Tokenomics: Pyth Network vs Chainlink

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15 Mar 2024

abstract

Whether you are a crypto investor, trader or web3 entrepreneur, tokenomics design is critical to assess the long term value creation and sustainability of crypto-currencies. You may be curious if Pyth Network, the latest competitor of Chainlink will outperform its predecessor. While this is not financial advice, as of November 25, 2023, Crypto Rookies believe that Pyth Network will outperform Chainlink in the 2024–2025 bull cycle.

Introduction

Regardless if you are a crypto investor, trader, or web3 entrepreneur, tokenomics design can have long lasting effects on the value creation of crypto-currencies that you need to be aware of. In this blog post, I will assess the tokenomics design of both Chainlink on Ethereum and their latest competitor Pyth Network on Solana. You may also listen to most of this content on YouTube.

Pyth Network versus Chainlink Discussion

Market Adoption vs Speed vs Cost

It is very difficult to assess the potential market adoption of either project, however given the use case of both Chainlink and Pyth which is operating data feeds for other applications to consume, we can expect that speed would be a critical factor of success. Depending on the data feed time interval, some applications that deal with data updates in the micro-seconds would require faster speed than some data feed that updates once a month, therefore the underlying technology may prevent the consumers of that data from achieving their goals. In that regard Pyth has an advantage since it is built on the Solana network which is one of the fastest.
Better technology in regards to speed may not be relevant to all applications/customers, the cost of operation would be the next factor in the decision. Typically, if data updates can function on both technology stacks, then customers would choose the cheapest option. In traditional technological products the better tech would often be priced more costly, but in the case of crypto, it is often the case that faster chains also offer the lowest cost of transactions. Therefore, customers would likely prefer faster with lowest cost, than slower with higher cost of operation.
The last factor in the decision would be potential market adoption given the size of customer base in each ecosystem. The Ethereum network (Chainlink) has the largest ecosystem in comparison to Solana (Pyth), so regardless of the speed and cost of operations, businesses that want to sell data feed may pick the Ethereum network since they may have access to more customers. Network Effects are difficult to overcome, and should we truly believe that the Solana ecosystem will gain market shares in comparison to Ethereum? I would tend to believe this is the case, but it may take significantly longer than expected.
Overall, I believe that Pyth and Solana may outperform Chainlink and Ethereum in terms of potential growth but there is significant execution risk left on the newer technology stack.

Market Capitalization

Chainlink currently has a $14.5B fully diluted market cap and a $8B market cap in circulation, while Pyth Network boosts a $5B fully diluted market cap and a $750M market cap in circulation. Chainlink launched 6 years ago and has accumulated a large devoted customer base, while Pyth is only 4 days old and has yet to execute on its vision. This implies that Pyth Network is vastly overvalued however the crypto market often follows perceived value more than actual financial value.
Typically speaking, price itself is not super relevant, but market capitalization is critical to compare similar projects, as they give you a potential outlook on what is possible. I often see crypto investors claiming that their favorite crypto-currency will go from $1 to $1,000 in the next 2 years and what these degens forget is that it would value this crypto-currency higher than the entire world’s economic value. As of today, Bitcoin, the big daddy of all crypto, has a $739B market cap in circulation and $793B fully diluted and we can rest assured that both Chainlink and Pyth Network are very unlikely to flip $BTC in the next 2 years.
Given that Chainlink grew to about $52B fully diluted market cap in the last bull cycle of 2021, then I would argue this should be the cap for Pyth to grow into. This would mean a 10X on the current price if everything goes well. Could it grow more than 10X, definitely yes, but it would require two main factors: 1) delusional thinking by speculators, or 2) large amount of customers not present in the last bull cycle or significant market share adoption taken out of Chainlink.
https://www.coingecko.com/en/coins/pyth-network
In regards to the market cap in circulation, a large portion (52%) of Pyth Network token supply is for ecosystem growth, which is possible it may not be allocated to participants or potentially ever, which could be burned or taken out of the supply entirely. In which case, potential growth would be more aligned on the market cap in circulation instead, which could be a 10X * 3.5X = 35X, in which case it is not impossible the price of Pyth could go from $0.50 to $8 or even $15 by sometime in 2025.
Meanwhile, Chainlink has most of its supply already deployed and part of the fully diluted market cap, so unless a burn mechanism is introduced, I wouldn’t expect more than a 15X growth from here if it gains additional value above the last all time high.

Vesting and Unlocks

Chainlink is nearly all vested at this point, there are no significant unlocks left which could lead to significant sell pressure. So, what you see is what you get for the most part, the project is mature and laws of supply and demand are in full effect. Meanwhile, Pyth has significant token unlocks every year on May 20 for the next 4 years.
https://token.unlocks.app/pyth-network
In theory when you see a staircase graph like this for token unlock and vesting is scary because it is a large unlock at a specific time point which could lead to significant sell pressure. However, in the case of Pyth, 52% of the supply is controlled by the team and dedicated to ecosystem growth, so the team can choose not to release these tokens even though they are vesting at a specific time. If they feel there are not valuable investments to be made, they could choose to wait for appropriate proposals that would lead to better market adoption. Given that there is only 10% of the supply, accounting to $136M from pre-sale investors that will unlock on May 20, 2024 and that the current daily trading volume is ~$200M, I believe that the market should be able to absorb this sell pressure without a massive collapse.
As a matter of fact, there was a study on hundreds of crypto assets and token unlocks, and the result is the following. Large token unlocks that are more than 100% the daily trading volume lead to significant price collapse before the unlock itself, a retest followed by further decrease, so projects suffer in such scenarios. However, if a project has a small unlock of less than 1% of the daily trading volume, then the price does not suffer as much and recover more quickly after the unlock itself.
https://www.coindesk.com/markets/2023/07/21/large-crypto-token-unlocks-drive-prices-lower-within-two-weeks-new-research-suggests/
Additionally, such a token unlock with staircase-like structure is more predictable to crypto traders that use technical analysis patterns to invest. They would expect potentially a drop of price to a support zone, and from there they have potentially an entire year for the price to recover back to a previously strong resistance zone. Therefore, traders would bank on the price to recover pending other macro-economic factors moving the crypto industry market. Since, May 20, 2024 and May 20, 2025 are likely to be both periods of bull activity, I would argue there is room to absorb any sell pressure around the time of these unlocks, which may not be as good in 2026+.

Presale Investments

Pyth Network sold 10% of the supply for undisclosed amounts to private investors. Since we don’t know what price discount they benefit from, it is difficult to assess the likelihood of them selling to cash in some hefty profits. For sure, given the project has launched with a massive market cap, it stands to reason these investors are in significant green territory, but we don’t know if they will have some OTC deals with other private investors instead of selling on the open market, or if they will play the long game. Regardless, in this particular case I believe the market will absorb this potential selling pressure adequately. The last thing I want is to enrich venture capitalists further than need be, but in this case I feel it may not be horrible.

Summary

While it is not investment advice, I believe Pyth Network will financially outperform Chainlink in the next 2 years during the bull cycle, but may crash more severely in the next bear market. This would represent up to 30X growth for $PYTH (~$15) versus 10X for $LINK (~$150) sometime during 2025. Both are valid technology stacks that solve a real problem and should gain additional market adoption as more legitimate businesses move into crypto.
Pyth may be the only solution for a certain segment of customers that need high throughput of data feed, while Chainlink may be acceptable for most other customers, not sure if this will need some pricing optimization to attract and retain customers.
The unlock schedule of Pyth was interesting to see and is very different from most tokenomics designs in the industry and may favor more trading volume and price recovery.

About

Crypto Rookies is a crypto investor, serial entrepreneur in Artificial Intelligence and Web3/crypto with expertise in tokenomics and market making. Currently CEO of Smooth, which focuses on solving the problem of 95% of crypto-currencies failing in their first 2 years.
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