Polkadot: The Web of Expectations

Published in
23 min readFeb 25, 2020


By Sandro Gorduladze, Head of Research (s.gorduladze@hashcib.com), Rustam Botashev, CFA, Lead Analyst (r.botashev@hashcib.com), and Peter Kalambet, CTO (kalambet@hashcib.com), at HASH CIB

We’ve recently published a report on Polkadot and its native DOT tokens . Unfortunately, it is unavailable to general public. If you are a financial/digital asset markets professional, fill out the form on our website with actual (and verifiable) information to request free-of-charge access. Below we present some of its findings. Any substantiated critique or commentary is welcomed. Thank you.

The following article is not a financial advice, and should be read for information purpose only. Please read the legal disclaimer at the bottom of the page.

The project of the year — Polkadot — is to launch its beta version shortly

  • Polkadot aims to become the backbone of “decentralized internet”, the so-called Web 3.0;
  • The project tackles both scalability and interoperability. Given little technology development in the recent years on those fronts, its one of the most important post-Ethereum launches;
  • The full-scale mainnet goes live between end-June and end-September, approximately;
  • DOTs will be transferrable end-May the earliest;
  • Token prices of all leading projects listed in 2019 crashed. Given the current market attitude, had DOTs been listed, we would’ve expected a similar trading pattern.
Source: HASH CIB

Leading infrastructure project

Polkadot is one of the most important public blockchains to launch post-Ethereum. It is the next-generation blockchain platform, which aims at becoming the backbone of “decentralized internet”, the so-called Web 3.0. Its creators envision a world with multiple public and private/consortium blockchains for many industries, which would need to transact between each other, thus facilitating new socio-economic interactions in finance, gaming, IoT, gaming, energy, supply chain and many other sectors we are unable to imagine yet. This aim is massive, yet distant from reality at this point. However, investors, with strong conviction over applicability of blockchain technology to sectors beyond just finance and risk appetite to bet on it, are fairly excited about the project. Still, they remain a minority, even among bitcoin/crypto investors.

Unlike most other projects, Polkadot’s team is meticulously open about each step of development and testing process, answering all of the community’s questions and explaining the project. They did a great job preparing Polkadot wiki and Web3 Foundation Research Portal, which not only describe the network in detail but also provide comparisons to other infrastructure blockchain projects. In this post, rather, we prefer not to repeat those comprehensive sources and present just the high-level project description and some details gathered from our conversations with Parity Technologies, the project’s main software developer, and the Web3 Foundation(W3F) that manages its ecosystem development. We hope to present this information with no significant omissions or subjective interpretation.

Polkadot is a heterogeneous multi-chain platform, which allows independent blockchains to connect and interact under one network. It is a sharded environment, common primarily in the context of shared security between a collective of blockchains, otherwise distinct in other aspects. The main functionality of Polkadot is the arbitrary inter-blockchain message passing via the Cross-Chain Messaging Protocol (XCMP). It allows exchanging any types of transactions between stand-alone blockchains, from value transfers to complex smart contract calls. To enable it, the developers of Polkadot had to create a new infrastructure protocol layer underneath this chain. This protocol of the same name hosts the network, providing the common environment referred to earlier — as otherwise it would have been impossible to connect the already existent blockchains for such arbitrary interoperability.

The key component of this infrastructure is the shared security across all connected chains. This means they share the same validator pool that produces a common ledger of states and state transitions (transactions) of all of these blockchains. Since its a PoS system dependent on parties staking their capital to ensure its security, this approach allows concentrating entire validator capital on a single security layer for the benefit of all connected chains, rather than having it dispersed unevenly across different chains on the network. The assumption here is that capital concentration follows power law distribution.

Polkadot consists of the main Relay Chain, whose functionality is limited to providing shared security and network governance, Parachains (short for parallelized chains, i.e. stand-alone blockchains on Polkadot), and Bridges to other, external networks. Additionally, there will be Parathreads — which are, effectively, pay-as-you-go parachains, ocassionally posting blocks on the relay chain exactly as parachains do.

* Cryptographically verifiable “summaries” of messages. The actual cross-blockchain message exchange should happen directly between the parachains. Relay chain validators can also act as “mailmen” for parachains as a fallback option. Source: HASH CIB

Parachains are independent blockchains with their own state transition functions which collect and process their own transactions (they have network nodes specially designated for it — collators), while using the relay chain and its global validator set for security. So, a parachain’s transactions are put together into a block (with cryptographic proofs of their validity) and proposed by that parachain’s collators to a subset of the global validator set (designated to each parachain on a rotating basis) and included into the relay chain. Parachains need to bond Polkadot’s native DOT tokens in order to lease slots on the relay-chain. Slots are limited in number and distributed via auctions.

External chains with their own security and other set of parameters can also be connected to Polkadot via bridges. Bridges are effectively parachains, whose functionality is in passing messages (transactions, smart contract calls and events) from “outside” blockchains to the ones on the network and back. Bridges are inherently slower than native Polkadot chains since they are dependent on an economic finality mechanism of the network they connect to (using “checkpoints” — e.g. a 6-block depth in Bitcoin), instead of forwarding their latest transactions right away. The bridges can potentially evolve over time into something more robust to connect Polkadot to external blockchains. Additionally, there are implementations in the works by Parity and third-party developers to be able to deploy bridge functionality to a Polkadot parachain as a smart contract instead of its own blockchain.

Parachains and bridges securing their states on the relay chain, source: HASH CIB

Most of Polkadot’s or any of its chains’ parameters could be easily upgraded — a feat impossible without the forks on Ethereum or Bitcoin. The upgrades could be implemented through the on-chain governance system, expected to be fully inclusive and transparent for the Polkadot community. It is definitely one of the most important innovations of Polkadot, but also very much an experiment, much more so than other core components discussed here. While the tech would prove itself (or not) in the upcoming months (and then gradually upgraded), the effectiveness of the governance mechanisms would need to be tested over a few years to be truly found useful. Good thing about it — governance is also upgradable.

To easier understand the whole concept, compare Polkadot to a state-of-the-art worldwide hub airport. Following this imagery, the parachains are different airlines, the parachain slots are the gates and the bridges are shuttles to other airports. Polkadot will lease its parachain slots to blockchain projects (as the airport leases its gates to airlines) and establish bridges with other blockchains (launching shuttles to other airports). Polkadot’s relay chain (the airport) connects its participants and allows them to seamlessly send cross-chain messages within the ecosystem (transfer passengers between airlines for connected flights), thus allowing them to interoperate. Moreover, the relay provides validating services to its partners ensuring shared security (an airport providing air navigation services to ensure safe landings and take offs). The more blockchains join the ecosystem, the higher its security and the value become — the bigger the airport, the more important it becomes as a global hub for air traffic.

Launching soon

We expect a beta version launch in beg-March and the full mainnet launch no earlier than end-June 2020. In the making since the publishing of November 2016 White Paper, the blockchain is currently in its final testnet phase, awaiting beta release in the matter of days. In addition to a testnet, Polkadot also has a more experimental twin network — the “canary-in-the-coal-mine” Kusama. Kusama is basically the same thing, with minor differences, already in operational mode. Kusama is a good indicator of where Polkadot is at in terms of readiness.

Having missed no deadlines previously, Polkadot has already had a few noncritical delays. Initially expected in 3Q19, the genesis block event was later postponed to end-2019. Then Polkadot moved the deadline to mid-January 2020 aiming to launch before Chinese New Year (January 25), as we’ve been told by W3F. However, the recent Kusama chaos, which led to it fully stalling, delayed the Polkadot genesis event once again, now approximately to end-February/early March. With the issue resolved and Kusama working stably, we are now confident in our expectations. Another reason for the delay is undergoing security audits, according to Parity. There were two audits in 2019 and five more are expected to be complete before the launch : two already complete, one 50% done and one more under way, accompanied by a red team testing currently in progress.

Polkadot will start as a Proof-of-Authority blockchain with Web3 Foundation being the initial validator. Then, it will gradually transition to a Proof-of-Stake network with parachains enabled. PoS will launch with 100 validators, steadily expanding the set limit to 1,000 validators during the first year after launch. Below we outline the steps from beta to fully functional network, as provided by Parity, and our estimations of the time needed to complete each step:

1. Network starts with about 6 to 10 Web3 Foundation-run validators (PoA consensus) in the beta phase. During that period, you can claim your DOTs, and execute basic validator setup commands, stake your DOTs to become a validator or nominate third-party validators (lend them your stake for pro-rata share of their returns). We estimate this phase to take from one to one and a half months.

2. As soon as more than 100 validators have indicated their readiness, an upgrade will be initiated to switch from PoA to PoS consensus. At that stage only ‘staking’, ‘claims’ and ‘sessions’ modules for validators and nominators will be enabled. This stage is required to test whether PoS consensus works as expected: finality on transactions is reached and no bugs pop up during the network’s normal operations. This step will take from two weeks to a month, according to our estimation.

3. After it is established that consensus works fine, the remaining Polkadot (relay chain) modules will be turned on, except for value transfers and parachain operations. During this stage the on-chain governance is enabled and proposals for further upgrades could be submitted and voted on by network participants.

4. The next step will be getting rid of the sudo module through a governance proposal. Sudo gives network developers the overruling superpower to issue arbitrary network upgrades in case anything goes wrong. It is present from the start as a safety measure to avoid issues from significant technology bugs and should be retired as soon as the network is found stable. Periods 3 and 4 combined will take one — one and a half months, we believe.

5. After a governance proposal to remove the sudo module goes through, the next proposal should enable balance transfers between DOT holders. This step requires from one to three weeks, we think.

6. Finally, the parachins will be enabled and first slot auctions for parachains will take place, but only after steps 1 to 5 are successfully executed. The Cross-Chain Messaging Protocol is also enabled at this stage. We estimate the time needed to complete this step to take one to two months.

Therefore, we estimate that the full Polkadot blockchain launch (with parachains enabled) might happen in 3 ¾ months after the genesis block event, at the earliest. The latest date for the launch should be in 6 ¾ months after the genesis. If the mainchain PoA version starts at beg-March, as we expect, the full launch should take place between the last week of June and the last week of September.

Source: HASH CIB

Value transfers will not be available until end-May 2020. Basically, the network will launch with initial investors’ balances reflected on their accounts, but that is it. In other words, trading DOTs will be impossible before May 2020 (approximately) as they will not be transferable between different accounts, according to Parity. However, this is unlikely to stop trading of DOT derivatives like IOUs on the OTC market. The Web3 Foundation does not welcome the gray market and is talking to reputable crypto exchanges to hold off their DOT listings until value transfers are enabled. It is also hoping to discourage smaller and more opportunistic exchanges from listing DOTs via official communications. Other transactions on the network involving DOTs — staking, nominating, bonding DOTs for casting votes, etc. — will be gradually enabled after the beta launch as discussed above.


DOTs serve three distinctive functions: governance of the network, staking to participate in network validation, and bonding to lease parachain slots. Entitled to block rewards and transaction fees, as nominators behind network’s validators, DOT holders can both avoid dilution from new issuance and make profit. All DOT holders can participate in the network’s governance which includes determining the fees, the addition or removal of parachains, exceptional events such as upgrades and fixes to the platform, etc. By extending a timespan of their bond when casting votes, network participants can increase their voting power.

DOT total supply will be uncapped, with the first-year issuance of 10%. The governance is to decide the future rate. DOTs will be generated according to the formula, so that the issuance to both validators and the Treasury combined always results in the targeted inflation — 10% in the first year. Depending on the staking participation, block rewards that go to validators versus to the Treasury will change dynamically to incentivize/disincentivize token holders to participate in staking. When the value at stake is below 50% of the total supply, the issuance to validators grows linearly with the rate while the issuance to the Treasury declines linearly until staking takes up 50% of supply. At 50% of supply staked all the inflation goes to validators. When the rate of validator participation goes above 50%, the issuance to validators declines inversely with the rate. Other newly issued DOTs go to the Treasury. Theoretically, validators can have an infinite return on their stake if the staking rate approaches zero. At equilibrium, validators’ return is 20% p.a. in DOTs.

Issuance and validator returns as a function of % of DOTs staked, source: Web3 Foundation

Parachains are the key to success

To join Polkadot, a blockchain project has to rent a parachain slot by bonding DOTs. Upon completion of the lease term, DOTs are unlocked and returned to the owner. As such, the cost to lease a parachain is made up of both the cost of capital frozen in the locked-up DOTs and opportunity cost for not participating in the validation process, i.e. dilution.

As a lessee, the parachain will have its state secured without additional DOT expenditures — getting consensus-as-a-service in return for bonding DOTs, but will pay additional fees to validators for the transactions that go cross-chain. Polkadot targets to have roughly ten validators per parachain. Given a thousand expected validators limit, there will be around a hundred slots available — to be reached gradually. Some slots will be reserved for the parathreads and some for bridges.

Parachain slots will be sold through permissionless candle auctions. A slot’s lease term is limited by two years and divided by four six-month periods: 1–4. A parachain may lease a slot for any consecutive range of these six-month periods within the 2-year limit. For example, a parachain may bid for periods 1–2–3, 2–3, or 2–3–4. Auction participants submit a configuration of bids specifying the number of DOTs they are ready to lock up and the intended timeframe. The auction algorithm chooses the combination of bids which allows for the maximum number of DOTs to be bonded. For instance, a bidder A offers 50 DOTs for the period 1, a bidder B offers 300 DOTs for the periods 2–3–4 (100 DOTs per period), and a bidder C offers 360 DOTs for the periods 1–2–3–4 (80 DOTs per period). In this case, the bidder C will win since she offered 360 DOTs for a slot, while bidders A and B offered 350 DOTs combined for the same slot, even though the bidder B offered more DOTs per a single period than the bidder C did (100 vs. 80).

Parachain slot take-up in a hypothetical multiple slot auction, source: HASH CIB

Parachains may effectively lease slots indefinitely by extending their lease past the 2 year slot duration simply by leasing a contiguous slot. To do so, a parachain has to win the auction for slots with term starting at or before the term of the slot currently taken by the parachain is up. For a continuous lease, the parachanin has to repeat this exercise every two years unless the network’s governance changes the auction rules.

There has been a two-way movement to and from Polkadot in the past several months. Polymath migrates to Polkadot from Ethereum seeking finality provided by its PoS. PoW only offers a statistical guarantee of transaction finality while for businesses working with regulated assets and security tokens, even strong statistical guarantees aren’t enough, according to the firm’s head of blockchain, Adam Dossa. On the other hand, Aragon, which is a relatively hyped on-chain governance-related app platform, has scrapped its initial plan to build on Polkadot and has since moved to building on Cosmos since Ethereum compatibility was already available on Cosmos when that decision was mаde, while the EVM module was only added recently to the Polkadot blockchain developer kit (made up of Substrate and Cumulus).

Non-exhaustive list of promising projects building on Polkadot, source: HASH CIB

The main reason for projects to join Polkadot is its expected interoperability. A promised high throughput through parallelisation is less of an attraction, according to Web3 Foundation, based on their communications with startups (relay-chain blocks take about 6 seconds on the testnet — just a 2–3 times improvement over current Ethereum speed). This surprising fact may come from the current belief that different Rollup technology implementations provide for long-awaited scalability solution on Ethereum and Ethereum-like general computation chains. Yet Polkadot’s interoperability feature is likely to interest Ethereum dApps seeking to expand their potential user base to other networks. Since blockchain builder framework for Polkadot, called Substrate, already has an EVM module, and Polkadot developers also intend to create tooling to allow Ethereum smart contracts to be compiled to Substrate-native WASM (Web Assembly-based) execution environment, there should be more ways for Ethereum dApp developers to expand to Polkadot.

Ethereum has the largest ecosystem among all blockchains supporting smart contracts. It has around 300,000 daily active accounts and constantly growing number of unique addresses which has recently exceeded 90mn. Getting even a fraction of Ethereum users to crossover to any Polkadot application-chain, with the help of a bridge, can supply Polkadot with the critical mass to drive initial adoption. In other words, timely building of a bridge to Ethereum and some additional work on Ethereum compatibility may be as important as launching the mainnet and conducting parachain slots auctions, in our view.

Unique addresses on Ethereum are approaching one hundred million, source: HASH CIB, Etherscan, BitInfoCharts

Yet, nobody is building an Ethereum bridge at the moment. There were a couple volunteer teams, however they discontinued their efforts (most notably the Dotetherum project) as it is a costly job, since whoever creates the bridge will need to support it going forward. The Web3 Foundation has just released new batch of grants. Parity team is the “usual suspect” for the assignment, in our view — as they are responsible for maintaining the second most popular Ethereum client for many years and are very familiar with everything Ethereum-related. However, they are laser-focused on developing Polkadot, specifically delivering the mainnet launch, and currently don’t have resources to develop the bridge. As such, the Ethereum bridge is likely to appear only after Polkadot goes fully live. Its development is not difficult yet time-consuming, according to Parity, which expects the bridge to definitely be ready within 2020.

On the other hand, there are projects like Edgeware, which plans to launch a parachain as soon as possible, having gotten some Ethereum community members’ attention last year. It conducted its unconventional “lock-drop” offering in 2019 — effectively promising ETH holders who would “lock” their crypto with a special smart-contract on Ethereum, a stake in their native EDG tokens on the future chain, proportional to the amount and duration of such locking. Edgeware “attracted” $220mn worth of ETH in less than two months. The project’s developers are building a bridge to Ethereum in the form of a smart contract deployed on Edgeware’s parachain (rather than depending on others’ bridge efforts). We would expect some traction there early with the Ethereum community members — specifically developers looking to explore capabilities of this new general smart-contract blockchain. Another project aiming to build an Ethereum bridge smart contract on their parachain is Centrifuge.

Parathreads should boost Polkadot usage

Parathreads are very similar to parachains from a development perspective. The difference is economic. A relatively new invention, Parathreads did not exist in the original White Paper. The project lead, Gavin Wood introduced the concept in July last year. The idea was to allow networks to take part in shared security on a block-by-block basis — i.e. get their transactions included into relay chain blocks, without leasing a dedicated parachain slot, although with an associated fee per block, paid in DOTs. This should increase the number of network participants as it effectively lowers the barriers to entry and allows projects to test and experiment with Polkadot, without investing too much resources in order to connect to the ecosystem.

Instead of leasing parachain slots, parathreads need only to register on Polkadot by bonding a fixed number of DOTs. The amount is expected to be much lower than the auction-set price of parachain slot leases. The locked DOTs will be returned to a parathread upon the conclusion of its term — similarly to how bonded DOTs are returned to parachains. Parathreads and parachains get the exact same benefits connecting to Polkadot: cross-chain messages and the full economic security of the network. However, while parachains’ blocks are guaranteed to be validated and included into the relay chain for free, paratheads will have to pay a fee (and potentially compete in the future) for inclusion of their blocks.

Competition not so stiff

Cosmos is the only live competitor to Polkadot. While from a high level architecture Cosmos’ Hubs and Zones may seem like Polkadot’s Relay Chain and Parachains, they are fundamentally different from the security perspective. Parachains share state and validation logic (i.e. their security) with the Relay Chain, which gives them a common execution environment. Zones, on the other hand, do not share security with Hubs. A receiving Zone, getting a message via a Hub, expects the sending Zone’s chain to remain immutable in the future (trust it in a way, as it cannot procure it). Zones on Cosmos are independent blockchains with in-house validators responsible for securing their states. To be as secure as any parachain, a zone has to incentivise and bootstrap a similar to Polkadot’s number of validators (1,000) and also make sure their stakes are sufficient enough to prevent malicious behaviour. The chains in the network would need to rely on each other for inter-blockchain operations and it’s realistic to assume that one zone’s weak security (if broken) could affect the security of the whole system. Thus, the security assumptions around each protocol’s functionality are different, favoring Polkadot’s approach.

Both projects aim to allow participating chains to intercommunicate using their in-house messaging protocols: Cross-Chain Messaging (XCMP) for Polkadot and Inter-Blockchain Communication (IBC) for Cosmos. It may seem that Polkadot is behind Cosmos, which was launched in March last year. But not so much, in our view. IBC was initially intended for cross-chain value transfers only, with broader inter-chain messaging support added to its developers end goals not so long ago, while XCMP from the start is aimed at allowing arbitrary message passing, which is more complex. This creates a gap between the projects in terms of functionality, as arbitrary cross-chain messaging opens an infinite number of possibilities way beyond decentralized value exchange. And Cosmos still awaits enabling only value transfer cross-chain communication. With the recent feud between the project’s key leaders that affects the speed of IBC development, we only see the gap between the projects widen with each day IBC is being delayed and XCMP comes closer to production.

Cosmos’ bridge-hub architecture, source: Cosmos Network

Membership in Cosmos is free and permissionless. Any blockchain can build a zone or a hub on the Cosmos network. There are two hubs at the moment: the Cosmos Hub and the Iris Hub. The latter intends to connect blockchains primarily operating in China and other Asian countries. There are less incentives for investors to hold the network’s native ATOM tokens since, unlike DOTs, they are not eligible for profit sharing with validators (nomination). The only hope investors would have here is that token’s value will appreciate along with the Cosmos Hub’s usage. Also due to security requirements highlighted earlier bootstrapping a Zone on Cosmos could turn out more costly than launching a parachain, given the network participants each aim to achieve sufficient security.

Ethereum 2.0 is likely to be a strong competitor although Polkadot claims that both blockchains are rather complementary. Ethereum 2.0’s envisioned beacon chain and its shard chains seem very comparable to the Polkadot’s relay chain and parachains. The distinction comes from Ethereum shards being part of the same blockchain (from the state transition and block validity standpoint) and therefore, have strictly the same logic, i.e. they are homogeneous. Parachains are independent chains and as such are much more flexible in their logic (state transition and what counts, according to the protocol’s logic, as its validity) — i.e. they are heterogeneous. With a bridge to Polkadot, Ethereum dApps could become connected to other platforms without losing their original users and having to migrate the smart contracts — that is why the two projects are also viewed as theoretically complimentary.

Telegram Open Network’s approach is unique but to a large extent based on Polkadot’s proposed architecture. TON somewhat combines the properties of both Polkadot and Eth 2.0 in that it intends to be a heterogeneous system, while its main “relay” chain (called masterchain) and the first “para” chain (called workchain0) were originally built by the Telegram developers to become Telegram Messenger-compatible (a plan recently abandoned amidst the ongoing litigation with the US Securities and Exchange Commission). But also each workchain on Telegram Open Network could become a sharded homogenous system itself, so each of its workchains could potentially resemble Ethereum’s beacon chain in relation to their shards. TON uses the same names for its blockchain keepers as Polkadot and calls them validators, nominators, and collators. TON targets 2^32 workchains while Polkadot speaks of only a hundred parachains for its 1.0 version. Telegram goes further intending to have 2^60 shardchains of its workchains. Polkadot doesn’t dare going that far, only expecting that some of its parachains will become para-relay chains in the second version.

Neither Ethereum 2.0 nor TON seem to be ready to launch in the near future.Telegram is struggling with the SEC in a high-profile litigation, which could potentially take months to resolve, also risking losing partial or full support of its investors after April 30, 2020 (the deadline date to launch the network, as per their SAFT agreements), if investors decide to pull their money out of the project. Ethereum, on the other hand, is engaged in a very extended research and development process that requires months and even years to launch its envisioned PoS sharded system. So we wouldn’t expect it to come earlier than end-2021 and even further beyond.

Where is the opportunity

Token prices of all large projects listed in 2019 crashed. Those with high private round valuations tanked the most suggesting that the early buyers didn’t believe in the prices they had paid and rushed to take off. Receiving little buying support from the new investors, the prices entered downturn spirals.

Major 2019 listings’ performances, Source: CoinMarketCap, Telegram OTC Groups, HASH CIB

Cosmos is the only positive example among these new, next-generation projects. In 2017 it sold 73,3% of its native ATOM tokens at $0.1 per token for $17.3mn, implying a mere $23.6mn valuation. Given ATOM’s current price of around $4.19, the return is 41.9x. The reason is a very reasonable private round valuation compared to the ones of other major projects, including Polkadot. The early backers are its only lucky investors though. Since being listed in March 2019 with an average first day price of $6.44, ATOM lost around 35% of its value.

In a highly anticipated 2019 debut, Algorand’s ALGO price dropped 87% in eight months after the placement. The project held a public Dutch auction in June 2019 and attracted $60mn by selling native tokens at $2.4 per ALGO. Provided that the Algorand Foundation plans to auction off 600mn ALGOs annually, consistent selling pressure is inevitable. Not surprisingly, its current market price is $0.32–7.5x down since listing.

Hedera Hashgraph sets another scary example to the yet-to-launch mega blockchain projects. It was valued $6bn in August 2018 when the project attracted $120mn by selling native tokens at $0.12/HBAR. Having started trading on September 17 at $0.36 HABRs dropped to $0.1 within 24 hours. Since then the token has tanked even further and currently trades at $0.05 — a 60% plunge from the private round level.

Latest investors in another ambitious project Blockstack, which is the first ever public crypto issuer to conduct a fully compliant token offering, have lost more than half of their stakes. The project received $23mn in September 2019 through a public sale under the Reg A legal framework and through a private sale to non-US accredited investors (the Reg S offering). Reg S tokens were sold at $0.25 and Reg A tokens to buyers without a voucher (that were given out for free to those signing up in November 2017) were sold at $0.3, while Reg A buyers with vouchers were getting them at $0.12 per STX. Started trading on October 29, 2019, STX has since lost almost a half of its ICO value and is now priced at $0.16.

The most recent listing of another VC-favoured project, the decentralized VPN platform, Orchid, didn’t avoid the trend.The project sold around 163mn tokens, OXT, for $4.9mn in 2017, 72mn — for $36.1mn and 10mn — for $7mn in 2018. All of those were private, accredited investor-only rounds. The last two rounds were at $0.5 per OXT (18-month lock-up) and at $0.7 (a year lock-up) correspondingly, implying a $700mn valuation for the latter round. The tokens plunged 62% within the first 24 hours of trading. Although they bounced back in the next two days, OXT didn’t manage to retain the success and now are trading at $0.28, which is 60% below the last private round.

Given the current market attitude, had Polkadot launched its mainnet and its coins been listed today, we would’ve expected a sour trading pattern as well. The project attracted $144mn back in October 2017 by selling 5mn DOTs (50% of total supply) at $28.8 per token. During the latest fundraising campaign in 1H19, the project allegedly raised another $60m by distributing 0.5mn DOTs at $120 per coin suggesting a $1.2bn market cap. Now the DOTs can be found on the OTC market at $80, which is about 33% price decline, giving a $800mn market cap.

Current market caps, $mn (logarithmic scale), source: CoinMarketCap, Telegram OTC Groups, HASH CIB

However, such ugly performances don’t invalidate the above-mentioned projects, most of which are very prominent industry leaders. The main problem is the market sentiment which turned from blind optimism to irrational denial. We consider this a very attractive opportunity for profound investors to cherry-pick future industry winners, best positioned to outperform the market. The task is easier now since developing valuation frameworks allows us to reasonably value crypto assets and make more educated decisions.

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