It looks a little DAG-gy, Fantom Fundamental Analysis

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Upon completing an online purchase, a supplier will ship you an item of choice.

The item is sent along an optimal route (or graph) to reach you. Unless the item is damaged or requires a replacement, it does not return to the supplier, and it is a one-way delivery that makes the process acyclical. If your package fails to reach you, the supplier will send you a replacement along an alternative route.

An inverse scenario would be taking a plane to your favourite holiday destination. As is the case when taking a holiday, you have to get on a plane to travel back home when it comes to an end. It is cyclical; you’re returning to where you departed.

It is helpful to consider these scenarios when wrapping our heads around Directed Acyclic Graph (DAG) technology. DAGs differ from blockchains. Despite the complexity of the technology, DAGs have gone largely unnoticed. Centralization issues and maintaining virtual machine states appear to be barriers to entry for the crypto community.

Several rather technical elements differentiate Hedera Hashgraph from Fantom. Still, one of the most notable is the hybridization of DAGs with a Proof of Stake1 consensus for a permissionless publicly accessible blockchain. Hedera Hashgraph by comparison are centralized by design, which does not appear to be changing anytime soon.

As a general smart contract platform, Fantom does the job, and there is innovation taking place on the mainnet with the likes of Tomb Finance reshaping definitions of DeFi 2.0. Multi-chain2 integrations and further developments are likely to continue given there are 370M $FTM allocated to incentivize developers to build. However, several glaring challenges are facing Fantom.

Fantom has experienced tremendous growth in 2021. In the space of 2 months, the price of $FTM had increased by 10x. That begs the question: Is there much gas left in the tank with the challenges ahead?

Fantom Key Summary

Your TLDR summary, D.I.S.R.U.P.T. score. 20/35

Rumors spread faster than truth

DAGs have been alluded to as ‘blockchain 3.0’, but the concept is ancient. Your family tree is a DAG. Your grandparents gave birth to your parents, who brought you into the world. That is directional as more branches of a family tree are added, acyclical in that you cannot go back in time, it is a graph in that there is a discernible lineage that flows on from your ancestors.

It is informative to reflect on how blockchains operate to understand DAGs. The logic of a blockchain requires marrying up information from past blocks to ensure a pending transaction in a new block is consistent with the state of the ledger. This model has inherent inefficiencies when two nodes or miners attempt to process the same transaction, leading to obsolete branches. For this reason, there is a grace period when validating blocks to give miners time to compete to finalize the block. During this time, nodes in a network communicate back and forth until the network is satisfied.

DAGs, on the other hand, make it so there is never an edge formed with the parent node. It is acyclical, it can link up with other DAG branch nodes, but it cannot go back to the original node. This process is known as gossiping or rumour mills, ‘node A’ tells ‘node B’ to tell ‘node E’ that ‘node A’ has broadcast a transaction. So ‘node A’ knows that ‘B’ told ‘E’, similarly that ‘E’ was told by ‘B’ what ‘A’ had said. In theory, this approach is infinitely scalable as more DAG branches can become involved as demand increases on the network.

Asynchronous Byzantine Fault Tolerance (aBFT) consensus refers to a trust issue within a network whereby participants are required to identify attacks from within. In an asynchronous system, information can only flow one way and does not enable nodes to revalidate a transaction. This enables the agreement to be reached within a network without inhibiting other transactions on-chain.

There are tremendous applications with a DAG framework. However, the primary limitations have been centralization and achieving Turing completeness. The former we will elaborate further upon, but the latter means there are significant challenges in maintaining a virtual machine state. Given the directional nature of DAGs, you cannot close the loop. So far, the fix to this is to integrate a proof of stake consensus to maintain a virtual machine. The likes of IOTA have spent years attempting to pull off a virtual machine and have managed to do so. Still, composability or rather the ability for a developer to copy and paste a Dapp source code from Ethereum, is limited.

Build it, and they will come.

The most commonly used ‘carrot’ for new investors is the allure of extremely high Annualised Percentage Yields (APYs).

It is an unfortunate reality of the DeFi space that greed takes over until there is nothing left. Fantom Foundation has taken a ‘build it then they will come’ approach. Andre Cronje didn’t mix his words when he said, “They are liquidity locusts, they come in, they feed, they destroy, they leave”.

With this in mind, Fantom Foundation is running a 370M $FTM developer incentive fund valued at over $500M USD. Fantom has the means to attract existing projects with large followings to integrate into their ecosystem. As well as enabling innovations, one noteworthy project is Tomb Finance that utilizes the seigniorage of an FTM pegged token, $TOMB, that has triggered a wave of copy/paste deployments across different blockchains. Maintaining value while offering consistent high yields is a challenge. DeFi 2.0 appears centered around the utility of DAO treasuries (community-owned funds) to pursue yield strategies outside of the protocol and bring the profits back into the token to benefit all holders. These types of innovations are attracting new liquidity to the Fantom blockchain.

Building a solid project to attract new investors is an effective strategy. If we look at the likes of Aave and Curve, one of the first takeaways is how comparatively low their APYs are to many other DeFi protocols. Yet they retain some of the highest total value locked (TVL) out of all DeFi protocols. They come with large communities and may be incentivized to migrate liquidity to Fantom for slightly higher APRs. Furthermore, from a market branding perspective, Fantom has done well to capture a horror/spooky type theme to the protocols deploying with Tomb, Scream, Spookyswap, Boo, etc.

Fantom Spookynomics

$FTM as of 24/12/21:

Current price: $1.91

Market cap: $4.87B

Trade volume: $848M

Circulating Supply: 2,541,152,731

Max Supply: 3,175,000,000

All time high: $3.46

All time low: $0.0019

Vested tokens: All released as of November 2020.

Blockchain TVL: $5.13B

% in staking: 63%

Market cap to TVL ratio: 0.94

Concealed DAGgers

As far as Fantom having a competitive product, they hold their own. But there are several glaring problems with Fantom that should be considered.

Firstly, the centralization of validator nodes is problematic. February 25th 2021, two validator nodes holding 1/3 of $FTMs total supply were unable to keep up with validating the ledger and caused the entire network to go down. Since then, Fantom has onboarded additional validator nodes running a total of 66 at the last count. However, the Nakamoto coefficient is still around 3, meaning if three major validators were to go offline, it would take the network down with it.

Details are lacking toward the identity behind the validator nodes. While we value the inherent pseudonymity of decentralization, this becomes less of an issue as the validator node count grows to dilute the possibility of malicious activity from bad actors. Still, it is concerning that three major nodes can bring the network to its knees. But what is clear is the barriers to entry for the little guy are still ever-present, with the 500k FTM minimum required to set up a validator node and the 1.5M FTM requirement to have it active on the network.

Secondly, while the team checks out, there are notable red flags. The founder of Fantom, Anh Byung Ik, had conceived of Fantom but left early for reasons unknown. Until there is an honest explanation of the nature of Anh’s departure, a modicum of speculation and doubt will persist.

Further, Andre Cronje was a key advisor initially but left the project. His passions took him toward DeFi and building out Yearn Finance, which by his own account, his experience with “liquidity locusts” led to burnout. Andre has since returned to Fantom as a DeFi strategist. There is no doubt that he will play a significant role in expanding the ecosystem. However, it would be damaging to Fantom if he suddenly packed up and left again. Andre has a substantial degree of influence at Fantom and in the broader DeFi community. It appears that he is in the right place with a development team that appears to support his passion toward achieving decentralization and building innovative products on the network.

“Fantom is a shitcoin. We don’t want to forget that. Because as long as we remember that we acknowledge that we have to work harder and we have to do more work to prove to people that we are not.” — Andre Cronje.

The third issue is unclear timelines. There is no shortage of details on the Fantom blockchain itself, such as the whitepaper, making for quite a technically tricky read. There is still no clarity on when to expect the Fantom Virtual Machine deployment. This development is on the back burner. Perhaps there is less demand to roll this out due to the network getting by with an EVM clone. However, having a runtime environment with rules fitting to Fantom and maintaining Ethereum Virtual Machine (EVM) compatibility is a major milestone that investors should not have to be left guessing.

Finally, Fantoms endeavour to bring real-world use cases to nation-states is a good cause for Fantom and the broader cryptocurrency ecosystem. However, the regions they have sought to integrate their technology in are politically unstable. The nature of Fantom’s ongoing partnership with Afghanistan since the Taliban have taken control is unclear.

Once you go DAG, you can’t go back — Discussion

Fantom has made progress toward onboarding developers to decentralize their ecosystem further. Their integration of DAGs to allow EVM compatibility is a noteworthy achievement.

Centralization is still a significant issue that warrants further discussion. From a project’s inception, there needs to be some degree of centralization. To direct the development of a project, there needs to be a vision. As Fantom gets closer to their goals, they can push closer toward decentralization. There is indeed evidence this is their intention. Making DAG technology as permissionless as your run-of-the-mill blockchain is a step in the right direction.

There are concerns that centralization can inhibit participation. Undoubtedly, we have all observed the effects of overly centralized systems in our own lives in one way or another.

Not only that, but which entities control major validator nodes in the network is crucial. We have seen no less than three network outages from Solana, and Fantom has experienced an outage as recently as February. A project similar to, Hedera Hashgraph continues to onboard council nodes (Google, Boeing, LSE, Avery Dennison, DBS, Deutsche Telekom, etc.). However, a simple Yahoo Finance search reveals these public companies on the governing council have Blackrock, Vanguard and Fidelity as key stakeholders. The power to change the rules of a network on a whim is in the hands of the few.

Fantom is unique as it experiments with permissionless DAGs, but there is not a great deal of clarity around the identity of validator nodes running the network. Many appear to be owned and operated by Fantom Foundation, but the information is scarce on the remaining validator nodes. The network has already experienced an outage from just two validators going down before. Scepticism of the potential players involved in maintaining the network is somewhat warranted in these conditions. As more validator nodes come onboard and cost barriers to entry are reduced we will see greater network resilience. But there is still a way to go.

Fantom has done well to attract a lot of innovation and development within their ecosystem. Recently TVL on the network surpassed $FTM’s market cap. Typically the market cap of a network token surpasses what is locked on the network. Whether this is a reliable metric to forecast growth is yet to be seen. Since October, the TVL has tripled from $1.6B to $5.79B within days. Since then, it has plateaued, and we haven’t seen any drastic movements.

$FTM is currently 40% below its all-time high with a market cap over $5B. To fly past the previous ATH, Fantom will need a market cap of $9B at the very least. So it appears likely that $FTM currently has room for upside. But what lies beyond that?

To reach the likes of $MATIC would require a market cap above $17B. While I’m not saying this is an impossible outcome, I am saying that the onboarding of 1000 validator nodes to decentralize the network cannot come soon enough. That said, there are many blockchains that are more centralized like Binance Smart Chain with an all-time high TVL of $48B. In my opinion, investing into $FTM now, one could reasonably expect is a 2–4x. Fantom could benefit from marketing some more creative use cases instead of going for a ‘jack of all trades’ image.

General use blockchains are a highly competitive market. Ethereum being highly decentralized makes it stand out. Binance Smart Chain’s ease of onboarding users from the Binance exchange gives it an advantage in attracting new liquidity. Solana’s speed and finality set it apart. Avalanches subnets is a hive of innovation as anyone can create their own sub-blockchains for permissioned and permissionless environments. Terra is home to the most viable decentralized algorithmic stablecoin with a burgeoning ecosystem. What we also notice is that despite their faults (ETH’s gas fees, Solanas network outages, Avalanches rocky start with scaling, $UST stablecoin peg being battle-tested) they still have made incredible gains and it is broadly accepted that their network effects make them a force of nature.

When it comes to Fantom, it does not particularly stand out or seem to be a force to be reckoned with. The horror-themed branding on the DeFi protocols is cute. Sure, it is a permissionless DAG. But DAG consensus can be used in Avalanche users’ custom subnets to integrate payment functions. Perhaps an ace up Fantom’s sleeve is innovating with real-world use cases. But it is not ideal for the Taliban to take over the nation-state where these innovations were being piloted. The hope for insane gains rests primarily in Andre pushing the development of DeFi protocols in their ecosystem. Tomb Finance and Spookyswap are two noteworthy protocols that stand to attract a lot more liquidity to the Fantom mainnet.

While it would be foolish to dismiss $FTM entirely, it would be even more foolish to expect 100x returns from here. It has already made gains in excess of 100,000% since conception. That said, there is absolutely value in picking up some $FTM to have a play around on the DApps available in the Fantom ecosystem.

References

Chain Bulletin, ‘2 Validators Responsible for Fantom’s Outage’ — https://chainbulletin.com/2-validators-responsible-for-fantoms-outage/

Coinspeaker, ‘What is Fantom (FTM)?’, https://www.coinspeaker.com/guides/what-is-fantom-ftm/

Decrypt, ‘YFI’s Andre Cronje is tired, broke and close to quitting DeFi’, https://decrypt.co/37995/exclusive-yfi-andre-cronje-broke-quitting-defi

Fantom Website — https://fantom.foundation/

Introduction to Fantom — https://fantom.foundation/intro-to-fantom/

Medium, ‘An Introduction to DAGs and How They Differ From Blockchains’, https://medium.com/fantomfoundation/an-introduction-to-dags-and-how-they-differ-from-blockchains-a6f703462090

Medium, ‘History and Use Cases of DAGs’, https://medium.com/fantomfoundation/history-and-use-cases-of-dags-25f05663d40d

Medium, ‘Uniting Smart Contracts and DAGs: The Next Step’, https://medium.com/fantomfoundation/uniting-smart-contracts-and-dags-the-next-step-aaa693a8d248

Messari, ‘Fantom Metrics’, https://messari.io/asset/fantom/metrics/all

Youtube, ‘Fantom: STRONG Potential?! FTM Prediction!!’ 🧐 — https://www.youtube.com/watch?v=Sjxja5wB1UI&t

Youtube, ‘HBAR Finally EXPLAINED! What is Hedera Hashgraph?’ https://www.youtube.com/watch?v=ySXQfobVoc4&list=PLxw6412DllRlCrvQuqz1zZ5YcY8bxKbeL

Youtube, ‘Hedera Hashgraph HBAR Vs Fantom FTM’ https://www.youtube.com/watch?v=ICSnelIiSzs

Youtube, ‘Is Fantom’s $FTM Worth The HYPE?!’ (Pros & Cons) https://www.youtube.com/watch?v=gtvOPYrSsko

Youtube, ‘Should I buy Fantom $FTM? Is it an #ETHKiller or a #SOLKiller? Let’s find out.’ https://www.youtube.com/watch?v=DRNA2BksAYA&t

Youtube, ‘What is DAG?’ https://www.youtube.com/watch?v=1Yh5S-S6wsI

Youtube, ‘What is Fantom? FTM Explained with Animations’ — https://www.youtube.com/watch?v=oRoS7VVwe7w&t

Whitepaper, ‘LACHESIS: SCALABLE ASYNCHRONOUS BFT ON DAG STREAMS’ — https://arxiv.org/pdf/2108.01900.pdf