Jul 27, 2022

The Klaytn Ecosystem Needs Time (featuring Xangle Analytics)

KP Jang외 1명
Translated by elcreto

The Klaytn Ecosystem Needs Time (featuring Xangle Analytics)

Klaytn 2.0: Signals of Change

On Feb 28, 2022, the Klaytn Foundation unveiled “Klaytn 2.0: The metaverse blockchain for all,” signaling changes. The five key pillars of Klaytn 2.0 are: i) metaverse package, ii) transaction finality and improvements, iii) Ethereum compatibility, iv) decentralizing governance, and v) massive eco fund. In particular, the project pronounced a shift from a governance council to stake-based governance model, allowing for greater contribution to the ecosystem.

클레이튼 2.0, 클레이튼 전망
[Source: Klaytn]

The release of the Feb 2022 light paper, however, does not seem to alleviate the issues surrounding the Klaytn ecosystem. The most glaring issue was prominent P2E and NFT projects’ departure from the ecosystem. Coupled with the drop in the price of KLAY, KLAY holders have increasingly demanded an improvement of the tokenomics design that currently centers on the Governance Council (GC) and foundation.

Pressing Issues

1) Popular Projects Exiting Klaytn

The reality that followed the release of Klaytn 2.0, though, was high-profile project’s departure from Klaytn: One of South Korea’s best known P2E projects Wemade announced the launch of its own mainnet, and leading NFT projects MetaKongz and Syltare migrated from Klaytn to Ethereum, switching their mainnet. The exit has since resulted in a persistent year-to-date decline in daily trades and trading volume of Klaytn NFTs on OpenSea.

  • As of Jun 2022, the trades and trading volume of Klaytn NFTs are down 68% and 74% from their peak in Feb 2022.
  • The number of daily average transactions on Klaytn is approximately 1,700 as of Jun 2022, less than 2% of the 94,000 daily average transactions on OpenSea for the same period. (4.5% as of Feb 2022)
  • Coupled with the doldrums in the NFT market, KLAY’s daily average trading volume has contracted from one month to another, coming in at 38% in Mar, 28% in Apr, 30% in May, 24% in Jun, and 15% in Jul, compared to the daily average in Feb 2022.

According to the on-chain data as of Jun 2022, the trading volumes of Meta Toy DragonZ, G.rilla, and Sunmiya Club, which used to be the key drivers of Klaytn’s NFT ecosystem at the beginning of the year, plunged 97%, 95%, and 89% from Feb 2022. An average of more than 79% decline in the trading volume in the month that followed the minting of the tokens does have implications as such a radical decline in not just MetaKongz and Syltare, but other well-known projects suggests a decline across the ecosystem. 

Worse, the migration of MetaKongz and Syltare, which used to represent 26% and 7% of all the Klaytn transactions from Feb to Jun 2022, further accelerated the downtrend of Klaytn’s NFT ecosystem.

  • Upon the launch of SNKRZ on Jun 13, 2022, KLAY’s trading volume hit 6M.
  • As the NFT market continued to wobble, the June trading volume plunged to 52% of the February trading volume.
  • The departure of high-profile projects ended up casting a chill on investor sentiment.
  • Promising, though, is the meteoric rise of Puuvilla Society and SNKRZ, each of which represents 28% and 39% of the entire trading volume of major projects from Jun to Jul, suggesting that the investor sentiment is holding up.

While the market-wide slump triggered a fall in the price of KLAY, which used to be the key currency for trading NFTs, the loss gaped wider with its KRW-denominated value. KLAY holders were disgruntled because the drop was more severe compared to the tokens of rival NFT blockchains like ETH and SOL.

  • As of Jun 2022, the prices of KLAY, ETH, and SOL are down 81%, 62%, and 79%, respectively, from Jan.
  • Compared to other layer 1 chains, the magnitude of decline was greater with KLAY.

The primary challenges in Klaytn’s quest to go global were the user base limited to domestic users, governance processes mostly led by domestic companies, and issues surrounding network stability, all of which made it difficult for the dapps and NFT projects to build an overseas user base. For this very reason, MetaKongz and Syltare, the widely successful NFT projects on the Klaytn network that topped the trading volume with a large domestic user base, performed a migration in search of global presence. Klaytn, in this sense, was a stepping stone for the growth of those projects in the initial stage.

2) The Task: Tokenomics Improvement

The area that stirred much criticism from the holders as well as significant commitment to improvement from Krust is the tokenomics. Back in the days when Ground X served as the engine behind the project, Klaytn announced its tokenomics that specified: i) an annual inflation of 3%, ii) the inflation and fee governance council (GC) and KGF dividend payout, iii) the distribution at genesis with 53% for the reserve and 16% for the business development (BD). (Please see below for reference).

The problems were i) excessive reserve and BD volumes, ii) opaque KLAY investment processes, iii) a tokenomics more favorable for the GC than the token holders. Krust, which has been leading the Klaytn project since the latter half of last year, laid out a blueprint for the holders that seeks to: i) burn 5B tokens in the reserve, ii) transparently disclose KGF investment details, and iii) introduce a token burn mechanism.


A Turnaround Takes Time

1) Betting on Metaverse and P2E

Despite a series of DeFi service liquidations and project departures, Klaytn is still the undisputed no.1 layer 1 blockchain in South Korea. Klaytn is currently sowing seeds in metaverse and P2E, steadily making investments in hopes of the “Next Summer.”

On Jul 21, 2022, Ground X formed NFT alliance “GRID,” in which not only the existing large enterprises but dapps in various areas have joined. GRID marks the laying of the foundation for a company with content and IPs to identify and explore collaboration opportunities with its counterparties, translating the content and IPs into revenue streams in the crypto scenes. Although the alliance is only in its infancy as yet, once it demonstrates how dapps and companies leverage each other for better outcomes, GRID will become a pivot as well as a firm footing for synergy.

2) The Ongoing Tokenomics Improvement

As discussed, Krust proposed: i) burning of 5B tokens in the reserve, ii) transparent disclosure of KGF investment details, and iii) introduction of a token burn mechanism. Here, using Xangle Analytics’ on-chain data, we would attempt to discuss what the changes are and whether the proposals can actually make valid changes in the tokenomics.

a. Burning 5B Tokens in the Reserve

According to Xangle Analytics, the analysis of Klaytn’s on-chain data shows that 7.8B tokens, representing 85%, out of 9.2B tokens in circulation are effectively held by the foundation, KGF, and KIR combined. The percentage is significantly higher than that of other layer 1 projects launched earlier or around the same time, provoking criticism about high token holding concentration and concerns about the risk of supply overhang. (Please see below for reference).

As such, Krust submitted a proposal to the community, seeking to burn the non-circulating supply of 5B tokens in the reserve (Please see Xangle Disclosure for more details). Once this proposal is put in place, more than 50% of the entire supply is burned, slashing the FDV (Fully Diluted Valuation)—the total market cap under assumption of the entire supply going into circulation— from $2.7B to $1.47B. If the tokens are burned similarly to the way a company’s treasury stock is bought back in the stock market, it will likely help shore up the price of the tokens that remain unburned.

b. Transparent Disclosure of KGF and Other Investment Details

Much like many other layer 1 projects, Klaytn has strived to boost its ecosystem using its own eco fund Klaytn Growth Fund (KGF). During the time when the project was led by Ground X prior to Krust, Klaytn invested in the ecosystem and Web 3.0, using its reserve (Business Development, Tech, and R&D) rather than in the form of a fund. The problem lies with the fact that most of the investment was done with KLAY tokens: the companies that received KLAY as investment cashed in the tokens, which is believed to have increased the burden of supply overhang. The burden was particularly significant with the recent slump in the market, given the weaker demand for the tokens.

During an AMA session, Krust promised to improve the process, making investment and grant details available to KLAY holders. On Jul 20, the project released an announcement that describes the status and direction of the investment of Krust and the Klaytn Foundation. One thing that stands out is the Alphanonce Klaytn Fund, which is the first fund created in the form of a collaboration between KGF ecosystem fund and the VC. This is considered an attempt to add investment expertise and diversify the responsibility of investment that has been laid on the Klaytn Foundation and Krust. In addition, the disclosure of investment details is expected to bring more prudence to investment decisions. 

As for the infrastructure and killer content, the Klaytn ecosystem has yet to catch up with global layer 1 projects. Projects highly anticipated to become the backbone, such as WeMix and MetaKongz, either left Klaytn or built its own mainnet. As such, surviving the intensifying layer 1 competition requires user-friendly infrastructure and onboarding of projects with originality. And on their way, transparent management of the KGF will be instrumental.

c. Introducing Tokenomics for Holders, Including Token Burn Mechanism

Klaytn’s tokenomics has not been free from the criticism that the structure is only focused on the interest of the Foundation and GC, leaving holders’ interest unattended. The structure of tokenomics was designed to distribute KLAY tokens newly minted at the rate of 3% every year and 66% and 34%, respectively, of the KLAY tokens paid as transaction fees to the Klaytn Foundation and GC. (Please see the Klaytn Docs below).

To address this issue, Krust has introduced a token burn mechanism into Klaytn just like EIP-1559, which introduced a burn mechanism into Ethereum. It illustrates the project’s endeavor to keep up with the trend where layer 1 projects increasingly carry out transition to PoS and introduce holder-centric tokenomics. According to Xangle Analytics, the number of KLAY burned between Apr 4, when the token burn came into effect, and Jul 25 is 2.77M in total, worth $680,000. The amount burned has not had much of an impact on the inflation as yet, as it represents a mere 0.7% of the amount of tokens newly minted during the same period. Still, burning of a sizable amount of KLAY tokens may later be possible once the ecosystem and number of transactions grow.  

The Klaytn Ecosystem Needs Time

There have been several issues facing Klaytn, including GC-centered tokenomics, projects’ departure that rocked the foundation of the mainnet ecosystem, and management of the ecosystem fund that lacked transparency. The project is taking a phased approach to tackle such issues starting with Klaytn 2.0, including tokenomics improvement, support for attracting overseas users and investment in NFT and metaverse, and disclosure of investment and grant details.

Klaytn has switched as well as upgraded its chain into a metaverse chain in an effort to sow seeds in the promising areas as it sees the “Next Summer” in the metaverse, P2E, and NFT. Aiming to turn the blueprint into a reality, Ground X is leading the initiative of NFT ecosystem buildup, and Krust is working on tokenomics improvement, taking a step-by-step approach to decentralization. At the moment, “time” surely seems to be what Klaytn needs most.

<Follow this link to see Xangle Analytics - Klaytn>


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