May Newsletter

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

FAL Consulting is a cryptocurrency consulting company. We provide a wide variety of services related to cryptocurrency and blockchain. You can find a full breakdown of our services at cryptofal.com.

The FAL Cryptocurrency Newsletter is a monthly newsletter that focuses on the monthly highlights throughout the cryptocurrency and financial technology (FinTech) industries.

Coins To Follow

Bitcoin

Bitcoin is the first cryptocurrency and the largest by market cap. Created in 2009, Bitcoin has grown astronomically since its launch and continues to lead the cryptocurrency industry while also often dictating overall cryptocurrency market movement. It also established the norm of using blockchain as a public ledger for tracking cryptocurrency transactions, providing a revolutionary level of transparency that the broader financial system has lacked.

Bitcoin has continued its downtrend throughout the past month. While it started a descending channel at the beginning of April, it mostly maintained an area of support above $37.5k until recently. Yesterday, it took a major dive after the news of an interest rate increase. The MFI is moving fairly neutrally on the daily chart as it has for the past couple of weeks.

The MACD’s momentum waves have remained mostly neutral, however, its EMA lines have continued a steady trend downward over the last couple of weeks. It’s very likely that BTC will continue to be affected by the woes of the fiat market, so it wouldn’t be too surprising if we see some volatility in the coming weeks.

Ethereum

Ethereum is the second-largest cryptocurrency by market cap. It’s known for being the first cryptocurrency to introduce smart contract capabilities on its blockchain, setting the precedent for ecosystem coins. As the most actively used blockchain, Ethereum has established itself as the largest ecosystem coin by market cap. Many other tokens are based on the ERC-20 protocol on Ethereum’s network.

Ethereum’s layer-2 scaling update has been delayed to Q3. While it’s in its final testnet, ETH’s delay to Q3 comes as a surprise to many after initially being intended to be released in June. While this may not be too significant of a development in the long-term, it definitely affects the overall cryptocurrency market, especially Ethereum, in the short term.

Ethereum has also been in a downtrend following the broader crypto market movement led by BTC. After testing the above resistance, ETH was quickly chopped down following the news of interest rate hikes. Volume has remained relatively steady over the past couple of weeks. The MFI is trending up slowly, however, it is still in neutral territory. The MACD’s momentum waves appear to be swinging downward as its EMA lines continue their downtrend. ETH will likely follow BTC’s movement until it has its own fundamental developments.

Algorand

Algorand is an ecosystem token with the ability to create smart contracts. It has its own DEX, governance capabilities, and its goal of working towards layer-2 smart contracts, Algorand is an ecosystem token that seems ready to take on much of the ecosystem space. It uses multiple layer-1 chains to help fulfill both its smart contracts as well as its transactions. This also allows for independent tokens to be built on its network, making it a true ecosystem token. These factors have attracted a diversity of investors and interest from institutions alike to the project.

Algorand has been stirring up quite a buzz throughout the cryptocurrency space. Recently, they’ve announced that they’ve actually partnered with FIFA. This will make Algorand the official blockchain partner of FIFA. According to Algorand’s website, “As part of the agreement, Algorand will also assist FIFA in further developing its digital assets strategy, while FIFA will provide sponsorship assets including advertising, media exposure and promotional opportunities.”

Algorand has had a strong period of consolidation throughout much of 2022. Recently, it broke below a line of support that has been held since February of 2021. Currently, the MFI has swung up sharply and we’ve seen a spike in volume since the beginning of May. The MACD looks to also be swinging up, which is a fairly significant accomplishment as BTC and ETH continue to struggle.

Terra

Terra Luna is a blockchain protocol that creates a variety of stablecoins that are coined to a variety of fiat-based currencies from the USD to the Korean won, to the Mongolian tugrik. Terra has its own blockchain and these stablecoins, as well as their own native token LUNA, is built onto it. LUNA is the governance token used to make decisions for the community and it is used to back the stablecoins and maintain their stability.

Terra is co-hosting the hackathon with the largest prize yet of $300,000 with Alpha. This hackathon will be occurring until May 9th. The Terra Community DAO has also joined into a partnership with the Washington Nationals. According to their announcement on Medium, “The Terra Community Trust (TCT) has entered a 5-year, $38.15M partnership with the Washington Nationals MLB franchise to promote Terra across various parts of its home venue and TV network and make efforts to implement UST as an accepted currency in venue transactions.”

LUNA has had an interesting few months. After seeing massive gains through February and early March, LUNA has developed a higher range of support around $77.50 that has yet to be broken, even as BTC and ETH struggle. This is a great sign for the project which has seen a large amount of attention throughout the past year. It should be noted that LUNA’s MFI is trending downwards and so is its MACD so it may continue to test support in this range. That being said, if we see some significant dips from BTC, we could see LUNA break below this area of support.

Quant

Quant was founded in 2018 and focuses on providing solutions for the interoperability of blockchain. They want to find a way to connect different enterprise software programs to different blockchains. It uses distributed ledger technology and APIs to facilitate communication with different blockchains.

The positive qualities of each blockchain aren’t diminished by these connections and are each able to maintain its unique features. They want to assist enterprises by providing avenues for more efficient workflows by being able to communicate with any existing blockchain, which is one of the reasons it’s able to be easily paired with traditional enterprise systems.

Recently, Quant’s Overledger API, which is used to connect with a variety of other blockchain networks, has now gained support for connecting with Polkadot’s mainnet. According to their site, it will now support, “creating transactions, searching transactions or blocks, monitoring activity on an address and more,” on Polkadot’s mainnet.

Quant has also seen a lot of consolidation over much of this year. After seeing some significant dips earlier in the year, it has yet to break this range between approximately $90 and $170. Volume has remained steady over the past few months after dipping significantly in February. The MFI is looking to swing upwards slowly while the MACD remains largely neutral on its momentum waves as its EMA lines trend downward.

Features

Scaling Solutions: What Are They?

Scaling solutions is a term that’s thrown around fairly often in the cryptocurrency space. We hear it in regards to a variety of blockchain protocols and tokens, along with the idea that they’re imperative for mass adoption and accessibility.

So what are scaling solutions and why are they so important?

First, you have to understand a bit about the current limitations of the cryptocurrency and blockchain space. Bitcoin, the original cryptocurrency, is based on a proof-of-work consensus protocol. Proof-of-work relies on computers solving complex problems to receive a reward. This process takes time and is energy intensive. This can result in a slower transaction settlement.

While in the early days of cryptocurrency and blockchain, this wasn’t as much of an issue. The overall transaction volume was much less, smart contracts were still new, and decentralized applications had yet to be prevalent. Now, this isn’t necessarily the case. With a significantly larger and more complex user base, blockchain protocols need to be able to fully adapt to the needs of their users. This includes providing them with the speed, and cost-efficiency that they need.

With this being said, scaling solutions are solutions for ensuring that transactions can be both affordable (with lower transaction fees) and fast. There are a variety of types of scaling solutions as well. Some use Layer-2 scaling like proof of stake, others use different consensus protocols that may be more efficient than proof of work.

First, let's look at one of the most popular consensus protocols, proof-of-stake. With proof-of-stake protocols, the owners of staked tokens act as validators for transactions. In general, proof-of-stake is seen as a better alternative to proof-of-work. According to Investopedia, “Proof-of-stake (POS) is seen as less risky in terms of the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.”

There are also other logistical benefits to proof of stake. As we discussed earlier, proof of work presents a variety of limitations as a consensus protocol. Not only is it a protocol that is less efficient cost-wise and speed-wise, but it also uses a significant amount of energy. This presents a challenge for entry to those who cannot afford both the equipment to mine, along with the high transaction fees. Proof-of-stake allows for a significantly larger user base to participate in the consensus mechanism of a protocol.

This, in turn, allows for a more decentralized network with a larger potential variety of validators. There have often been arguments that the cost to be profitable with many POW-based blockchains results in very few entities being able to exist in the mining space. So POS allows for more users to participate with little to no cost. The validators are usually randomly chosen, and then they’re provided with a regular reward in the cryptocurrency they’re staking or another token that’s part of that ecosystem. Those with more tokens staked are more likely to be chosen, which then makes it more likely for that user to receive a reward.

On top of this, since proof-of-stake doesn’t require massive amounts of computers solving problems to validate transactions, it tends to be significantly less energy intensive, in comparison to proof-of-work. This is especially relevant as the broader cryptocurrency space has come under fire due to the potential environmental impact of proof-of-work blockchain protocols. This also results in quicker transaction speeds and cheaper fees than proof-of-work protocols that require validation through mining. It should be noted that similar to POW-based consensus protocols, POS-based ones vary in their specific features from protocol to protocol.

Other types of layer-2 scaling methods include optimistic rollups. Optimistic rollups (ORs) use the Optimism application that’s built on the Ethereum network in an attempt to increase transaction throughput. They allow for faster and cheaper transactions while also allowing for the creation of more scalable smart contracts as well. This technology bundles transactions together to allow for more transactions to be able to occur at once.

There are other consensus protocols that allow for high-transaction throughput providing fairly cheap and fast transactions. Solana is one blockchain protocol that uses something called a proof-of-history consensus protocol along with proof of stake. This combined consensus protocol allows Solana to process up to 65,000 transactions per second.

Solana uses proof of stake for consensus with a proof-of-history approach. This proof-of-stake method is called Tower BFT.

According to LeewayHertz, “Voting on a fork is limited to a defined period of hashes called a slot each time a validator votes on it. For one slot, the current network configuration is about 400 milliseconds (ms). The network has a possible rollback point every 400ms, but each successive vote increases the length of time it must delay before it may unroll that vote. In summary, secondary votes make it considerably more difficult to reverse transactions in a certain slot.”

This proof-of-history method has a verifiable delay function that is performed at high speeds. The information sent to nodes is trusted in the order it’s sent, so it can start producing the next block without having to verify with the whole blockchain beforehand. This allows for extremely quick transaction settlements. This type of consensus protocol allows for extremely fast transaction speeds while still being considered a layer-1 blockchain protocol.

Another scaling solution that the space is still working on actively includes interoperability between blockchain protocols. Features that allow for cross-chain interoperability could greatly reduce the issues present when attempting to make different protocols interact, whether it be via smart contract or just sending simple transactions. Some protocols are actively exploring blockchain interoperability such as Cosmos, and Quant.

These features are truly remarkable, as they would allow different blockchain protocols to interact, potentially breaking down the walls between different blockchain communities, and even bolstering the weaknesses of some protocols with the strength of others. It should be noted though that as far as using this as a scaling solution, the space is still working on these solutions.

It’s very likely that the crypto space will continue to develop a wide variety of solutions in order to scale to its needs. As more and more people and institutions alike enter the space, it’s only inevitable that more scaling solutions will be adopted and pursued. We’ll likely continue to see a variety of scaling solutions available that are highly dependent on the use-case of a project. Either way, it’s going to be very interesting to see how the crypto space addresses these scaling issues as it grows.

Fed Meeting Notes Reflect Economic Uncertainty

Since the Federal Open Market Committee (FOMC) at the Federal Reserve first began to signal an aggressive stance on rate hikes, the markets have reflected a shift in investor confidence and a movement away from higher-risk assets like cryptocurrency. The release of the FOMC notes from Tuesday and Wednesday’s meetings reveal what to expect from the Fed and their assessment of the health of the U.S. economy as they try to tackle the nearly $9 trillion balance sheet and an 8.5% inflation.

During a press conference given Wednesday, Chairman Powell announced that the FOMC unanimously decided on a half-point rate hike with further half-point hikes for June and July on the table. Traders hoping the recent market fluctuations might produce a dovish Fed were immediately disappointed however, Powell’s reassurance that the rumored three-quarter hike was unlikely led the stock and crypto markets to enjoy a momentary sigh of relief. Across both markets, immediate gains were posted signaling hope for a recovery. Unfortunately, the gains were lost the following day, with Bitcoin dropping 11%--its largest drop since January.

These contractions in the market and subsequent downturn reflect the mixed confidence in the ability of the Fed to prevent a recession. The growing concern of a recession weighs heavily and could, in part, be influencing market movements. When asked about a possible recession, Powell indicated that the Fed “expects growth to be solid this year” because based on labor demand, this is still a “strong economy” and strong labor market.

Typically, a recession would signal high unemployment, whereas today's labor market reflects the opposite with almost 2 to 1 job vacancies in the labor force. Unfortunately, a competitive labor market will also work towards increasing inflation as will the increasing threat of supply shock coming from overseas.

Though there are many factors that power the fluctuations in both stock and crypto markets, it is difficult to ignore the prevailing issues that plague the global economic system. Russia enters the third month of its war with Ukraine and the lockdown in China, namely the port of Shanghai, has begun to stress the chain of supply in the global economy.

Commodity prices and supply shock on grains and wheat threaten the Middle East and South Asia, whereas China deals with the absence of metals from Ukraine. Much of the world is dependent on Russia, the reality for Europe being a potential energy crisis due to the sanctions placed on Russian oil.

All of this culminates into the mentality that very few stores of value are safe or guaranteed. While the correlation coefficient between BTC and S&P 500 reached a 17-month high in March, it’s a possibility that may deviate should the aforementioned factors hold true. In spite of a hawkish Fed, supply-side shocks, international conflict, inflation, the threat of recession, and the pandemic, cryptocurrency has held relatively strong.

The continued adoption of crypto continues despite all the factors influencing the market today. More than anything, curiosity and low confidence in traditional institutions is what entices consumers towards crypto as a wild card asset, and is what continues to further its adoption by countries, governments, institutions, and businesses.