicator (VFI) has consistently remained below 0 since late April and shows no signs of abating given the negative trend (red arrow). The VFI interpretation is a value above 0 is bullish and below 0 is bearish, with divergences between price and oscillator being high probability signals.

However, there are two semi-positive elements for DCR at time of writing. First, even if $37 support does break, price has a myriad of support levels (black dashed line channel) beneath it, with $20 being the last stop. Second, to date, when price volatility has compressed, an upward breakout typically has ensued (black arrow). Heuristics like the aforementioned are dangerous in trading given they are biased to one point of view and have a small sample size. But, DCR’s price volatility is currently compressing, which may set the table for a price jump, especially if long-term support of $37 holds.

Ichimoku Clouds with Relative Strength Indicator (RSI)

The Ichimoku Cloud uses four metrics 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, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the 1D frame with singled settings (10/30/60/30) for quicker signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

At time of writing, DCR is sitting at ~$36 which is testing its long-term support level (first dashed black line). Price was making a consistent recovery and potentially marching towards a Kumo breakout attempt when it fell abruptly from the news that Goldman Sachs was not opening their own crypto trading desk. This news sent price into a tailspin from near $46 to now $36. One positive point is that with this recent fall, price is back to near oversold territory on the RSI. This may suggest that long-term support will hold and a short term price revival will awaken shortly, with an eventual Kumo breakout retest. However, the probability for a successful Kumo breakout is low.

For either scenario, the critical support level is $37 (first dashed line). If that support fails, the next, stronger support levels are $30, $25, and $20. In the unlikely event of a Kumo breakout, price targets are $57 and $70.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and price.

Again, in the unlikely event of a Kumo breakout in the near-term, price targets are $78 and $97.

Conclusion

The Decred blockchain offers an alternative to the status quo of informal blockchain governance used by traditional blockchain power horses like Bitcoin and Ethereum.

While challenges like inherent centralization and low voter turnout continue to be issues faced by the onchain/token staking governance model, the improving network statistics of Decred indicate that its style of network decision making, may be gaining traction.

The technicals for DCR are bearish despite decent price resilience in 2018. However, beyond the bearish technicals, price has a myriad of support levels near its current level, coupled with an oversold RSI metric and compressing volatility. All of which, may provide some downside protection and commensurate price relief in the near-term. However, both, the prudent short term trader (10/30/60/30) and longer term trader (20/60/120/30), on the 1D chart,will await a positive TK cross and Kumo breakout above $57 and $78, respectively, before entering a long position. The critical support level is $37. If that support fails, the next, stronger support levels are $30, $25, and $20.

Disclaimer: This analysis has been designed for informational and educational purposes only. Readers are advised to conduct their own independent research into individual assets before making a purchase decision.

About the authors

Christopher Brookins
Christopher Brookins is the founder and CEO of Pugilist Ventures, a quantitative investment firm focused on digital assets and blockchain technology. Chris has a deep knowledge and unique perspective on digital assets formed by his polymath experience in equity trading, credit investing, and business development at two West Coast startups (one acquired). He has been involved in the blockchain community since 2014. Follow @chris__brookins

Aditya DasAditya Das is Brave New Coin’s in-house market analyst. Raised in Dubai, UAE, he holds a post-graduate honors degree in Economics from the University of Auckland and a BA in Economics from the University of Sussex. Prior to joining BNC his most recent roles were as a researcher and Economics tutor at the University of Auckland. Follow @Quartlifecrypto