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
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.
|Binance Smart Chain||13.49%|
Source: stakingrewards.com, Messari. Data as of 11/30/21.
Originally published by VanEck on December 3, 2021.
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1Source: stakingrewards.com, Messari, protocol websites, VanEck research. Data as of 11/30/21.
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