Not-Quite-Mid-Year Review

A look at how the Internet Computer performed in the first 5.5 months of 2022

Background

Early in 2022, I wrote about the ways to measure circulating supply and multiple drivers of demand (NFT/DeFi liquidity pools, ICP transactions, NNS Staking, Computational Burn). As we approach the end of the 2022 second quarter (and have started the Internet Computer’s second year!), I thought it would be good to provide a quick update on supply and demand metrics.

Supply

Node Rewards - 555k ICP minted in the first 5 months (average of 111k/month). The total value at the time of mint was $10.1M (average $2M/month).

Governance Rewards - 17.8M ICP was provided for governance rewards. 6.3M was minted as ICP and 11.5M remained as maturity. The governance changes enacted in February had an effect on the ratio of governance rewards minted as ICP (either through Merge Maturity or Spawn Neuron) vs. accumulated maturity. Prior to February only 23% of governance rewards were minted as ICP. Post February that number is 41%.

NNS Dissolving - A total of 26.8M ICP dissolved off the NNS in the first five months (5.36M/month). That average will drop significantly (closer to 3.5M ICP/month) moving forward as we enter the much-welcomed Zone 2.

Demand

NFTs - The transaction volume for NFTs for the first five months of 2022 was 960k ICP ($17.8M). That’s an average of almost 200k ICP per month ($3.6M). Compare that to December’s totals of 74k ICP ($2M) or November’s totals of 82k ICP ($3.8M) and it’s likely that the NFT liquidity pool has increased by approximately double in ICP terms and ~40% in USD terms in 2022 vs. the end of 2021.

DeFi - The launch of Sonic in late January resulted in 50k ICP being burned between January and May, most of which occurred in the first 3 weeks after Sonic’s launch. The Internet Computer also saw it’s first major token launch with Origyn’s OGY launching on Sonic.

Computational Burn - Computational burn has picked up rapidly in 2022, recording approximately 33% month-over-month increases in USD terms (I use USD terms to negate the large affect that the ICP:cycles exchange rate has on computational burn). If the IC continues to experience 33% month-over-month growth in computational burn then we could see ICP burned for computation become greater than ICP minted for node rewards by the end of Q2 of 2023. However, I would expect high month-over-month growth will be challenging to maintain over long periods of time. As of 09JUN, June is on pace to surpass May’s total burn by ~$10k.

NNS Staking - Approximately 19.2M ICP (3.8M / month) has been staked on the NNS in the first 5 months of 2022 (that’s a pretty impressive number that doesn’t get a lot of press). 8.9M ICP of that staking has been in 8 year neurons. Given that we have recently entered Zone 2, it’s possible that staking on the NNS may be greater than dissolving on the NNS in the second half of 2022.

Summary

There’s a few milestones I look forward to, and given the progress the Internet Computer has made in its first year, those milestones look to be coming close:

Near Term

• NNS Positive - This is when the ICP coming on to the NNS is greater than the ICP dissolving off the NNS. As discussed above, this looks likely to occur by the end of this year. In fact, it’s possible that we are currently at this milestone. The lower ICP price is beneficial for more ICP being staked and the tokenomics are such that we will see much less dissolve off the NNS than in the previous months.

• Operational Efficiency (oe) >= 1 - Operational efficiency, basically the amount of ICP burned for computation divided by the ICP minted for node rewards, is one of the best metrics for determining whether the growth of the IC ecosystem is outpacing the growth in node providers and whether the ICP token can become deflationary from an operations perspective (oe > 1.0). As discussed above, with 33% month-over-month increases in ICP computational burn, we would hit this milestone in the middle of 2023. However, given the variability in growth metrics, that milestone date could move significantly.

  Longer Term

Longer Term

• ICP Completely Deflationary - This milestone would occur when the ICP burned for computation is greater than the ICP minted for governance and node rewards. Given that ~3.5M ICP are provided as governance rewards a month, this milestone is probably many years out, perhaps 2024 at the earliest.

• Circulating Supply Deflation - This would occur when the demand drivers above are greater than the supply dynamics above. This will actually occur prior to the ICP Completely Deflationary milestone because this metric also accounts for ICP liquidity pools within NFT and DeFi markets. From an investment standpoint, this is a key metric because deflationary pressures on the ICP circulating supply would significantly drive the price of ICP up.

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