What Is So Smart About Smart Contract Platforms?

The innovative qualities of Ethereum have led to an explosion of new digital assets in the Smart Contract Platform sector. Here's a look at the sector, its significance as a digital asset sector and how CoinDesk Indices is setting standards that define this sector.

AccessTimeIconMay 4, 2022 at 1:00 p.m. UTC
Updated May 4, 2022 at 4:04 p.m. UTC

Jodie Gunzberg, CFA, is the Managing Director of CoinDesk Indices.

Ether (ETH) is the main token of the Ethereum blockchain and is now the world’s second-largest cryptocurrency by market capitalization. Just like the largest cryptocurrency, bitcoin (BTC), ether can be used to send payments directly to another person without the need for an intermediary.

The long-term vision for Ethereum is to power more than just financial transactions. Software developers can build applications on Ethereum, ranging from decentralized platforms for lending money to social media networks to develop and exchange content. ETH is unique in its ability to fill the role of a capital asset, consumable/transformable asset, and as a store of value.

The innovative qualities of Ethereum have led to an explosion of new digital assets in the Smart Contract Platform (SCP) sector. This blog post takes a brief look at the Smart Contract Platform sector, its significance as a digital asset sector and how CoinDesk Indices is setting standards that define this sector.

The SCP sector

Smart contracts are computerized blockchain protocols that execute terms of a contract. Smart contracts represent computer codes ensuring that when both parties meet the terms of the contract they will execute automatically, allowing for trustless, peer-to-peer transactions. SCP assets are designed for the building of decentralized applications, layer 2 scaling systems, decentralized autonomous organizations (DAO) and other custom protocols.

Every platform has a unique open-source user and miner incentive structure that utilizes the Byzantine Fault-tolerant (BFT) consensus mechanism. Every platform also utilizes a native token for the payment towards building on the platform, providing liquidity and allowing interoperability between the native token and the newly created tokens built on the platform.

SCP sector is part of DACS: What does that mean?

In December 2021, CoinDesk Indices launched its Digital Asset Classification Standard (DACS) to set the standard for defining the industries of digital assets. Every one of the top 500 digital assets by market capitalization is assigned to an industry defined by DACS. Then, at least one industry is assigned to an industry group. Finally, at least one industry group is assigned to a sector.

The SCP sector is the second-largest sector in DACS, with 88 assets representing over 35% of the digital asset market worth approximately $750 billion in market capitalization as of March 31, 2022. In addition to the SCP sector, DACS offers five other sectors: Currency, Computing, Culture & Entertainment, DeFi (Decentralized Finance) and Digitization. The six sectors in DACS represent 22 industry groups and 35 industries.

Assigning industries to the SCP sector

To be assigned to an industry in the SCP sector, the digital asset must be transparent, self-executing and trustless. Smart contract platforms tend to have their own blockchains and consensus mechanisms, but it is disputable how to classify tokens with smart contract capabilities, depending on whether they are used for specific applications or not intended to build dapps (decentralized applications). There are also debates on whether smart contracts need to be decentralized and whether a permissioned blockchain can be classified as smart contract platform.

There are two single-industry groups: Multi-Chain/Parachain and Single Chain.

The Multi-Chain/Parachain industry includes smart contract platform assets that enable multiple parallel blockchains and cross-chain interoperability. The platform can be structured with a relay chain that allows slots for external parallel chains, or parachains.

The Single Chain industry includes layer 1, or base, blockchain in which all transactions are recorded on the primary distributed ledger. The Single chain allows for layer 2, or companion, scaling systems that remain tied to the primary blockchain for transactional competency.

SCP sector offers investors flexibility

At present, CoinDesk Indices offers two indices based on the SCP sector. The flagship index is the CoinDesk Smart Contract Platform Select Index (SCPX) that constitutes a diversified basket of smart contract platform assets with ETH making up 73% of its portfolio from its market cap weighting. However, many investors who already hold ETH do not look for that much exposure to it.

Therefore, the CoinDesk Smart Contract Platform Select Ex ETH Index (SCPXX), which is just like SPCX but without ETH, offers flexibility to investors to get exposure to assets in the smart contract platform to complement their existing positions in ETH. Alternatively, SCPXX can be used simply to get exposure to the smaller assets inside the SCP sector. The two, taken together, can be analyzed for insights on performance between ETH and the rest of the sector.

The digital assets in the SCP sector indices are determined by eligibility criteria for investability and liquidity that have the following requirements:

· Ranked in the top 200 of the DACS universe

· Listed on eligible exchanges for at least 30 days

· Supported by eligible custodians

· Market cap is higher than the median of the top 20 eligible assets

· Median daily trading volume over the past 30 days is higher than the median of the top 20 eligible assets

Shaping the digital asset economy

The SCP sector tends to foster a rich environment for innovation that attracts a high level of development and resources. These platforms leverage network effects, decentralized consensus mechanisms and compatibility with various programming languages that enable creative and innovative developers to build protocols for a wide range of purposes such as decentralized exchanges, lending platforms and non-fungible token (NFT) marketplaces.

The SCP sector serves as a foundation for the digital economy as the dapps built on these platforms attract numerous users, empowering individuals to take greater ownership over their finances and transactions and creating a burgeoning economy with a wide range of opportunities. They also facilitate a positive reinforcement cycle through the network effect.

The SCPX and SCPXX indices offer investors greater transparency into the sector, offering essential intelligence needed to allow them to express their views by making decisions and executing more efficiently.

To find out more about DACS and its indices, contact us at info@coindesk-indices.com.

Relevant indices

Smart Contract Platform Index (SCPX)

Smart Contract Platform ex-ETH Index (SCPXX)

Index-linked products

Smart Contract Platform ex-ETH Index (SCPXX) underlies the Grayscale® Smart Contract Platform Ex-Ethereum Fund

Disclaimer:

CoinDesk Indices, Inc. (“CDI”) does not sponsor, endorse, sell, promote or manage any investment offered by any third party that seeks to provide an investment return based on the performance of any index.

CDI is neither an investment adviser nor a commodity trading adviser and makes no representation regarding the advisability of making an investment linked to any CDI index. CDI does not act as a fiduciary. A decision to invest in any asset linked to a CDI index should not be made in reliance on any of the statements set forth in this document or elsewhere by CDI.

All content contained or used in any CDI index (the “Content”) is owned by CDI and/or its third-party data providers and licensors, unless stated otherwise by CDI. CDI does not guarantee the accuracy, completeness, timeliness, adequacy, validity or availability of any of the Content. CDI is not responsible for any errors or omissions, regardless of the cause, in the results obtained from the use of any of the Content. CDI does not assume any obligation to update the Content following publication in any form or format.

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

CoinDesk - Unknown

Jodie Gunzberg, CFA, is the Managing Director of CoinDesk Indices.

CoinDesk - Unknown

Jodie Gunzberg, CFA, is the Managing Director of CoinDesk Indices.