A recent report from CoinMetrics suggests that a new legacy season will play out in ways that are very different from the 2017-2018 market.
According to the report’s authors, the arrival of institutional investors and their interest in Bitcoin (BTC) and Ether (ETH) has fundamentally changed the market landscape for cryptocurrencies. Tokens with real use, Layer 2 technology or attractive deployment ecosystems will surpass the large-cap tokens from before 2017.
Bitcoin and Ethereum dominate, but L2 tokens will catch up
Institutional inflows have firmly established Bitcoin and Ethereum as selected Layer 1 (L1) blockchains. This is reflected in the price development of the market since December 1, 2020. As shown in the graph below, the only L1 coins outperform BTC and Ether during this period were Cardano (ADA), Dogecoin (DOGE) and Decred (DCR).
Altcoin returns 12/1/20 – 11/17/21. Source: Coin Metrics
Competitor L1 blockchains from previous runs like Litecoin (LTC) and Bitcoin Cash (BCH) underperformed BTC, and both continue to see their share of market cap decline as the conversation shifts payment capacity to value-added performance.
Price-market capitalization dominance (LTC, BCH). Source: TheTIE
So-called “Ethereum Killers” like Tron (TRX) and EOS have not met their high standards and are plagued with concerns about the collusion between block producers and central networks.
Polkadot is the standout L1 blockchain that has emerged in the past few months. What makes it special is the team’s decision to drive the overall growth and interoperability of the blockchain ecosystem rather than dominate it. This explains why the altcoin rose 85% in 2021.
Today’s successful projects offer deployment and DeFi integration
This is where this off-season begins to deviate from the last. Deployment, governance tokens, and DeFi integration are the main drivers in this market as users want greater participation in the growth and direction of each project.
Decred (DCR) is a perfect example of this emerging trend. The network was modeled on Bitcoin with a maximum supply of 21 million tokens and combines PoW with PoS to give all members of the community the opportunity to get involved and earn rewards.
An integrated governance mechanism gives token holders a direct say in the future of the project, and the release of the Decred Decentralized Exchange (DCRDEX) on October 21, 2020 caused the DCR price to drop from 11.68 to a new high of $ 67.80 rose January 8th.
Cardano is asserting its value as the L1 blockchain by implementing inserts and discussions from creator Charles Hoskinson on rolling out DeFi in developing countries once the smart contract functionality is fully integrated. These developments have contributed to the ADA price increasing 100% since early 2020.
DeFi governance tokens give investors a voice
The DeFi boom has been incredibly attractive to investors looking for a more hands-on approach to interacting with new blockchain projects.
The sector is a clear driving force in the market and as of December 1st, Uniswap (UNI), AAVE, Synthetix (SNX), MakerDAO (MKR), SushiSwap (SUSHI) and Curve (CRV) have outperformed Ether and BTC. Note that they contain all of the staking and governance functions.
DeFi returns from 12/01/20 – 01/17/21. Source: Coin Metrics
Perhaps the 2018 bear market that followed the euphoric rally from 2016 to 2017 spawned a more discerning investor looking to have more leverage in developing the project rather than focusing on details that lack white papers and high promises from anonymous developers.
Total value locked in DeFi. Source: DeFi Pulse
As can be seen in the graph above, DeFi’s total value continues to grow, recently hitting an all-time high of $ 25 billion, a number that is above the market cap of many of the top projects combined.
Cryptocurrencies that offer real world use cases that meet the needs of the sector and the ability to guide project decisions have emerged as the most desirable traits for today’s retail investor.
Institutions may have chosen Bitcoin and Ether as their preferred investments, but the battle for Layer 2 dominance between tokens that act as Ethereum alternatives is clearly where retail investors get their attention, and it will push the next season forward.
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