bytefolio

ByteFolio Update 37

Disclaimer: Your capital is at risk. This is not investment advice.

ByteTree's Crypto Leaders

ByteFolio brings together ATOMIC, ByteTrend and Token Takeaway to create ByteTree’s model portfolio, known as ByteFolio. This is a selection of crypto tokens, which are weighted according to their risk/reward characteristics. ByteFolio has a modest turnover and will not suit traders. It will appeal to investors who wish to diversify beyond bitcoin, with the aim to beat it.

Tru use case

We reduce exposure to BNB this week. It has been a tremendous performer for the portfolio but has started to lose ground against BTC at a time when there are many concerns about the business model. Elsewhere, most trends are intact, but the altcoin market has undoubtedly softened. The portfolio has lost some ground over the week and now stands at B10.10. Below we highlight an interesting use case for Chainlink and introduce you to zero-knowledge proofs.

We’ve had a brief improvement in short-term sentiment in the crypto sector, but it’s not convincing. Look at the breadth chart below, showing crypto breadth in US$. While you can see a retreat in the red sky, the blues (3-5 stars) have actually declined. This suggests a situation where there’s been a bit of stability off a low base for some tokens but very little trend strength otherwise.

Source: ByteTree. ByteTrend breadth chart, in USD, for the top 100 crypto tokens, over the past year.

The good news is that when we do the same exercise but look at crypto breadth in BTC, ByteFolio is very much in the blue section. UNI, XMR, BNB, MATIC, LINK and CAKE are all 4- or 5-star trends, while QNT is a 3-star, and ATOM remains on one.

Source: ByteTree. ByteTrend breadth chart, in BTC, for the top 100 crypto tokens, over the past year.

MOVERS & SHAKERS

Movers (inside the portfolio)

Binance Coin (BNB). BNB has been the standout performer since we devised ByteFolio, and in so doing, has grown to 23% of the book. Lately, however, it has started to underperform BTC, unsurprising given the levels of fear, uncertainty and doubt (FUD) being conferred on it. Regardless of the attempts to show “proof-of-reserves”, Binance is an opaque structure, relying on trust. If that trust breaks down and capital starts to leave, it undermines the investment argument and amplifies the risk. We cannot deny that many questions remain unanswered. We are not throwing in the towel on BNB, just managing the exposure. It has become too large in the portfolio. We will reduce it to 10% and redeploy the funds into BTC.

Source: ByteTree. ByteTrend score for BNB, measured in BTC, over the past year.

Bitcoin (BTC). The ByteTree Network Demand Model is on a score of 4/6, down from the first bull setting of 5/6 we have had for a long time, reported on 17 November. Broadly speaking, the picture looks constructive, but transaction value is falling fast at the moment. It would be good to see more activity underpin the price at these levels.

Source: ByteTree. Bitcoin Total Transaction Value on-chain, over the past 5 weeks.

Chainlink (LINK). The leading decentralised oracle (that fetches real-world off-chain data for blockchains to use) opened its first staking pool on 6 December 2022. Within two days, the staking pool amassed approximately $170 million in LINK tokens. Participants who lock their LINK token holdings in these staking pools are currently rewarded with 4.75% annualised returns. There are approximately 508 million LINK in circulation, so the staked LINK equals approximately 5% of the circulating supply. Aside from the staking pool, Chainlink is one of the few crypto projects with a viable use case scenario. If you’re interested in seeing inflation in real-time, for instance, take a look at the website Truflation. All price feeds are sourced through Chainlink, and here’s the (somewhat horrifying) difference they see between the US and the UK.

Source: Truflation

Shakers (outside the portfolio)

Zero-knowledge proofs. Something a bit nerdy today, but if you’re going to invest in this space, you need to get to grips with the most important concepts. You’re going to bump into ZK-proofs more and more. This idea is central to retaining privacy in a decentralised and open ecosystem. In essence, the problem that needs to be solved is proving that something you say is true without revealing details of the information. For example, this can be applied to identity; I am who I say I am, but I don’t want to reveal all my personal details.

Zero-knowledge proofs are based on the concept of a mathematical problem that is easy to solve in one direction but difficult to solve in the opposite direction. For example, it might be easy to multiply two prime numbers together to get a third number, but it would be difficult to take that third number and figure out what the original prime numbers were.

In a zero-knowledge proof, the prover and the verifier engage in a series of challenges and responses. The prover tries to convince the verifier that they know the solution to the mathematical problem without actually revealing the solution itself. This is done by the prover providing responses that are consistent with the solution without actually revealing the solution itself.

For example, in a zero-knowledge proof of a secret number, the prover and verifier might engage in the following dialogue:

Verifier: “Prove to me that you know the secret number without actually telling me what the secret number is.”

Prover: “OK, here’s how I can prove it to you. First, I’ll pick a random number, R, and I’ll tell you what it is. Then, I’ll calculate another number, S, based on the secret number and R. Finally, I’ll tell you what S is, and you can verify that it’s correct by using the known mathematical relationship between the secret number and R.”

Verifier: “OK, that sounds good. What’s R?”

Prover: “R is 5.”

Verifier: “And what’s S?”

Prover: “S is 25.”

Verifier: “OK, I see that S is the square of R, which is consistent with the mathematical relationship I know between the secret number and R. This is sufficient to convince me that you know the secret number, even though you haven’t actually told me what it is.”

This is the essence of a zero-knowledge proof: the ability to prove knowledge of something without actually revealing the thing itself. The primary advantages of zero-knowledge proofs are protecting sensitive information, requiring only milliseconds to verify, and not necessitating extensive interaction between the parties involved.

This is going to be a majorly important feature of the ability of blockchains to scale.

Tether (USDT). In a further reputational blow to the most notorious stablecoin, it’s worth noting that Coinbase, the world’s second-largest crypto exchange by volumes, now charges zero fees on conversions of Tether (USDT) into Circle (USDC). In a blog post released on 8 December, Coinbase highlighted that USDC is, in their opinion, the most trustable and secure stablecoin in the market and encouraged its users to swap their USDT to USDC.

Cardano (ADA). An algorithmic decentralised stablecoin called DJED is set to be launched on Cardano in January 2023. DJED will be pegged to the USD and will be backed by ADA. SHEN, another crypto token, will be used as DJED reserves. The DJED team has highlighted that DJED over-collateralisation will be up to 8x. However, the community has shown a mixed reaction towards this project by pointing out that algorithmic stablecoins are very risky and could have severe consequences (like Terra (LUNA) and UST). Nevertheless, the DJED team seems to be confident about the stablecoin. This could be a much-needed boost for the Cardano ecosystem to grow further.

Moreover, a stablecoin project on Cardano, called Ardana, recently shut its operations, unleashing further waves of Fear, Uncertainty, and Doubt (“FUD”). Ardana was backed by, er, Three Arrows Capital, CFund (a venture capital firm affiliated to IOHK), and Ascensive Assets, among others. Ardana tweeted:

“Unfortunately due to recent developments with regards to funding and project timeline uncertainty, the Ardana project has had to come to a halt […] Development on Cardano has been difficult with a lot of funding going into tooling, infrastructure and security. This alongside the uncertainty around development completion has led to the best course of action being halting development of dUSD (Ardana’s decentralised stable coin)”.

To counter claims regarding development on Cardano being difficult, Cardano’s founder Charles Hoskinson argued that the issue behind Ardana’s halt is their leadership. Regardless, this is definitely bad news for the Cardano ecosystem, which is widely seen as slower-growing and less active compared to blockchains of similar size. ByteTrend is certainly not a fan, it’s on zero stars versus BTC.