Messari Summary Report On Covalent’s Growth In Market Cap, Staking And Token Buyback In Q1 2024

Key Insights

• The percentage of staked CQT grew from 22% in Q1 2023 to 29% in Q1 2024, despite a 20% increase (an additional 104 million CQT) in the circulating supply.

• The CQT market cap rose 28% QoQ, reaching $275 million multiple times before ending Q1 at $199 million.

• Covalent announced plans to introduce a revenue-sharing model in the future, implementing a buyback program at the end of January that repurchased 219,000 CQT by the end of Q1.

• In Q4, Covalent introduced the Ethereum Wayback Machine (EWM), a long-term data availability solution for historical data on Ethereum.

• Covalent increased its network operator set by decentralizing another network operator role called the Block Results Producer (BRP) and adding more validators to an already decentralized set of operators called the Block Specimen Producer (BSP) in Q3 2023.

Key Metrics

Performance Analysis

Network

Covalent has hundreds of enterprise as well as thousands of broader crypto industry API customers using its robust infrastructure to access structured data. These data consumers range from traditional finance and consulting companies to AI, DeFi applications and investment tools. A few notable users include Fidelity, EY, Consensys, Matcha, Rainbow Wallet, and CoinLedger. To arrive at the data these entities consume, the protocol must extract, transform, and enrich the raw blockchain data to make it accessible.

Staked CQT

Covalent uses a Stake-for-Access model where network operators (BSPs and BRPs) stake CQT to perform work on the network. Covalent employs staking parameters, such as max/min values and a delegation ratio to ensure staked CQT remains distributed among the operator sets. BSPs must stake a minimum of 175,000 CQT and are restricted to 350,000 CQT.

Alternatively, BRPs must stake a minimum of 35,000 CQT, are restricted to 70,000 CQT, and do not receive delegation. Covalent has now migrated the staking contract from Moonbeam to Ethereum.

The percentage of staked CQT grew from 22% in Q1 2023 to 29% in Q1 2024, despite a 20% increase (an additional 104 million CQT) in the circulating supply. When the BRP role decentralized in mid-August 2023, it enabled a new group of network operators to stake CQT. Nevertheless, the BRP node set accounts for less than 600,000 of the 184 million CQT staked, representing just 0.3%. Given the maximum stake limits and that most BSPs have not reached delegator capacity, contributors to the growth in the percentage of staked CQT can be partially attributed to the 9% YoY increase in active delegators and the addition of two new BSPs in Q3 2023, which increased stake capacity by 19.6 million CQT.

Financial

Market Cap

The CQT market cap rose 28% QoQ, reaching $275 million multiple times before ending Q1 at $199 million. Since Covalent opened the BRP role and added two new operators in mid-August 2023, the CQT price has risen 232%, while the broader market only appreciated 132% in the same time period. Though the BRP role minimally impacted the amount of CQT staked, adding two new BSPs increased stake capacity by 19.6 million CQT. This reduced tradable CQT and applied upward pressure on the asset price.

In late January, Covalent implemented a CQT buyback program. Although only 219,000 CQT were bought back by the end of Q1, this program lays the foundation for linking network demand directly to increased buying pressure on CQT. Essentially, as API query demand rises, Covalent's revenue will increase, enabling further buybacks of CQT with the additional revenue.

Qualitative Analysis

Ethereum Wayback Machine

In Q4, Covalent introduced the Ethereum Wayback Machine (EWM). The EWM is a long-term data availability solution for historical data on Ethereum. It was born from Ethereum’s introduction of state expiry in its Dencun upgrade. State expiry addresses Ethereum state bloat from rollups posting transaction data to the network. All the additional data could lead to performance degradation, high storage costs, and increased sync times for nodes in the long term.\

EIP-4844 (a part of Dencun) introduced a blob transaction type that rollups will use to post data more cheaply to Ethereum. Furthermore, blob data is only stored by Ethereum consensus layer nodes (beacon nodes) for roughly 18 days before being deleted. Covalent’s EWM will store blob data indefinitely, providing a persistent and verifiable layer for storing rollup history. In addition to archival purposes, the EWM will help applications from compliance to AI model training.

AI Use Cases

Covalent's structured data is used by a wide range of consumers, from taxation tools (CoinLedger) to investor dashboards (Consensys) to user wallets (Rainbow). Artificial intelligence (AI) is an emerging data consumer well-suited for Covalent’s data infrastructure products. To attract AI talent to the Covalent product, the team has administered multiple grants to AI projects. The Q1 grantees using Covalent in their AI applications are detailed below.

• SmartWhales: an onchain copy-trading platform that enables investors to follow DEX traders and automate trades to copy their activity.\

• BotFi: a protocol that enables users to automate DeFi tasks, such as copy trading, dollar cost averaging (DCA), limit order scheduling, and more. It also offers an AI token screener, a frontrunning bot, and other tools to enhance the DEX trading experience.

  
  

• Laika AI: a browser extension that offers onchain analytics, token contract analysis, wallet tracking, AI alerts of onchain activity, and more.

• Entendre Finance: an AI accounting tool that enables users to aggregate onchain activity from different platforms, automating transaction tracking, analysis, and record-keeping.

Closing Summary

Covalent has significantly improved its network since Messari’s last report on the protocol in Q4 2022. It has expanded support to over 225 blockchains, decentralized another layer in its supply-side operations, launched the GoldRush developer kit, implemented a CQT buyback program, and announced the Ethereum Wayback Machine. As we move forward into the remainder of 2024 and beyond, Covalent is poised to increase its API usage while continuing to enhance its protocol in the next stage of the market cycle.