Recently the PYTH network did an airdrop, dropping $PYTH tokens to wallets who had interacted with protocols who used the PYTH network data feed. To be honest, up to that point, I had no idea what the PYTH network was about. The token dropped on 20th November and price hovered around $0.30 before pumping up to approximately $0.55.
Personally, I wasn’t eligible for this drop. However, it did pique my interest sufficiently for me to invest a small amount into this token.
In this article, I delve into the PYTH network and how they provide value to web3 ecosystems and protocols. I also go into a bull case scenario for the PYTH token, and how I think this could very well be a runner in the bull market.
What is an oracle
Blockchain oracles are entities that connect blockchains to external systems, thereby enabling smart contracts to execute based upon inputs and outputs from the real world. - Chainlink
I’d say think of oracles as a way for blockchains to get off chain data on chain. Currently, Chainlink is the market leader in this, with over $15bn in Total Value Secured (TVS) as of writing. PYTH is sitting at just over $1.6bn TVS (DefiLlama). TVS is defined as the aggregate amount of Total Value Locked within all protocols and platforms that depend on the proper operation of an oracle network to protect user funds (source).
How does PYTH work
The PYTH network is a decentralised oracle network who are first-party data providers. They aim to bring accurate and timely financial data to DeFi applications. The PYTH protocol aggregates and combines the price feeds of all these individual publishers into a single price feed which is their product.
They also have developed PYTHnet, which is an application-specific blockchain to store and update the state of each price feed. There’s a few interesting features about PYTHnet:
It uses a Proof of Authority consensus, which means that only trusted entities can validate transactions. Read more about it here.
It is gasless for the Publishers, who act as validators, in order for them to be more efficient in publishing data onto PYTHnet.
It uses decentralised cross-chain messaging protocols (eg. Wormhole) to send data across different blockchains.
A key part about the way PYTH updates prices (and how its different from Chainlink) is that consumers only pull data from PYTHnet on demand. This means that they incur transactions costs only when they require a price for an operation, and not pay a fixed cost for regular updates. This optimises the efficiency of the system design and enables the consumer application to only request prices when they really require them, much unlike how Chainlink works.
How does PYTH generate revenue
They do this by incentivising data publishers (think trading firms, market makers, centralised exchanges) to share their data. The inventive comes in the form of fees paid through consumer usage of data updates. While the PYTH network is built on Solana, these fees are paid using the native token of consumer network, depending on which blockchain the DeFi protocol is residing on.
Summary
In summary, Pyth Network generates revenue through consumer update fees. With future unlocks and the strategic allocation of its native token, PYTH, it also incentivises both users and contributors to continue using and interacting with protocols using PYTH while ensuring the sustainable growth of the network.
Analysis
So I did some simple analysis on PYTH’s current token performance compared to ChainLink’s LINK token.
There are a few assumptions here, but the main assumption would be that PYTH’s Total Value Secured (TVS) stays at a relatively similar percentage of ChainLink. ChainLink is the market leader in the decentralised oracle space and there’s no reason to think that PYTH would overtake LINK by doing over a 100x.
Let’s look at the TVS comparison during the last bull market.
At ChainLink’s peak (Nov 2021)
ChainLink TVS: ~$60 billion (source)
Pyth TVS: ~$5 billion (source)
Pyth TVS - ChainLink TVS Percentage: ~8.3%
At Pyth’s peak (May 2021)
ChainLink TVS: ~$40 billion (source)
Pyth TVS: ~$7 billion (source)
Pyth TVS - ChainLink TVS Percentage: ~17%
Now let’s look at today.
As of today (Dec 2023)
ChainLink TVS: ~$16 billion (source)
Pyth TVS: ~$1.6 billion (source)
Pyth TVS - ChainLink TVS Percentage: ~10%
Seems like it’s relatively safe to assume that PYTH captures around 8-15% of ChainLink’s TVS market share (safe estimates),
Now we compare the two tokens’s market capitalisation.
As of today (Dec 2023)
LINK Market Cap: ~$8,580 million (source)
PYTH Market Cap: ~$639 million (source)
PYTH mcap - LINK mcap Percentage: ~7.4%
What this tells me is that it seems like PYTH’s market cap seems to be lagging slightly behind the capture of TVS. There’s a situational context to this - PYTH recently just got into the headlines with their airdrop and there are many other tokenless protocols operating using PYTH’s data - this could have resulted in PYTH’s spike in TVS.
If we are to go with the assumption that the market cap of PYTH catches up with the lower range of its TVS percentage with ChainLink (8.3%), and assuming that LINK’s market cap stay constant ($8,580 million), we are looking at a PYTH market cap of around $712 million (8.3% * $8,580 million)
Seeing as the next PYTH token unlock is only in May 2024 (source), we know that the amount of tokens won’t be increasing and circulating supply remains constant. Which means that with a market cap of $712 million, the price of PYTH should be trading around $0.48.
The current price of PYTH at time of writing is around $0.43, which shows that there’s a little room to grow. Take note, we’re taking the most conservative estimates here,
Let’s throw in a few more bullish factors.
Both ChainLink and Pyth’s TVS and market cap is sure to grow over the next few months. With the increasing price of SOL, there is an increasing number of eyes on the growing SOL Defi ecosystem, which would lead to further growth in Pyth’s TVS. It is also interesting to note that most of Pyth’s consumers are operating on Layer 2s or chains that aren’t Ethereum (Arb, zkSync, Sui etc.)
Should Pyth’s growth outpace ChainLink in the near future and we hit 15% of ChainLink’s market cap, we are looking at a $1287 million market cap for PYTH, which translate to a PYTH token price of $0.84 (that’s nearly 2x current prices). Take note that this is all assuming ChainLink’s and Pyth’s market cap doesn’t grow.
As mentioned earlier, the next PYTH token unlock is only in May 2024. In April 2023, BTC halving is expected to be taking place (source). We all know what that entails. The fact that the PYTH token unlock is only happening after the expected BTC halving date makes me think that this token could really rally prior to its unlock.
Summary
Maybe I should add in some opposing viewpoints, such as the possible lack of DeFi usage amongst PYTH supported consumers, ChainLink becoming a monopoly in the oracle market, the possible USDT collapse, or PYTHnet getting hacked…
But all in all, I’m bullish PYTH.