A Fundamental Look At Elrond | marketrealtime.com


Galeanu Mihai

As the cryptocurrency market continues to mature, we have generally seen some of the newer smart contract-focused blockchain projects trying to address scalability issues from Ethereum (ETH-USD). There are essentially two ways to go about this problem; create a level 2 solution that uses Ethereum’s base layer for security or make a competing base layer chain entirely. A quick glance at the top 15 coins by market cap shows each of these approaches has had some level of success so far.

Source: CoinMarketCap

While we certainly see a proliferation of new base layer blockchains, the approach to solving the scalability problem is often different. For instance, Avalanche (AVAX-USD) has three different chains. AVAX breaks up transactions into categories and designates certain activities to specific chains to not bog down the entire network. Other chains try to implement “sharding” for scalability. Which is similar in that it breaks up the data but it doesn’t necessarily do so by category of activity. Sharding enables blockchain nodes to not have to store all of the information on the chain simultaneously.. This can allow for much more scalability and more transactions per second, or TPS. One blockchain that is implementing a sharding approach is Elrond (EGLD-USD).

Elrond Model

Elrond is a level 1 blockchain that breaks the network up into 4-sharding parts. Three of these parts are execution shards – these are the sharding units that validate transactions. The fourth is a coordination shard, or the “Metachain.” This is where the information from the validator shards is stored. Each validator shard can process thousands of transactions per second simultaneously, and Elrond claims the network can handle 15,000 TPS. This would easily make it one of the fastest public blockchains that I’ve come across.

Node Shuffling

Node Shuffling (Elrond)

Security-wise, Elrond uses what they’ve called a Secure-Proof-of-Stake consensus mechanism that shares important characteristics of both PoS and PoW. While there is no energy waste through mining like a typical PoW network, Elrond’s PoS validation is randomized through node shuffling. From the website:

The BFT-like consensus protocol maintains a high security level through random sampling of the consensus group, and random reshuffling of nodes into other shards. The consensus uses an unbiasable randomness source generated by the block proposer via signing the previous random source.

This is interesting and seemingly addresses some of the censorship-resistance concerns that have come from Ethereum’s successful PoS merge. There are currently 3,200 validators on the network:

Validator Map

Elrond Explorer

59% of those validators are in Europe. This is important since it means the SEC can’t claim Elrond is an American network as it recently did with Ethereum.

The Token

Like the other base layer public blockchains, Elrond has a native asset on chain that is used for paying transactions. EGLD is used to reward validators and for network transactions. The max supply of the coin is 31.4 million. Of which 23 million are currently in circulation. Messari quotes a 14% annual inflation rate until the maximum is reached. According to Elrond’s native block explorer, 14.1 million of the tokens are currently staked.

Tokens Percent of Max
Circulating 23,000,392 73%
Staked 14,125,339 45%
Max Supply 31,415,926 100%

Sources: Elrond, Messari

With that current level of inflation remaining, EGLD is what I would personally classify as a staking asset over a buy and hold asset if you’re not using the tokens for on-chain transactions. According to CoinMarketCap, Elrond is the 46th largest coin market capitalization in the crypto market with just under a $1.1 billion valuation of the circulating supply. The fully diluted cap is just under $1.5 billion.

Network Activity

So far, Elrond has processed almost 58 million transactions and has a little under 1.9 million on-chain addresses. Like most smart contract blockchains, Elrond has a decentralized finance footprint. In this capacity, Elrond punches well below its weight based on smart contract blockchain market capitalization. At just $134 million in TVL, DeFi interest in Elrond appears to have stalled out quite a bit:

Elrond Defi

Defi Llama

Another big concern is just 1 DeFi protocol on the network that accounts for all of the activity. That protocol is Maiar Exchange (MEX-USD). At 8.1, Elrond is on the higher side of TVL/MC ratio. By itself, this isn’t necessarily a deal breaker as smart contract chains can do much more than just DeFi. We would just want to see more transactions elsewhere in the Elrond ecosystem. As far as total network activities go, Elrond just doesn’t have the trading volume of other similarly capitalized layer 1 networks:

Elrond volume Comps

Token Terminal

Comparing Elrond to NEAR Protocol (NEAR-USD), Fantom (FTM-USD) and Algorand (ALGO-USD), we see a general lack of volume in Elrond compared to similar base layer peers. When we adjust the volumes for market cap, we can see how little activity is happening on Elrond compared to the selected peers above:

30 Day Averages Market Cap Vol/MC
NEAR Protocol $3.32b 0.0179
Algorand $2.12b 0.0139
Elrond $1.17b 0.0085
Fantom $662.7m 0.0429

Source: Messari

In the table above, the lower the Vol/MC metric, the less activity on the network. While NEAR might be a tougher comparison given the much larger market cap, Algorand and Fantom both have much larger levels of activity comparative to Elrond with market caps that are a little more in line with EGLD’s.

Risks

Getting beyond the fact that cryptocurrencies are inherently more risky than well established speculative vehicles like stocks due to regulatory concerns and normal volatility, there are plenty of other risks associated with getting exposure to EGLD specifically.

In my view, Ethereum’s successful merge from proof-of-work to proof-of-stake has de-risked ETH in a variety of different ways. It might be more prudent to bet on level 2 Ethereum scalers than on competing layer 1 chains. That said, many view a multi-chain world as the most likely outcome. In that regard, taking a stab at well constructed base layer chains that try to address the “blockchain trilemma” could be the best approach.

Additionally, the biggest hill most of these networks may have to climb is the macro environment these builders are now facing. With rising interest rates globally and expected balance sheet tightening from the Fed, the market action has been screaming risk-off for several weeks from an investment perspective. And sourcing capital could be an ongoing problem for some of these lesser known blockchains projects, developers, and startups. Cryptos will not be immune from the macro setup.

Summary

I think there is a lot to like about Elrond. It seems to address a couple of the major problems with both proof-of-work and proof-of-stake consensus mechanisms. Judging by the TPS metrics, it has better scalability than many competing layer 1 blockchains and a randomized validation security function that I find very interesting. I don’t currently hold EGLD. But it’s definitely a token on my radar and I think if the crypto market takes one final leg down, this might be one to potentially add to a diversified crypto portfolio.

That said, I do find the general lack of activity to be concerning. I think given the current crypto winter that the market is experiencing, it isn’t a total shock to see some of the newer chains struggling with network activity. But for me to be interested in EGLD enough to buy it and stake it down the line, I’d want to see a big increase in network usage. It’s a watchlist for now.



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