Decred Investment Thesis - Why It Will Be A Top 10 Coin in 2018

DECRED
Date Started: 1/12/2018
Date Completed: 1/16/2018

Note: This investment thesis should be used as an aid to your research surrounding Decred, and feel free to question any assumptions made within. All investment decisions are your own responsibility, so all gains / losses are to your own credit. Nonetheless, hopefully you find the Decred analysis insightful.

The investment thesis behind Decred is based on the following concepts:

o Scarcity / Coin Distribution
o Tickets / Staking Process
o Channels for stakeholders to earn money within the network (incentive to contribute)
o Community
o Interface of Decred tools (wallets, websites, discussion channels, etc.)
o Analysis & Liquidity (Exchange support)
o Development / Upcoming items in 2018

Abstract:

Among people that are aware of the project, Decred is known as a “governance” cryptocurrency. Simply stated, this is because Decred has something that most cryptocurrencies lack, which is an on-chain voting mechanism. Decred achieves this through its hybrid proof-of-work / proof-of-stake system, by delegating the job of “accounting consensus” to miners / nodes, and the job of “philosophical consensus” (direction protocol will head) to the stakeholders, just as a corporation would allocate voting rights to shareholders. The above describes the network at a high level, but doesn’t adequately explain the beauty of the design of the incentives mechanism within the cryptocurrency and the investment potential of this completely overlooked token.

Scarcity / Coin Distribution

Scarcity:

20.5 Million of the 21 Million total Decred to ever exist will be in circulation by January of 2039. As of today, approximately 7 Million of the final total have been subsidized into the hands of Decred contributors. Just like Bitcoin, this hard-cap on the amount of coins injects it with a built-in form of scarcity.

As we all know – Bitcoin cuts its block reward in half every 210,000 blocks (every 4 years on average). Just like Bitcoin, Decred’s block reward decreases with the passing of time. Unlike Bitcoin however, Decred’s block reward marginally decreases every 6144 blocks (every 3 weeks on average). This decreasing block reward that is doing so on a very normal basis reminds Decred faithful of one thing: blockchain subsidies will not last forever. For example, assuming a ticket price (to be discussed in next section) of 85 DCR, the returns on staking coins decrease from 1.35 January 2018 to 1.13 of January 2019. That’s a 16% staking reward decrease in just a matter of 12 months! Bitcoin users always talk about the 4-year halvening periods, while Decred undergoes a subsidy decrease on a monthly basis. Over time, and with enough of a drop, the scarcity of Decred will become increasingly a bigger player in the mind of a Decred holder.

Coin Distribution:

With any token, coin distribution is a matter of great importance. Why? Well, because you don’t want to get dumped on by a bunch of scammers. Fortunately, Decred seems pretty healthy in this regard. As of January 2018, only 12.1% of the coins in circulation are from the dev pre-mine, with this number to further decrease as more Decred get pumped into circulation. Most importantly, 70% of coins that exist are the result of value-add activities (staking & mining), aligning incentives within the network towards a contribution mentality instead of suffering from tragedy of the commons (which admittedly, Bitcoin has in some pockets of the community).

Tickets / Staking Process

Staking Process:

Staking coins is the backbone of the governance process in Decred. The process for staking with Decred is simple: buy your coins on an exchange, and move them to your Decredition wallet. After this, you just need to sign up for a staking pool (listed on decred.org), copy the stake pool’s API Key, and paste the key into your Decredition wallet. From there – you just buy your voting “tickets” within the wallet, and wait 24 hours for your ticket to go live on the network.
Once your tickets are live, you need to understand how blocks within the Decred network operate:

o Blocks are discovered every 5 minutes through the POW mining
o Blocks contain the following:
o Coinbase transaction
o Normal transactions
o Ticket submissions (for those who want to buy a ticket)
o 5 Votes

These 5 votes each receive a payout once selected, which we will hit more on in the tickets discussion. However, what’s really cool is that these votes help secure the network and help protect against bad actors, such as miners indulging in any selfish behavior that is detrimental to the overall network. For example – if a miner discovers a block, but includes zero transactions in it, the stakers can penalize the miner by voting against it, or giving it fewer than 5 votes. This combo of POW and POS play with each other in a very awesome way, as they provide checks and balances for one another. It does so in 2 main ways:

o POS rewards coin holders, which can lead to centralization in coin holdings. However, POW rewards generally need to be sold by miners, which distributes coin holdings into more hands. As the protocol issues 60% block rewards to miners, and 30% to stakers, we can be assured that coin holdings end up in the right number of hands, while also encouraging contribution from value-add behavior.

o POS can stop POW from indulging in selfishly bad behavior, and POW can do the same for POS. These “checks” occur in this way:

• If POS passes bad network upgrades, or starts sabotaging miners by rejecting their blocks, the miners will abandon the network. This will devastate the POS party because their money is locked up, while the network freezes, and the price most likely plummets.

• If POW starts abusing their role as guardians of the blockchain, POS can decide to not pay them through the voting process. Doing work, and not getting paid for it, is a painful idea for anyone, but especially miners who need to pay off their hardware and electricity costs.

Tickets:

As of 1/13/2018, the price for a single ticket on the Decred network is 86.66 DCR, which is the equivalent to $10,485 USD. The average ticket has a 50% chance of being selected every 28 days, and the average return of a ticket is 1.55%. Assuming that a ticket will receive payout 6 out of 12 months this year, your annual compounded return would be close to 10%! That’s a 10% cushion if your principal takes a hit in USD terms or 10% more Decred tokens that can potentially appreciate in the future. If that doesn’t aid you in maintaining a strong hand, I don’t know what will. If you can afford it, this kind of return is sexy even just on an absolute basis – if you buy 10 tickets / $100K USD (which is a lot of money for most people, but bear with me), you could receive what is basically interest payments amounting to $1,500 - $1800 monthly. This could fund a person quitting their job and attacking a personal project, or even fund traveling somewhere every month during their time off.

Another interesting part of Decred is that there’s a ticket market within the system. The goal at any point in time for the network is to maintain around 40,960 live tickets, and it achieves this through algorithmic ticket price retargeting every 144 blocks, or 12 hours. Until July 2017 the pricing algorithm was buggy, and it showed through the spikes and crashes of the ticket prices on a consistent basis. Ever since the devs cleaned this up, the ticket price has been in a healthy uptrend, and compounded by increases in the price of DCR on a fiat basis.

The daily volume of tickets decreases on the price spikes, and vice versa. The ticket price spikes shed the numbers in live tickets in 2 ways:

(1) The ticket prices increase faster than the returns people are making from staking their coins. So if users want to maintain same amount of tickets, they will need to purchase more Decred in order to do so.

(2) Stakers will decide that the opportunity cost of holding Decred is too high, as the staking reward + token appreciation isn’t sufficient to accommodate for the returns investors could receive elsewhere. So, the holders decide to forego staking, and either (a) sell their Decred, or (b) decide to keep their Decred liquid due to their waning confidence in perceived future returns.

Now, with this said, there are a few items that we can extrapolate from the Decred ticket market to date:

(1) The USD price has gone up substantially on a percentage basis. However, the price per ticket (on a DCR basis) has steadily increased (with a few bumps in the road) from July 2017 to January 2018. This tells us something very simple: people are buying Decred, and they’re holding it. As you can guess, this is insanely bullish, especially considering we are in the midst of a shitcoin bubble where people are flipping in and out of coins on a daily basis. All the truly quality coins have communities with a strong HODL mentality, and Decred is showing signs of this characteristic.

(2) By looking at the monthly graph we can see that people are buying very heavily on dips in ticket prices. Who buys on dips again? Oh, that’s right, HODLers.

(3) Heavy volume purchases on dips, steadily increasing price per ticket, and an increasing amount of DCR tokens locked up in staking might show us a few things:

a. The demand for DCR is inelastic as of today – i.e. people want it, despite the ever decreasing returns on staking (even though the returns are still great).

b. On a macro scale, the ticket price could be a measure of DCR sentiment / network adoption. The fact that increasing USD price of DCR is accompanied by an increasing ticket price is our evidence for this claim.
Last of all, did I mention that 47% of Decred tokens aren’t for sale due to staking?!? Obvious but important metric to not forget! We will discuss how this impacts pricing and liquidity dynamics in a later section.

Channels for Stakeholders to Earn Money / Incentive to Contribute

With an adequate level of decentralization, it suffices to say that cryptocurrencies are their own sovereign entities, equivalent to your local nation-state. As such, for Decred I believe that the title of “market capitalization” is somewhat misleading, and that a phrase resembling a country’s Gross Domestic Product is more fitting. The “goods and services” that produce value within Decred include:

o Block discovery
o Security via hash power
o Accounting performed by any full nodes
o Technology development introduced through proposals
o Consensus on direction (achieved with POW & POS combo)
o Anything else that is value-add, funded through the Decred treasury

This number of different places that Decred citizens can leverage to help increase the network GDP is close to unmatched within the cryptocurrency space. If you can think of another coin that has Proof of Work, Proof of Stake, and a Treasury, I would love to look at it. The next closest thing is DASH with its masternode system, but it is not quite the same (actually, not similar at all – but a discussion for another day). With this mild similarity in mind between the two systems, keep in mind the DASH network is worth 10x more than Decred.

Returning to our original discussion, the “incentive to contribute” is beautifully baked into Decred. Also, for further clarity, “incentive to contribute” is more so focused on the protocol’s ability to bait users into contributing to the system at large. At a high level, Decred is a quality model for capitalism, and is innovative as far as crypto-capitalism is concerned. Bitcoin manages to dominate the 4 first bullet points above, whereas the rest of alts lag insanely far behind on those points, with most largely lacking a fair platform to support their valuations. Decred admittedly lags as many other alts do on the first 3 bullet points, but the last 3 are gigantic differentiators and add a large amount of quality points to the network and its viability as a source for investment in future years.

Community

Every cryptocurrency community consists of the following:
o Traders
o HODLers
o Network stewards (i.e. people who have dedicated hardware to system maintenance)
o Businesses
o Developers

Traders (in my opinion) are a wash as it relates to community value, as they aid in amplifying pumps, and spread the bloodshed in the dumps. Let’s also acknowledge that most altcoins lack in the categories of network stewards and business development. Decred is not an exception in this regard, as it needs to incentivize more miners to join the network (increase in hash power, and decentralization of mining) and businesses to start accepting it more widely for trading (to be discussed in later section), and as a means of exchange. For these reasons, we will purely focus on the 2 items which can help the other bullet points fall where they need to, which are (1) HODLers and (2) Developers.

(1) HODLers: These community members are overlooked by most, but they perform a set of special functions that enable token price appreciation, and at large community expansion:

a. THEY DON’T SELL – this may not seem like a big deal, but it is actually a key principle behind the Decred investment thesis. If you have a large amount of users unwilling to part ways with their tokens, it means that your downside is limited when you decide to take the financial plunge into Decred. How can the price keep going down if there’s nothing to sell? This limit in the downside allows new people to jump in without getting burned badly. We mentioned this earlier, but HODLers also create the inelastic demand, the so-called “vultures” of the token who collect cheap coinage when the weak hands panic sell. Finally, the proof of HODLers can be found in the staking numbers – which are currently upwards of 47% of existing tokens. Who would lock up their coins for anywhere from 28 days to almost 5 months? HODLers.

b. THEY EVANGELIZE – HODLers are marketers on wheels, the so-called “shillers” of the coin. In addition, they also help new users onboard and understand the protocol. When new users get onboarded, liquidity expands, which motivates businesses to get involved in the token’s ecosystem. Look for the proven HODLers (at a minimum the 11,800 users of staking pools), to start spreading the word about the Decred network. You can already see the wheels being put into motion with the multitude of interviews being done by developer Marco Peereboom in January 2018.

c. THEY SELF GOVERN – In the Decred network, HODLers police miners to ensure they are taking their blockchain stewardship seriously. Within the community Decred advocates make sure no one is bringing bad behavior around. Unlike most other cryptocurrencies, Decred HODLers have a role in on-chain activity outside of transacting with other users.

(2) Developers: The invention and proof of the ability to create / use atomic swaps was arguably one of the greatest cryptocurrency tech developments of 2017. Guess who was behind it? Yep, Decred developers! This developer community is widely known as guys who “code first, hype tech later”, which could be partially attributable for the quietness surrounding the project. Another key consideration surrounding developers is keeping them independent of any outside influence. If you’ve kept up with Bitcoin you know that many of the developers struggle making ends meet, and trying to focus all their energy on their true passions. With Decred, the treasury helps keep these adept developers independent as far as incentives are concerned and paid enough to make ends meet to work full time on Decred.

Interface of Decred Tools

Decred passes the eye test with flying colors. Every resource and tool you find related to this project is extremely user friendly and highly functional. Just as should be the case with any token, Decred’s website is the perfect intersection to find whatever you need related to the project. Looking for staking pools? Check the website. Need an explanation on how the protocol works? Check the website. Need outside resources to perform your own financial analysis of the token? Listed on the Decred website as well. You might start laughing to yourself reading this, but the quality of the website or lack of quality reflects on the quality of the community. Here’s an example – Ethereum Classic’s website has links on it that are expired, or that lead to websites that are no longer maintained to track Ethereum Classic. And just in case you care, Ethereum Classic’s market capitalization is almost 6x larger than Decred’s.

I can’t speak for anything on the mining front (sorry), but this thesis is focused on the investing front. However, for investors / HODLers, the user interface of the Decredition wallet is incredible. After downloading the wallet and syncing to the blockchain (which takes about an hour), your wallet is good to go (just remember to write down your 33 word seed!). Once your wallet is installed, it’s incredibly easy to get your staking / passive income going within 20 minutes. You can buy the tickets for staking within your wallet, and enable auto-buying so you can pick up new tickets everytime an old ticket votes.

Overall, what you need to know is this – Decred has very little friction involved with getting started as an investor. This lack of friction, and the polished touch of everything speaks of dev quality and commitment to the project from all Decred stakeholders.

Analysis & Liquidity

Analysis:

After going through the Decred data dump provided by coinmetrics.io, I came out feeling even stronger about Decred’s current valuation. Here is a quick run-through of what I found:

o Decred’s NVT Ratio sits within the channel of 20 to 40. Any time the ratio jumped above or below these amounts, it corrected back into the channel. I understand Willy Woo has his concerns with using NVT for tokens that have staking, but I believe that’s only an issue when comparing ratios of different tokens. The consistency of this 20 to 40 NVT channel makes me feel confident in the ratios and their ability to identify Decred tops and bottoms. As of today, the Decred price sits comfortably within the channel at a ratio of approximately 30.

o For every day between 1/1/2017 to 1/14/2018, I took the daily exchange volume and divided it by the price. After this, I took the average of these 379 occurrences and came to find that on average, it takes $78,577 to move the Decred price up or down $1, which is also on average 4% of the Decred daily trading volume. For a little perspective, it takes approximately $8.6 Million of trading volume to move the Ethereum Classic price $1. The price moves very easily with this token!

o I was admittedly disappointed in the amount of transactions that flow through the Decred network on a daily basis, with the average day processing around 2,000 transactions. With word of mouth ramping up with this project, I expect the transactions to go parabolic at some point this year (very speculative, I know), which will most likely accompany rapid price appreciation. In our final section we will discuss development and what’s in store for 2018, and why these items will bring in new users.

One last point that is unrelated to the data dump is the newest feature from onchainfx.com, “normalized by BTC supply”. This button on the website divides any altcoin’s market cap by Bitcoin’s supply to get a comparable figure / bring to light whether or not a token is over / under valued. In comparison to many other tokens, Decred fared well, with a normalized price of $39.09. The majority of other tokens in the top 50 by market cap had a drastically higher normalized price than the price as listed with their own supplies.

After going through everything, my conclusion is pretty clear: this token isn’t suffering from the inflated prices that have become commonplace within the cryptocurrency world.

Additional Note: 1/16/2018 was a very “red” day for cryptocurrencies, with Bitcoin dropping more than $3,500 by the end of the day. As many know, these on these occasions altcoins generally bleed worse than Bitcoin. I saw this as an opportunity to test my “HODLers protect price from dropping to brutally low levels” theory. And behold – Decred lived up to the hype, dropping only 4% in terms of BTC during the day.

Liquidity

Decred effectively only trades on 2 exchanges: Bittrex and Poloniex. These 2 exchanges support 98% of Decred’s trading volume, with the remaining 2% supported by a handful of smaller exchanges. This means that there’s a lot of bigger players that have not added DCR to their trade offerings, including many of the larger exchanges in Asia which have historically dominated global cryptocurrency volumes. It’s actually shocking that a project of this quality and that has been around for this long only has support from 2 large exchanges within the space. Also – please note that Bittrex hasn’t allowed new users to get accounts since December 15! Definitely not helpful for the Decred price. You will also notice from the screenshot above that Decred only traded a total of 238 BTC on “red” Tuesday!

In 2017, the average volume exchanged was $1.8 Million. However – in the last 3 months of 2017 the average amount exchanged was $2.9 Million. The period of 1/1/2018 – 1/15/2018 had an average volume of $4.8 Million. It should be interesting to see if this volume of exchange keeps exponentially increasing, or if it plateaus in the near future.
The exchange volume numbers for Decred are tiny, considering the top 10 tokens trade with over $1 Billion of volume on any given day. As the eternal optimist, and considering the fundamentals behind the token, I view this as a huge opportunity – and one that can lead to massive gains in the coming year.

Future Developments

We previously touched on Decred’s developers and how these guys are prolific coders. It’s true, and it shows in everything you can find related to Decred. The 2018 roadmap has not been released as of this writing, but obvious updates you can expect in the near to medium term include:

o Atomic Swaps

• Related: Decentralization

• Atomic Swaps allow for on-chain exchange between different protocols i.e. Decred will be able to interact with other tokens. For example – if you have Litecoin and I have Decred, we can trade with each other without having to go through an exchange (a third party).

o Lightning Network

• Related: Scalability

• P2P off-chain transacting, which helps will help users transact quicker, for cheaper, and with more privacy. Similar to starting a tab at a bar, you can have however many transactions you want, and when you want to close to the tab, you settle on-chain.

o Decentralized Storage of Treasury Funds

• Related: Decentralization

• The treasury is currently storing close to $50 Million, which will be used to support the project years into the future. However, as of now, the funds are not being stored in a DAO (Decentralized Autonomous Organization). Decred’s goal is to create a DAO that will store the funds and allocate funding based on the voting performed by network participants. This model will ensure that no one is left with the burden of storing the funds!

o Enhancements to Voting System

• Related: Governance

• Politea: See link https://blog.decred.org/2017/10/25/Politeia/ . In short, Politea will provide a public, timestamped record of all dealing in Decred governance.

• On-chain Policing: You will notice that once you download the Decredition wallet, there’s no way for you to have a say in the type of activity that is occurring on chain. Effectively these duties are left to the techies that are savvy enough to do so. In the future the goal is for an average user to have simple buttons that allow them to vote on conditions that they consider valid for things like block discovery and other on-chain happenings.

o ASIC Mining

• Related: Security

• ASICs have a bad rap in the Bitcoin community, because they’re considering by many to be the key source of some of the “mining centralization” that’s in the ecosystem. On the other hand, these same people would also argue that the hashing power ASICs offer are great for the overall security of the blockchain. This is because more hashpower = more expensive to attack. Increased security will help bigger money move into Decred as they can be more assured that their funds will be protected.

All of these developments are next level and on the forefront of anything technology-related in the world of cryptocurrency. The main questions are:
(1) Are the devs technically capable of getting this done? And…
(2) Will they be able to make it user friendly?

As of today, all evidence suggests that both answers to this are YES. These devs are one of the best bunches in cryptocurrency, and all of the Decred tools prove it. Quality wallets, block explorers, home page, community channels, etc. have all impressed thus far.

Concluding Thoughts

My thoughts on Decred are this: it’s a HUGE steal below $1 Billion dollar (in market cap). While I write this, Decred is trading at a healthy spot within its NVT Ratio, the community’s marketing has ramped up, and they have a bunch of cutting edge stuff around the corner. Even more importantly, they have a product with a track record, and a user base of HODLers. The amount of tokens on a percentage basis being staked are increasing daily, and volumes have maintained a healthy uptrend. In my mind, this project has top 10 potential when it comes to market cap. IOTA currently sits at #10 in market cap, at $7.1 Billion (keep in mind it’s a rough Tuesday for crypto), which suggests Decred could go over 10x by the end of the year. However, for the sake of not sounding crazy I’ll say that I can see Decred jumping to at least $3 Billion in market cap by the end of the year. To some in cryptocurrency this might not sound sexy, but I make bets where I believe I have a substantial asymmetric risk / reward i.e. I don’t think I can lose much money, but have an opportunity to make a lot. We will see in due time!