Smart Contracts Retain Value in Crypto Sell-off

"See, cryptography is this amazing powerful technology that allows even the weakest of computational devices to monitor and know with very high certainty that a huge computer, run by an evil government, has been executing with integrity. And this is completely mind-boggling…Now, some of this was known in the 1980s, but what was not known was how to make this really efficient and practical. And that's where the inventions from StarkWare really help. Making it practical on today's computers, making it available to programmers." - Uri Kolodny, StarkWare core developer, on the ‘Bankless’ podcast November 24, 2021

Total crypto market cap fell 14% in the last month as looming central bank rate hikes spooked market participants into selling high growth, high valuation assets such as unprofitable tech stocks and crypto.¹ Of the top 75 digital assets with over $1B market cap (as of 12/16), 70% (52) fell more than 15% while only six (8%) posted positive returns.² Among large-caps, investors huddled in smart contract platforms such as Terra (+51%), Avalanche (+25%) and Ethereum (-4%), scaling solution Polygon (+20%), and centralized exchange Crypto.com (+38%), who announced in November the purchase of naming rights to the LA Staples Center for $700M over 20 years.³ Laggards included DeFi leaders Compound (-37%) and Aave (-35%), who continued to drag down the entire DeFi sector. For perspective, while the number of decentralized exchanges has tripled in 2021, and the mean DEX transaction size of $26K is more than double the mean transaction size on centralized exchanges ($12K),⁴ DeFi was the worst performing sector heading into the rout and has bounced the least off the bottom. The barriers to entry in DeFi appear to be relatively low, consistent with the technology use-case that permits anyone to spin up a bank.

Cryptocurrencies with Over $1B Market Cap: Scatter Plot of Last 1 Month % Returns

Source: Messari, VanEck, as of 12/16/2021. Past performance is no guarantee of future results.

Crypto Sectors Performance Since April, Benchmarked to 100

Source: MVIS, Bloomberg, as of 12/16/2021. Past performance is no guarantee of future results.

Crypto Sectors Performance Last 30 days, Benchmarked to 100

Source: MVIS, Bloomberg, as of 12/16/2021. Past performance is no guarantee of future results.

While liquid token prices may have struggled, the private fundraising market remains red hot. Four of the largest crypto fundraising rounds ever closed in November,⁵ possibly absorbing capital that might have found the liquid market instead. Crypto-fiat gateway app MoonPay, for example, raised $555M at a $3.4B valuation, quickly capitalizing on the momentum by partnering with Melania Trump to accept both Solana and credit card payments for a collection of “Melania’s Vision” non-fungible tokens (NFTs), a watercolor art collection that “embodies Mrs. Trump’s cobalt blue eyes.”⁶ Solana would seem particularly attractive for lower value NFTs given the network’s sub $0.01 transaction costs.

Private Crypto Fundraising Remains Hot

Source: Blockdata, as of 12/16/2021.

Though not the largest, perhaps the most notable fundraising of the month was Israel-based StarkWare, who raised $50M in a series C funding led by Sequoia Capital in November, valuing the blockchain scaling technology firm at $2B.⁷ With the Ethereum network clogged with high fees and slow throughput, there is strong investor and developer demand for scaling technologies (side chains, ZK rollups, optimistic rollups and state channels – see tables 1 and 2 below) that can increase functional capacity on the largest smart contract platform (Ethereum), even though many of these alternative chains don’t yet support permissionless smart contracts. In the case of StarkWare, the firm has already been operating walled-garden versions of its zero-knowledge proof-based database on behalf of derivatives exchange dYdX, NFT platform ImmutableX, and blockchain-based fantasy sports platform Sorare with considerable success. Indeed, dYdX volumes now regularly exceed Coinbase’s, and StarkWare says they have settled more than $270B worth of trades, more than all layer 2 blockchains combined, at transaction fees 99% cheaper than ETH.⁸ This month, StarkWare migrated its algorithms to a public chain – StarkNet – a permissionless platform allowing anyone to build applications using Stark’s ZK rollup technology, which now includes limited smart contract functionality. StarkWare has also announced plans to decentralize its governance and convert to a DAO (decentralized autonomous organization). But, like so many layer 2 scaling solutions, there is no token (yet). Thus, many market participants have moved balances and trading activity to these layer 2 chains in search of lower fees and potentially lucrative airdrops.

StarkWare’s Product Map

Source: StarkWare, as of 12/16/2021.

Table 1: Scaling Technologies

Sources: Messari, ethereum.org, crushcrypto.com, Blockchain-council.org, publish0x.com, VanEck research. As of 12/14/2021. Past performance is no guarantee of future results.

Table 2

Sources: Messari, ethereum.org, crushcrypto.com, Blockchain-council.org, publish0x.com, VanEck research. As of 12/14/2021. Past performance is no guarantee of future results.

Speaking of DAOs, ConstitutionDao may not have won the Sotheby’s bidding on the $43M sale of the last remaining U.S. Constitution in private hands, but the effort has sparked some amusing copycat plans. Newly formed BlimpDAO has just announced plans to raise $25M on Solana to buy one of the last 25 blimps still in operation. The DAO will auction advertising space on the blimp via $AIRAD NFTs and distribute seat giveaways and auctions via $SEAT NFTs. “Paper-hands” holders who sell the NFTs for less than the mint price will pay taxes to the DAO, who will use the proceeds to buy back $BLIMP tokens and burn them. BlimpDAO has “diamond hands for the blimp aerospace industry” and may also use its treasury to sponsor DAO members to get their blimp pilot license or hire engineers to spur blimp innovation and develop new IP.⁹

Another interesting project is KrauseHouseDAO, which describes itself as a “community of hoops fanatics that are crazy enough to purchase and operate an NBA team as a DAO.” With 8,000 followers on Twitter, KrauseHouse raised $4M in ETH via an NFT drop in November. Still, since the cheapest NBA team (Memphis Grizzlies) is reportedly valued at $1.3B,¹⁰ KrauseHouse will need a 32,400% funding increase to achieve their goal. According to the group’s whitepaper, “it’s important to understand that there was a time not too long ago where players were at the same place on the totem pole where fans are today. There’s no reason fans can’t do the same if organized correctly.” Lastly, a separate group of American investors including Daryl Morey, the NBA Philadelphia 76ers’ team president, have founded “WAGMI United”, a DAO reportedly in advanced talks to purchase an English Football League club.¹¹

We appreciate that groups like the KrauseHouse DAO and WAGMI United may be attempting the equivalent of a full-court heave. Nevertheless, with both smart contracts and DAOs gaining more widespread attention and attracting large amounts of institutional financing as scaling solutions like StarkWare’s make Ethereum more accessible to the masses, we expect some of these “crypto spacs” to make a big splash with successful acquisitions in 2022.

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