Every week IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
This week, we focus on the crypto-assets leading in 2021 so far and potential reasons for their outstanding performance. With Ether reaching new all-time highs, we dive into factors pushing Ethereum and other smart contract platforms higher, as well as decentralized finance (DeFi) applications built on top of them.
“Alt Season” Being Led by Smart Contract Platforms & DeFi
The so-called Alt Season has arrived, as cryptoassets with smaller market capitalization than Bitcoin are outperforming the market. Despite the fact that only three weeks have passed in 2021, many cryptoassets have already seen triple-digit growth. By analyzing the top performers year-to-date, we observe that the majority of the gains are being realized by smart contract platforms and DeFi applications:
The table above displays the top 10 highest returning cryptoassets so far in 2021. The dominance of smart contract platforms and DeFi is evident, with Stellar being the only exception (though they do support limited smart contract functionality).
DeFi tokens in particular have enjoyed remarkable growth over the last month, with their aggregate market cap doubling from $10 billion to $20 billion. These protocols have been favored by a market currently centered around opportunities with high potential.
There are two likely reasons for smart contract platforms’ and DeFi’s leading returns: the market’s risk-on stance and the increasing demand for censorship resistance.
Risk-On Market Realizes the Value of Censorship Resistance
The risk-on positioning from the market can be observed from the high returns of volatile assets such as crypto. This positioning is linked to the upcoming $1.9 trillion stimulus package in the United States, which has increased forecasts for economic growth in the largest economy.
Due to this and the federal reserves’ plans to keep interest rates at zero for the foreseeable future, stocks and risky assets have rallied. In particular, assets with high potential growth such as space exploration (e.g. Virgin Galactic), electric vehicles (Tesla), next-generation finance (DeFi) and decentralized infrastructure.
Decentralization has also gained momentum amidst unprecedented censorship. Following the incitement of violence from former U.S. president Donald Trump, social media platforms permanently banned him. Similarly, social network Parler was kicked off Amazon Web Services following the incident. As a result, Google search results for “censorship” worldwide reached a five-year high.
In light of the attention surrounding censorship, blockchain technology has been brought up by many as a potential solution. In short, public blockchain allows censorship-resistance as it is not controlled by one single entity or group of entities, but rather by a decentralized network.
As the crypto venture fund Paradigm’s cofounder Matt Huang implies, the increased censorship highlights the value proposition of a decentralized web built on top of smart contract platforms.
Overall, crypto holders by and large profited from their assets thus far in 2021. As speculation in crypto increases, we see risk-on positioning accompanied by a growing proposition for decentralization as drivers in the recent run-up. Smart contract platforms and decentralized finance protocols have accrued the most value as they fit both of these narratives. Ultimately, the next few years should be pivotal for crypto protocols to realize their potential as censorship-resistant next generation applications, instead of merely a risky bet.