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Tornado Fallout Fuels Shift to Privacy Coins

September 08, 2022

Read Time 10 MIN

In the aftermath of sanctions on Tornado Cash smart contracts, privacy-related coins outperformed in August while projects with stricter censoring lost market share.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Digital asset prices fell in August, as tech stocks performed the worst among all S&P 500 sectors. Amidst continued high inflation and more restrictive central bank policy, the Bitcoin/Nasdaq 30-day correlation remained elevated at 47% vs. the 5-year average of 9% and the 1-year average of 36%.

Despite the macro environment, institutions continue to allocate to the space—specifically worth noting is Blackrock’s partnership with Coinbase to provide crypto access on its flagship Aladdin platform. Blackrock also launched a private trust to enable direct spot Bitcoin access. Overall, listed crypto ETNs saw inflows in August, driven by Ethereum (ETH, mkt cap $197B) momentum into the merge. Globally, more than 150 crypto funds, including hedge fund and venture strategies, have raised $36B in the first half of 2022, compared with $18B raised in all of last year. We count an additional $1B in venture capital raised in August. This dry powder is still keeping private valuations somewhat elevated vs. liquid tokens, in our view.

Negative news around regulation provided headwinds in the month, specifically the U.S. Treasury’s unprecedented sanctions of Tornado Cash smart contracts, which prompted Infura and Alchemy, two major Ethereum infrastructure providers, to block access to the Tornado protocol. One anonymous Tornado Cash user even sent Tornado Cash ETH to many famous, doxed ETH addresses in the hopes of bringing visibility and making a few innocent souls into criminals. Github deleted Tornado Cash code repositories and one Netherlands-based Tornado developer was arrested. We believe the Office of Foreign Assets Control’s (OFAC’s) action reflects pressure brought by the Biden Executive Order signed last March. This September 9 marks the 180 day deadline for seven separate federal agencies to respond to the executive order, which emphasizes the need for interagency cooperation. We would not be surprised to see additional enforcement actions against unregulated crypto protocols over the next month. Still, recognizing the crypto community’s commitment to issues of free speech and code, privacy-related coins outperformed in August, led by Decred (DCT, mkt cap $430M, +12%), Ergo (ERG, mkt cap $100M, +51%) and Secret (SCR, mkt cap $175M, +1%), even as Tornado Cash (TORN, market cap $13M) fell 66%. Overall, projects that adhered to stricter censoring lost market share in August, as you will read in later paragraphs. We believe the politics around private money will change as fiat debasement becomes more obvious to the younger generation and inflation constricts real growth and perverts institutions. Overseas, we are encouraged by adoption such as occurred in Argentine’s fourth largest province, Mendoza, which announced its intention to receive taxes in crypto in August.

August also saw a continued focus on consolidation and resignations: Genesis CEO Mike Moro stepped down amidst a 20% reduction-in-force. Alameda Research, the proprietary market-making and trading arm of Sam Bankman-Fried’s crypto empire, parted ways with CEO Sam Trabucco and merged its venture investing business with FTX. And Crypto VC DragonFly acquired competitor MetaStable Capital. Among crypto native companies, Fei/Tribe DAO, a failed merger valued at more than $2B at its peak, and Babylon Finance, another victim of the $80M hacking exploit on Rari, announced plans to shutter. We believe the bear market will continue to force consolidation to the benefit of leading players.

For the month (7/29-8/31), the Nasdaq Composite fell 4%, Ethereum fell 10%, MVIS CryptoCompare Smart Contract Leaders Index fell 11.5%, and Bitcoin fell 16%. Among other crypto sectors we track, centralized exchanges performed best, down 6%, while defi-related coins fell furthest, down 24%.

Digital Asset Market Cap 7 Days 30 days 90 days 365 days
Bitcoin $389.09B -6.29% -15.77% -36.94% -59.43%
Ethereum $194.45B -6.24% -10.06% -20.01% -58.85%
Digital Assets Index Market Cap 7 Days 30 days 90 days 365 days
MVIS® CryptoCompare Decentralized Finance Leaders $7.69B -8.96% -24.29% -17.91% -80.77%
MarketVector™ Centralized Exchanges $52.14B -5.43% -5.80% -13.12% -42.38%
MVIS® CryptoCompare Infrastructure Application Leaders $13.70B -7.15% -13.73% -8.62% -76.27%
MVIS® CryptoCompare Media & Entertainment Leaders $6.52B -10.37% -16.01% -23.85% -76.02%
MVIS® CryptoCompare Smart Contract Leaders $247.59B -6.53% -11.46% -21.22% -72.23%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022. See index definitions below.

Smart Contract Platforms

Among smart contract leader index constituents, there were four coins with positive returns in August: ATOM, EOS, FLOW and NEAR.

EOS (EOS, mkt cap $1B) rose 50% after the EOS Network Foundation (ENF), a nonprofit organization that oversees the growth and development of the EOS blockchain, opened registrations for its upcoming “Yield+” incentive program. Yield+ is a liquidity incentive and reward program to attract decentralized finance (DeFi) applications that generate returns for their users. EOS also announced a hard-fork set for September 21 and a rebranding to “EOSIO”. The rebranding and upgrade serve as EOS’s symbolic divorce from Block. One, the company that originally designed the network, nine months after the EOS community elected to stop the issuance of 67M EOS, or around $108M, due to over the next five years, on concerns the company no longer represented the community’s best interests.

ATOM (ATOM, mkt cap $3B) outperformed as more coins were staked on the network, locking up supply. ATOM is set to become a primary collateral asset of three new stablecoins (USK, IST, CMST) that will launch within the Cosmos ecosystem. Minting these stablecoins will require the “lock,” or depositing, of ATOM tokens similar to the Maker (MKR, mkt cap $730M) model. IST is particularly intriguing as its native Agoric (BLD) blockchain will support smart contracts in Javascript, the most widely used programming language with 17.5M developers, compared to 2.2M who code in Rust (Solana) and ~200,000 on Solidity (Ethereum). Adding to the Cosmos momentum, liquid staking will come to ATOM in H2 2022. Current data from Staking Rewards shows that 65.84% of issued ATOM tokens are staked for a minimum yield of 17.85%, with a 189% increase in the number of ATOM tokens staked over the past 30 days. Consistent with our $140 price target for the ATOM token, VanEck is among these stakers, expecting this ratio to rise as new Cosmos ecosystem chains like Agoric stake ATOM tokens for security.

  Marketcap 30 Days 365 Days
EOS $1.44B 20.93% -72.96%
Cosmos $3.44B 19.96% -53.23%
NEAR Protocol $3.32B -0.58% -22.05%
Internet Computer $1.59B -22.08% -90.61%
Waves $0.49B -22.16% -84.66%
Solana $10.82B -22.52% -72.16%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022.

Media & Entertainment

Metaverse tokens continued to underperform as on-chain activity on platforms like The Sandbox and Decentraland languish. Combined, land sales at the five largest metaverse platforms fell 43% in August to $19M. Sandbox and Decentraland monthly land sales are now down 98% and 89%, respectively, from their peak.

Chiliz (CHZ, mkt cap $1B) was a notable outperformer in the month, up 46%. CHZ powers, a platform where fans can purchase and trade branded fan tokens such as Paris Saint-Germain (PSG, mkt cap $34M) and FC Barcelona (BAR, mkt cap $30M). Currently, Socios powers 62 of 67 fan tokens listed in FanMarketCap, comprising $205M in market cap in addition to the CHZ token. On August 5 Socios received regulatory approval to offer virtual currencies and digital wallets for its fan engagement and rewards platform from Italian regulators, expanding the company’s presence in southern Europe. Then, on August 22, Chiliz founder Alexandre Dreyfus announced the protocol’s intention to stop utilizing the Ethereum blockchain to launch their fungible and nonfungible tokens and replace it with their own native chain, CHZ 2.0. "We don't have to rely forever only on ERC20 or ERC721 equivalent," said Dreyfus. We expect the new Chiliz chain to add significantly more value to the CHZ token, which will be used as gas and for staking in addition to its current utility as the medium of exchange for Fan Tokens on Socios.

We continue to focus considerable attention in understanding the state of blockchain gaming. Among the 25+ blockchain games we track (and play) weekly, we observed 1.87M users in the week ending 8/29, a 28% increase over July levels. By layer 1 blockchain, Solana (9%) and FLOW (25%) stand out as recent market share winners; Ethereum and Ronin (which hosts the Axie Infinity game) are recent losers. Although we estimate 40%+ of these “gamers” are actually bots, nevertheless we are encouraged by the recent growth.

  Marketcap 30 Days 365 Days
Chiliz $1.11B 51.92% -46.26%
Gala $0.38B -16.06% 96.52%
Basic Attention Token $0.5B -16.46% -61.61%
Axie Infinity $1.24B -19.91% -81.35%
Decentraland $1.42B -20.25% -22.10%
The Sandbox $1.36B -27.43% -8.65%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022.


Defi TVL (total value locked) fell 9% in August as leverage has been slow to return in the space. Traders continue to post collateral to leveraged positions; thus, we now observe only $28M in leveraged ETH positions able to liquidated within 20% of the current price. This is a healthier position for DeFi than we have seen year-to-date. Traders are crowded into the futures markets to hedge outsized ETH spot exposure ahead of the merge, amidst hopes for a meaningful ETH proof-of-work airdrop. There is little demand for leverage against those ETH assets, as is more typical in a bull market.

Among DeFi coins, which underperformed again in August, Kyber (KNC, mkt cap $317M) was the notable winner, up 65% as the automated market maker (AMM) announced partnerships with Lido Finance and Avalanche-based DEXs Yeti and Benqi. Kyber’s latest protocol Elastic purports to give liquidity providers more capital efficiency by concentrating liquidity and compounding fees, similar to Uniswap’s V3 algorithm. On September 1 Kyber announced a hacker had used a frontend exploit to steal $265,000 worth of user funds, which the protocol said would be reimbursed.

GMX (GMX, mkt cap $430M) was another DeFi winner in the month, up 12%. GMX is a decentralized perpetual futures exchange that supports spot and margin trading on Arbitrum and Avalanche with up to 30x leverage. It offers zero price-impact trades through the use of Chainlink oracles and price feeds from large centralized exchanges, as opposed to AMMs whose LPs provide price discovery but also bear the risk of impermanent loss. Liquidity on GMX is provided through a basket of assets called GLP, which consists of BTC, ETH, USDT, USDC, LINK, UNI, FRAX, AVAX and Dai. GMX can be a very attractive place to conduct asset swaps in DeFi given low slippage and minimal fees. GMX revenue rose 50% in August, taking share from leader dYdX (DYDX, mkt cap $200M), whose revenue fell 10%. dYdX stumbled after blocking so many Tornado Cash-associated wallets that they ended up apologizing and backtracking; dYdX also backtracked on its plan to require user biometric data in return for a $25 bonus on deposits of $500 or more.

Uniswap (UNI, market cap $3B), the largest DEX by market cap and trading volumes, underperformed, down 25% in August as the long-awaited fee switch proposal passed unanimously and investors “sold the news.” A second vote to turn off the fee switch will be submitted 120 days after this pilot. Still, Uniswap market share of DEX volume rose to 65% in August vs 48% in July.

Lastly in DeFi, we want to highlight that among stablecoins, USDT (Tether) supply has increased by $1.7B since the Tornado Cash ban, while USDC (Circle) has fallen by $2.4B. Circle, the issuer of USDC, blacklisted wallet addresses associated with the crypto-mixing service. Tether did not. Like dYdX, USDC is losing market share because of this move.

  Marketcap 30 Days 365 Days
Kyber Network $0.2B 65.16%  
PancakeSwap $0.54B 3.34% -83.83%
Aave $1.18B -9.57% -79.55%
Uniswap $2.82B -25.12% -80.29%
THORChain $0.56B -27.77% -82.47%
Maker $0.73B -28.14% -79.74%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022.

Exchange Tokens

Centralized exchange tokens continued their pattern of outperforming in weak markets and keeping pace in strong ones, highlighting the enduring appeal of the buy-back and burn tokenomics employed by several including FTX’s FTT token. As if to punctuate our point, someone leaked internal documents to CNBC revealing FTX’s 2021 net income of $388M on revenues of $1.02B, which grew 1,000% in the year. Although the revenue growth is impressive, in absolute terms FTX is still dwarfed by Binance (FY21 revenue: $20B) and Coinbase (FY21 revenue: $7.84B). Still, at least 33% of fees generated on FTX markets are used to buy FTT and then subsequently to burn the token, providing a predictable return to FTT stakers that public equity investors do not enjoy.

  Marketcap 30 Days 365 Days
Celsius Network $0.32B 11.28% -76.76%
Huobi Token $0.72B 6.81% -70.16%
BNB $44.36B -3.26% -43.92%
KuCoin $0.88B -10.07% -36.10%
OKB $0.92B -15.18% -32.03%
Cronos $3.05B -20.73% -25.89%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022.

    Average Daily Transactions 30D Change Change from ATH
Smart Contract Solana 40,703,742 -10.34% -42.66%
Polkadot 6,832,726 -18.96% -98.61%
Binance Smart Chain 3,198,633 -8.76% -78.19%
Ethereum 1,055,175 -19.15% -36.78%
Avalanche 182,820 -8.65% -83.51%
Cardano 58,064 -7.01% -98.88%
DeFi Curve 1,464 20.15% -93.61%
Uniswap 1100 -26.02% -98.24%
Aave 914 -38.68% -93.45%
Compound 465 -34.93% -99.72%
Maker 391 10.31% -94.50%

Bloomberg, Messari, CryptoCompare, MVIS, VanEck research as of 8/31/2022.

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Sources: Bloomberg, Coinshares, JPMorgan, Dove Metrics, Messari, Blockworks Research, TokenTerminal, TheTie, FanMarketCap, DappRadar, protocol websites, SlashData, VanEck research.

Index Definitions

Index returns assume reinvestment of all income and do not reflect any management fees or brokerage expenses associated with fund returns. Returns for actual fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. You cannot invest directly in an index.

MVIS CryptoCompare Smart Contract Leaders Index: designed to track the performance of the largest and most liquid smart contract assets, and is an investable subset of MVIS CryptoCompare Smart Contract Index.

MVIS CryptoCompare Infrastructure Application Leaders Index: Designed to track the performance of the largest and most liquid infrastructure application assets, and is an investable subset of MVIS CryptoCompare Infrastructure Application Index.

MVIS CryptoCompare Decentralized Finance Leaders Index: Designed to track the performance of the largest and most liquid decentralized finance assets, and is an investable subset of MVIS CryptoCompare Decentralized Finance Index.

MVIS CryptoCompare Media & Entertainment Leaders Index: designed to track the performance of the largest and most liquid media & entertainment assets, and is an investable subset of MVIS CryptoCompare Media & Entertainment Index.

The MarketVector™ Centralized Exchanges Index: designed to track the performance of assets classified as 'Centralized Exchanges'.

Nasdaq Composite Index: measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities.

Token Definitions

Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

Ethereum (ETH) is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.

Decred (DCR) is a cryptocurrency that uses two consensus mechanisms, proof-of-work and proof-of-stake. It was created to address the problems some believe are inherent to these consensus algorithms and redirect the centralization cryptocurrency has experienced.

Ergo (ERG) is a programmable blockchain that uses advanced technological features to design decentralized apps (dApps). According to the whitepaper, Ergo's goal is to make financial contracts more efficient, safe, and simple to implement.

Secret (SCRT) is a privacy-oriented blockchain built on Cosmos.

Tornado Cash (TORN) Tornado Cash aims to solve a number of the privacy and anonymity issues in the crypto world, particularly surrounding traceability of transactions.

Cosmos (ATOM) is a cryptocurrency that powers an ecosystem of blockchains designed to scale and interoperate with each other.

EOS (EOS) is an open-source blockchain platform that prioritizes high performance, flexibility, security, and developer experience.

Flow (FLOW) is a fast, decentralized, and developer-friendly blockchain, designed as the foundation for a new generation of games, apps, and the digital assets that power them.

NEAR Protocol (NEAR) is a decentralized development platform that uses a Proof-of-Stake (PoS) consensus mechanism and will eventually feature a sharded architecture to scale transaction throughput.

Uniswap (UNI) is a popular decentralized trading protocol, known for its role in facilitating automated trading of decentralized finance (DeFi) tokens.

Maker (MKR) is the governance token of the MakerDAO and Maker Protocol — respectively a decentralized organization and a software platform, both based on the Ethereum blockchain — that allows users to issue and manage the DAI stablecoin.

Agoric (BLD) is a smart contract platform built on the Cosmos SDK that uses Tendermint Proof-of-Stake (PoS) and a native token to secure the network. The Agoric chain enables developers to create decentralized applications (dApps) using composable JavaScript smart contracts.

Internet Computer (ICP) is the world's first blockchain that runs at web speed and serves content on the web, with unbounded capacity.

Waves (WAVES) is a public blockchain network that enables users to create and access decentralized applications. It features on-chain governance, Formal Verification for smart contracts, and a variation of Proof-of-Stake (PoS) called Leased PoS to ensure network consensus.

Solana (SOL) is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake and proof of history. Its internal cryptocurrency is SOL.

Chiliz (CHZ) is a digital currency for sports and entertainment, powering the world’s first blockchain-based fan engagement & rewards platform

Ronin (RON) Ronin is an Ethereum sidechain built specifically for gaming. Ronin is operated by validators which are appointed by Sky Mavis, the core developers of Axie Infinity.

Gala (GALA) is a play-to-earn game development company building a robust gaming ecosystem that leverages the power of blockchain technology to empower its users.

Basic Attention Token (BAT) is a blockchain-based digital advertising and rewards platform powered by BAT, an ERC-20 token, and Brave, a new internet browser.

Axie Infinity (AXS) is a "play-to-earn" pet training game and virtual world built on the Ethereum blockchain.

Decentraland (MANA) is building a decentralized, blockchain-based virtual world for users to create, experience and monetize content and applications.

The Sandbox (SAND) is a virtual world where players can build, own, and monetize their gaming experiences using non-fungible tokens (NFTs) and $SAND, the platform’s utility token.

Kyber Network (KNC) is an Ethereum based decentralized exchange focused on rapid onchain execution of transactions.

Avalanche (AVAX) is an open-source platform for launching decentralized finance applications and enterprise blockchain deployments in one interoperable, scalable ecosystem.

GMX (GMX) is a decentralized spot- and perpetual-trading crypto exchange which offers low swap fees and zero price impact trades.

dYdX (DYDX) is a decentralized exchange built on the Ethereum network delivering key financial instruments to users such as perpetuals, margin and spot trading, as well as lending and borrowing.

Frax (FRAX) is a fractional-algorithmic stablecoin protocol that uses both collateralization and algorithmic processes to create its decentralized stablecoin, FRAX.

Tether (USDT) is a stablecoin (stable-value cryptocurrency) that mirrors the price of the U.S. dollar, issued by a Hong Kong-based company Tether.

USD Coin (USDC) is a stablecoin that is pegged to the U.S. dollar on a 1:1 basis.

Dai (DAI) is an Ethereum-based stablecoin (stable-price cryptocurrency) whose issuance and development is managed by the Maker Protocol and the MakerDAO decentralized autonomous organization.

PanCake Swap (CAKE) is an automated market maker (AMM) — a decentralized finance (DeFi) application that allows users to exchange tokens, providing liquidity via farming and earning fees in return.

Aave (AAVE) is an open-source and non-custodial protocol to earn interest on deposits and borrow assets with a variable or stable interest rate.

THORchain (RUNE) is an independent blockchain built using the Cosmos SDK that will serve as a cross-chain decentralized exchange (DEX).

FTX Token (FTT) is the native token designed for the cryptocurrency derivatives exchange FTX. It has numerous uses designed to benefit its users and increase network effects around the platform.

Huobi Token (HT) is an ecosystem token launched by Huobi Global, offering benefits such as trading fee and margin discounts and access to certain trading events.

Binance Coin (BNB) is digital asset native to the Binance blockchain and launched by the Binance online exchange.

Kucoin Token (KCS) is a cryptoasset exchange platform aiming to offer low-cost trading for users. Ultimately, the platform plans to transition to a decentralized exchange platform.

OKB (OKB) is the native exchange token of OKEx that provides discounts on trading fees, access to the OK Jumpstart initial exchange offering (IEO) platform, and voting rights for tokens to be listed on the exchange.

Cronos (CRO) is the native cryptocurrency token of Cronos Chain — a decentralized, open-source blockchain developed by the payment, trading and financial services company.

Cardano (ADA) Cardano is an open-source, smart-contract platform that aims to provide multiple features through layered design.

Polkadot (DOT) is a sharded heterogeneous multi-chain architecture which enables external networks as well as customized layer one "parachains" to communicate, creating an interconnected internet of blockchains.

Tron (TRX) is a multi-purpose smart contract platform that enables the creation and deployment of decentralized applications.

Polygon (MATIC) is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. Its core component is Polygon SDK, a modular, flexible framework that supports building multiple types of applications.

Tezos (XTZ) is a decentralized, open-source proof of stake blockchain network that can execute peer-to-peer transactions and serve as a platform for deploying smart contracts.

Elrond (EGLD) is a blockchain protocol that seeks to offer extremely fast transaction speeds by using sharding.

The Graph (GRT) is a protocol for indexing and querying data from blockchains, starting with Ethereum.

Celo (CELO) Celo is a blockchain ecosystem focused on increasing cryptocurrency adoption among smartphone users.

Lido DAO (LDO) is a liquid staking solution for Ethereum and other proof of stake chains. This allows users to stake their tokens without having to lock assets or maintain staking infrastructure.

An investment in the strategy is subject to risks which include, among others, regulatory, general investment and trading, opaque spot market, digital assets, digital asset exchanges, investing through DEXes, stablecoin, OTC transactions, valuation and liquidity, cryptocurrencies lending, digital asset lending and borrowing, DeFi lending of digital assets, digital asset lending programs offered by certain CeFi and DeFi exchanges, rebasing of digital assets, credit, credit market illiquidity, third party wallet providers, loss of private key, volatility and speculative nature of digital assets trading, digital asset network protocols and software, digital asset network malicious actors, forks and airdrops, digital asset miners ceasing operations, cybersecurity, computer malware and viruses, data loss, incorrect transfer of digital assets, initial coin/pre-sale initial coin offering, synthetic investments, options, futures, forwards, lack of blockchain company operating history, blockchain company failure, short selling, leverage, limited diversification, non-U.S. securities, and counterparty risks.

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