First Mover Asia: Tough week for layer 1 as Solana, BNB chain suffer outages

The problems that both protocols suffered are reminders that neither is really decentralized, and that they are not yet true challengers to Ethereum; ether and other altcoins trade sideways.

Good morning. Here’s what’s happening:

Prices: Bitcoin and other cryptos have yet to receive much inspiration in what has historically been a strong month.

Insights: Layer 1 protocols Solana and BNB had a difficult week, reminding crypto observers that they are not yet ready to challenge Ethereum.

Prices

• Bitcoin (BTC): $19,406 −0.2%
• Ether (ETH): $1,318 +0.1%
• CoinDesk Market Index (CMI): 960.70 +0.4%
• S&P 500 daily close: 3,639.66 −2.8%
• Gold: $1,705 per troy ounce +0.3%
• Ten-year Treasury yield daily close: 3.88% +0.06

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.

A Sideways Weekend for Bitcoin as the Next Inflation Report Nears

By James Rubin

Nine days into the usually bustling crypto month of October, bitcoin has yet to find inspiration.

The largest cryptocurrency by market capitalization was recently trading at about $19,400, roughly flat over the past 24 hours and about where it started the weekend. BTC spurted briefly early last week amid encouraging data suggesting that the economy was slowing and inflation might soon lessen, only to plunge below $20,000 as fresher employment indicators suggested otherwise.

"Bitcoin's failure to breach $20,500 has led to a correction," said Joe DiPasquale, CEO of crypto asset manager BitBull Capital, wrote to CoinDesk. "Now the bulls will need to defend $19,500 in order to keep chances of a rally alive."

Ether was recently changing hands slightly above $1,300, also flat from Saturday same time, and the previous day. The second largest crypto in market value has been sharing many of the same daily fluctuations with bitcoin since last month's Merge, the technological overhaul that is leading to a more energy efficient Ethereum blockchain. The Merge's benefits will occur over time, so ether is likely to continue being part of wider, crypto price trends.

Most other major altcoins were recently trading sideways with XRP and XLM up approximately 5% and 2.7%, respectively but popular meme coin DOGE off about 2%. The Crypto Fear and Greed Index, a measure of investor sentiment continues to lag in fear territory, about where it has lingered for weeks.

The CoinDesk Market Index (CMI), a broad-based market index that measures the performance of a basket of cryptocurrencies, rose slightly.

Stocks

Equity markets ended the trading week in a three-day depression after an upbeat Monday and Tuesday. The tech-heavy Nasdaq, S&P 500 and Dow Jones Industrial Average (DJIA) dropped 3.8%, 2.8% and 2.1%, respectively after non-farm payrolls increased by 263,000, a 17% decrease from August, but more than the projected 250,000. Slackening employment and manufacturing indicators earlier in the week had given investors hope of the sort of economic slowdown that would enable the Federal Reserve to scale back its current diet of hawkish interest rate hikes.

Investors this week will be eyeing the latest Consumer Price Index on Tuesday, which is widely expected to arrive at 8.1%, slightly lower than last month's 8.3% but hardly enough to shift Fed thinking. The price impact of OPEC's decision this week to cut the supply of oil and Hurricane Ian looms in the background. On Friday, the University of Michigan releases its monthly Consumer Sentiment Index, a much-regarded reading of consumer attitudes about the economy. It is expected to fall slightly from last month's 58.5 reading.

Geo-political uncertainty has plagued asset markets of all stripes in recent months. On Sunday, CoinDesk's Eli Tan reported that Ziya Sadr, an Iranian Bitcoin advocate, was arrested by Iranian security forces last month. The arrest came amid widespread anti-government protests over the state killing of 22-year-old Mahsa Amini, though a reason has not been provided for his arrest.

BitBull's DiPasquale noted warily that if "support breaks," bitcoin could drop below $19,000. However, he added that "more volatility is expected this month," particularly as the CPI report approaches.

Biggest Gainers

Asset	Ticker	Returns	DACS Sector
XRP	XRP	+4.9%	Currency
Stellar	XLM	+2.7%	Smart Contract Platform
Terra	LUNA	+1.3%	Smart Contract Platform

Biggest Losers

Asset	Ticker	Returns	DACS Sector
Dogecoin	DOGE	−1.9%	Currency
Bitcoin	BTC	−1.9%	Currency
Ethereum	ETH	−1.2%	Smart Contract Platform

Insights

A Tough Week for Layer 1 Protocols Solana, BNB Chain

By Sam Reynolds

In the course of a week, both the BNB Smart Chain (BSC) and Solana suffered outages. For BSC, the outage was the first in recent memory while for Solana, outages seem to be regularly scheduled events. But the problems for both offer reminders that neither is really decentralized, and that they remain far removed from being credible challengers to Ethereum.

Paradoxically, BSC's lack of decentralization appears to be its strength while Solana's continues to be a weakness.

When analyzing the decentralization of a blockchain, a metric called the Nakamoto coefficient comes into play. First coined by Coinbase CTO Balaji Srinivasan, this metric determines just how decentralized a blockchain really is by considering how many nodes must collude to control the chain. Like any conspiracy, the more entities required to be a part of it, the more likely it will fail. So the higher the number the better.

Because of BSC’s relatively small base of validators, the chain’s Nakamoto Coefficient is 7.

“It's hard not to presume that each Binance Chain validator is in some way connected or tied to Binance,” Messari’s Wilson Withiam wrote in April 2021. “They each take turns producing blocks in a seemingly predefined order. There doesn't appear to be any stake-weighted mechanism to determine which one produces the next block.”

Withiam’s colleague at Messari Ryan Watkins added: “The reason why BSC is faster and more scalable is not because of some magical technological innovation. No, it’s instead the magic of centralization.”

Contagion runs quickly

Certainly, this is a double-edged sword. Because of the lack of decentralization the point of failure that created this exploit could have taken down the network; contagion runs quickly.  But at the same time, because of the centralization, a fix could be easily implemented. Binance’s influence over the nodes means that they were all compliant in updating their code to make the fix.

Solana, on the other hand, has seen its Nakamoto coefficient improve over the last year with its increased number of validators as it now stands at 31.

But at the same time, Solana's validators seem to be an unwieldy bunch, often breaking the network. Their lack of decentralization and lack of support from a large entity like Binance means shutdowns are frequent and painful.

Solana’s most recent outage, according to Decrypt, was caused by a validator running a duplicate validator instance. The code should not have allowed this to happen, but it ended up causing an inadvertent fork.

Before this outage, there have been at least a half-dozen other major outages as the protocol struggles with its code.

There’s also the argument that’s been made that comparing Solana to Ethereum with regards to decentralization isn’t right, but rather it should be compared to its layer-1 peers of which it has a better Nakamoto Coefficient.

Regardless, it's interesting to see how the question of centralization versus decentralization doesn’t yield the same results when comparing BSC and Solana. The centralization and support from Binance certainly helps as its scale is much more than Solana’s supporting foundation.

Important events

Canada Thanksgiving Day holiday

3 p.m. HKT/SGT(7 a.m. UTC): China M2 money supply (Sept. YoY)

3 p.m. HKT/SGT(7 a.m. UTC): China new loans