By Matthew Sigel
Head of Digital Assets Research – Van Eck Associates Corporation

In Sorting Out the Crypto World, we identified the need for a classification system for crypto coins and introduced the categorization scheme developed by MV Index Solutions (MVIS), a VanEck subsidiary. This crypto categorization series will offer a closer look at several of these digital assets categories: smart contract platforms, media and entertainment (metaverse), DeFi and infrastructure applications. Here we explore smart contract platforms.

Understanding Smart Contract Platforms

Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. Just like your bank account, they have an address and balance. Unlike accounts, however, they have no associated private key to their address; rather, they take their instructions from their code, which anyone can execute provided certain conditions are met (required funds deposited, special permissions satisfied, or another arbitrary piece of logic). For example, a lottery smart contract would only pay a jackpot to users who spend funds to buy tickets; a time-locked smart contract might only disburse funds to a beneficiary designated by the user who deployed and funded the contract. Smart contracts are one of the killer apps of blockchain technology.

The main benefits of smart contracts are:

  • Programmability: They can execute complex, pre-determined, multi-step transactions.
  • Speed and accuracy: There is no need to rely on a mediator or other third party. Instructions are automatically executed with code. Final settlement is instant.
  • Trust: Blockchain transparency and transaction irreversibility ensure there is only one definitive contract shared with all involved parties, which decreases the risk of fraud and manipulation.
  • Cost reduction: Automation and removal of intermediaries is a compelling economic argument.

While many enterprises and governments may build closed blockchains to exploit smart contract functionality, it’s often more practical to use existing open-source blockchain platforms that support smart contracts. These platforms charge fees based on the amount of power required to execute and deploy the smart contracts. Each platform offers different tradeoffs regarding speed, security, cost, degree of centralization and hardware required to run a node. Each also offers its own execution environment, smart contract programming language, fee structure, and governance.

Thus, think of smart contract platforms as the operating systems of these rule-based programs, akin to MS-DOS or Linux. Led by Ethereum, smart contract platforms are open-source blockchain software protocols that enable instant, permissionless 365/24/7 global value transfer. They act as global, censorship-free computing systems that can execute arbitrary code (smart contracts) and power other decentralized applications.

Valuing Smart Contract Protocols

Most smart contract platforms collect transaction fees denominated in the native tokens and mint new issuance rewarded to network validators or to other users who delegate tokens to network validators. Multiplying the percentage of a given token’s supply which is staked, by the interest rate (APY) on offer by delegated validators or directly from the protocol, yields the market’s expectations of value creation over the next year. For smart contract leaders (ex-Ethereum, which will continue to run a proof-of-work chain into 2022), we track this data daily. As of November 30, smart contract leaders (ex-ETH 1.0) “market-implied revenue” totals $14B on a combined market cap of $233B, putting the universe on a price-to-sales ratio of ~15x forward sales.1

Smart Contract Leaders ex-ETH 1.0: 1 Year Forward Revenue Implied by Current Staking Rates

Smart Contract Leaders ex-ETH 1.0: 1 Year Forward Revenue Implied by Current Staking Rates

Source: stakingrewards.com, Messari, protocol websites, VanEck research. Data as of 11/30/21. TZ: Tezos; ALGO: Algorand; FTM: Fantom; ATOM: Cosmos; ICP: Internet Computer; AVAX: Avalanche; ETH 2.0: Ethereum 2.0; ADA: Cardano; DOT: Polkadot; SOL: Solana.

CoinStaking Rate
Algorand4.65%
Ethereum 2.07.09%
Solana6.79%
Avalanche9.37%
Cosmos10.86%
Binance Smart Chain13.49%
Polkadot13.94%

Source: stakingrewards.com, Messari. Data as of 11/30/21.

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Originally published by VanEck on December 3, 2021.

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DISCLOSURES

Important Information Regarding Cryptocurrencies.

The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The securities/ financial instruments discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/financial instrument, or to participate in any trading strategy.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Investing in cryptocurrencies, such as Bitcoin, comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

  • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
  • An investment in cryptocurrency is not suitable or desirable for all investors.
  • Cryptocurrency has limited operating history or performance.
  • Fees and expenses associated with a cryptocurrency investment may be substantial.

There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.

1Source: stakingrewards.com, Messari, protocol websites, VanEck research. Data as of 11/30/21.

Information provided by VanEck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.