STEPN's Contraction, Auction Market Theory, and Arweave's Ascension

Chart of The Day: STEPN’s Active User Numbers Contract

STEPN has been one of the biggest hits in crypto over the past few months — at least in terms of raw usage. The idea of being able to “earn” just by going on a run is compelling, though many have questioned the sustainability of such a product.
However, after briefly zooming past 100K daily active users, STEPN’s numbers have begun to contract. For the most part, this is a casualty of dropping token prices.
When people use StepN, they’re paid in the project’s native GST token. And as you can see in the above chart, GST took quite a hit, down 92% over the last five weeks. Since GST’s price is down, users of STEPN earn less in USD terms, making it less appealing than it was.
STEPN has had other issues as well, with a spam protection initiative flagging real users and bots instead of just bots. This, alongside their move to restrict players in mainland China, has put the project under some duress.

Understanding Auction Market Theory

[Excerpt from a Delphi Insights Report]

Before we hop into the core topic of this report, Finding Appropriate Exits and Accepting Losses, it is important to review Auction Market Theory (AMT), and the core principles that encompass it. In last week’s report, AMT principles were factors taken into account when looking at our example and entry criteria. It is important to be consistent with your methodology (consistency will be a common theme throughout this note). Therefore, AMT principles will factor into finding appropriate exits.

Simply put, AMT is a framework for observing and trading financial markets. It tries to define the market’s main purpose, and how market participants interact with each other, fulfilling that purpose.

A market achieves two main things:

A market facilitates trade in a two-way process (auction, buy/sell, etc.)
A market seeks the fair value of an asset (over time)

AMT looks at the market through the lens of supply and demand dynamics and the price discovery and auction process. A core tenant of AMT is that VALUE and PRICE are very distinct from one another. Tools used to visualize these concepts are Market or Volume profiles.

How is “value” defined in terms of financial markets? Outside of the market price of an asset, value can be defined as any type of data set, such as time or volume (think market or volume profiles). What is “fair value” of an asset? Within the AMT framework, “fair value” is synonymous with “value area”. To visualize this, the below graphic is a normal distribution bell curve, with 3 standard deviations from the mean. “Fair value” refers to ~68.3% of data occurring within 1 standard deviation of the mean.

At this point, the three components of AMT should be more clear:

Price – market price is simply an advertisement to the market, an opportunity
Time – time regulates the price opportunity
Volume – volume measures the interaction of market participants at different price opportunities (price levels)

AMT goes one step further and provides context to two types of market conditions: balanced and imbalanced markets. These terms are synonymous with ranging markets and trending markets, and this is a topic we’ve discussed several times in the past.

“A common adage within FX trading is that markets typically range 70%-80% of the time, and trend for only about 20% of the time. While not a direct 1:1 comparison to crypto, this heuristic can be helpful for market observers when developing a market view.” – Monthly Chartbook – The Sellers Strike Back.

For more information, Delphi members can see the full Market Insights here.

Arweave’s Growth to Date

[Excerpt from a Delphi Pro Report]

At this article’s posting, the Arweave weave has grown to over 65 TB of data; an impressive 8x increase since our previous Arweave report back in April 2021. More importantly, as can be seen, the growth rate of the weave suddenly changed in September 2021 and has persisted to this day at an average of 20% MoM. This is due to the implementation of ANS 104 which improved upon the “bundles” introduced by ANS 102 in July of the same year. Bundles massively increased the accessibility and useability of Arweave, and eventually, the work that went into them gave birth to a complementary protocol called Bundlr. We cover Bundlr in depth later in the article. Additionally, around the same time, Arweave also saw an increase in various NFT protocols making use of its network such as Metaplex, Glass, Mintbase, as well as large Solana and NEAR NFT marketplaces.

Lastly, since Arweave’s permeant storage claim is based on an economic guarantee that miners must be consistently incentivized to continue to participate through Arweave’s reward mechanism. The basic principle to ensure this is that the reward emitted by the network at any given block must be greater than the total value of expenditures required to maintain the blockweave for that period. In order to ensure the rewards mechanism has some longevity, a portion of the fees (currently ~80%) from each transaction are taken and placed into an endowment pool. The goal of the endowment is to sustain the economic incentives of the protocol as block rewards diminish over time. In the event that a specific block’s rewards aren’t sufficient to compensate miners’ for their estimated storage costs, the difference is taken from the endowment pool. To sum up, 20% of fees and block rewards immediately benefit miners, while 80% of fees accumulate in the endowment pool for sustainable future incentives. It’s therefore essential for endowment growth to reach meaningful levels.

Last year, the inflationary block rewards accounted for roughly 972k AR (assuming an avg of 3.7 AR/2 mins blocks). Meanwhile, the endowment has roughly grown by 20k AR or, put another way, 2.5% of the block rewards. While this is a low figure that would not be able to sustain the storage expenses of Arweave today in the absence of block rewards, it could indeed become sufficient if weave can sustain or increase its current growth rate. It’s important to recognize that at ~20% MoM growth rate weave can grow by 9x in a year and 80x in 2 years. Based on the rate at which block rewards are decreasing from the graphic above there is enough time for the endowment pool to grow and begin to sustain the network before block rewards perish if current growth continues. However, in the case that fees start to diminish faster than expected the network could stagnate as miners may lack incentive to continue to participate. The next two years will be critical in determining this. Given that the weave growth is highly correlated with endowment pool size such growth, if sustained, would certainly imply a bright sustainable future for Arweave.

For more information, Delphi members can see the full Delphi Pro Report here.

Notable Tweets

A small percentage of voters are pushing for “ApeChain”

74% of the voting power against keeping ApeCoin within the Ethereum ecosystem comes from 3 of 497 voters (one is a delegate). They’re winning.

You don’t need to (read: shouldn’t) start from scratch and build a new chain to scale, just move to an L2.https://t.co/SQ6llqlyd6

— zkSync (@zksync) June 6, 2022

Yearn Finance takes treasury transparency to new heights

this is huge, now you can see how yearn pays their salaries in real time https://t.co/lnA4THnmhH pic.twitter.com/IZRHssk14V

— 0xngmi is grazing (@0xngmi) June 5, 2022

Concerns around TRON’s new stablecoin

Mixed feelings, better than $UST but still not ideal.

– Counting the Burn/Mint algo as 100% collateral is dishonest at best, because in that case $UST was 100% collateralized too
– $TRX is backing the stablecoin twice, once from the burn/mint, another time as actual collateral https://t.co/OjXZYQY6Yw

— Tree of Alpha (@Tree_of_Alpha) June 5, 2022