Are you looking for novel cryptocurrency projects that have not yet reached mainstream status but have the potential to disrupt entire industries? If yes, then one of the first things you need is a methodology for your fundamental analysis (“FA”) that allows you to triage low market cap coins between outright scams, duds that are good for a quick flip (at best), and the diamonds in the rough that have the potential to become top market cap projects.
To show you a hands-on example of such a methodology, we have interviewed a professional cryptocurrency investor and early coin holder of a (so far) relatively unknown crypto project called Zenon.Network. He is the author of the “Ape’s guide to the Galaxy” medium article which is one of the most referenced community-created project summaries. “Shazz”, as he calls himself, will share with you his FA heuristic which he developed for more than 3 years and has given him the conviction to make ZNN the main component of his cryptocurrency portfolio.
Q: Shazz, please tell us about your journey to becoming a professional crypto investor and how long you have maintained a vested interest in Zenon?
It all started when I “invested” in altcoins for the first time amidst the 2017 bull run. As a bloody beginner, I had no idea what I was doing, and more often than not I just jumped onto coins that were shilled by crypto Twitter accounts with a large follower base. I was a miserable trader and, unsurprisingly, missed getting out in time when the market turned in January 2018. As a result, I gave back most of my gains in the subsequent weeks – a devastating experience. However, I believe it had a silver lining because I had learned enough to understand that crypto market cycles repeat in relatively short yearly intervals. Because I had a business development background in fintech and a passion for decentralized internet protocols, I convinced myself that I could become a successful crypto investor if I just learned as much as I could about the subject matter before the next bull cycle would start with the next Bitcoin halving in May 2020. After all, I was not rich in any sense and the fear of eternally being financially dependent on employment made me hell-bent on making this happen. I, therefore, focused all my private and professional energy on learning more about fundamental analysis and developing my heuristic on how to research, compare and assess the many different aspects one needs to consider before making a qualified investment decision into a new and relatively unknown crypto project.
I began developing this methodology when I started a job as a product manager at one of the first regulated crypto exchanges in early 2018. There, I was tasked with finding high-quality coins and tokens for exchange listings and, as a result, spent a full year researching hundreds of projects – I loved it because it allowed me to create an extremely detailed yet effective due diligence process for which I found inspiration in Charlie Munger’s bestseller “Poor Charlie’s Almanac”. In a nutshell, Munger suggests using a systematic “checklist”-approach which allows an investor to scrutinize a broad range of factors which, on their own as well as in interplay, would allow making a qualified assessment about a company’s potential for success or failure. In a way, all I had to do was to apply this logic to crypto assets by making a checklist of factors that would apply to this particular asset class. On a high level, the factors in question are:
- Initial Distribution
- Project Funding
- Degree of Innovation
- Crypto Economics
- Community Engagement
- Holder Base
- Project Adoption
- Secondary Markets
- Crisis Management
This approach turned out to be a good idea as it allowed me to spot gems in the rough (amongst tons of literal shitcoins) such as Chiliz, Theta, Ren, and Reserve Rights in their early stages. Though I invested in most of those coins early on, I lacked the conviction to hold them until today. I felt like even these (now highly successful) projects were really solid, they all lacked something I couldn’t point my finger on. Until I found Zenon in November 2019 which I decided to make my long-term hold. It was the combination of the following factors that created this conviction:
- a 100% fair launch and initial distribution,
- an unprecedented dual-ledger architecture,
- and an unwavering devotion to the Bitcoin ethos.
It’s almost ironic that I stumbled across Zenon because I did thanks to a tweet of one of the biggest crypto Twitter influencers (thank you @GalaxyBTC) – but I suppose I would never have had the ability to see just how much Zenon stood out from all the other projects at that time, had I not spent the past years refining my “shitcoining” skills, as I call them. Ever since I dove into that project, my motivation was no longer just to improve my research skills, but I was rather on a mission to acquire as much ZNN as I possibly could get my hands on. Since November 2019 I have systematically accumulated ZNN by converting part of my monthly salary and trading profits. And thanks to staking rewards I was able to reduce my average entry price to around $2 per ZNN.
Q: Since that period, the price of Zenon has grown by a factor of 11. Why do you think it reached such a high valuation before the network fully launched?
While the recent price appreciation has certainly benefitted from favorable market conditions, I believe Zenon is still fundamentally undervalued. Since its inception (with a PIVX fork as a placeholder chain) amidst the depths of the bear market in March 2019 (though the team has been working on the project since May 2018), ZNN has maintained a stable price floor despite a considerable emission rate, zero advertising, and not much more than a fully functioning wallet and a yellow / white paper (plus the occasional medium articles). I, therefore, believe the price increase in early 2021 was a precursor of what we will see once the Zenon mainnet is launched, upgraded coin economics are announced, incubator projects are realized, and industry partners are introduced.
Now, someone reading this might think “D’uh, of course, he says he believes the price is going to increase – after all, he invested a lot of money in it and just wants others to buy in too!”. This is a legitimate objection. Therefore, to minimize the risk that my exposure to ZNN could bias the opinion of others, I will mainly provide a summarized dissection of Zenon Network as per my Fundamental Analysis Methodology which I mentioned earlier. This way, I just share with others the process and steps I went through to come to a conclusion about this project and why it made sense to me to invest in it. This does not need to apply to others – but they nevertheless can get some useful insights in regards to aspects I look at whenever I conduct fundamental analysis on a low market cap coin.
Q: Did a private sale or pre-mine occur and to which degree did it give selected initial investors or early stakeholders an unfair advantage?
Zenon did not have a coin sale per se. Instead, the team offered initial “investors” to lock up 1 BTC for up to 2 years in exchange for 5000 ZNN. The locked-up BTC would then successively be paid back to initial investors via so-called “xStakes” – an algorithmic refund mechanism. It was also possible to buy less than 5000 ZNN but they were not eligible to xStakes. The goal of this initial allocation procedure was hence not to raise funds but to incentivize committed early network participants in setting up nodes and establishing a stable consensus with a decentralized first version of the network. There was no pre-sale, nor a premine-based team allocation. Anyone with a few years of experience in crypto can confirm that this setup is relatively rare.
In my opinion, the xStakes funding mechanism was also an incredibly smart move to eliminate an attack vector in form of regulatory compliance with financial markets authorities. You see, several financial market regulators have deemed placeholder coins / tokens a financial security if they were issued with the promise of future revenue and/or as compensation for a monetary investment to pre-fund the development of a protocol or platform. If the Zenon team had not collected the initial Bitcoin from early contributors with the promise that they will get it back in time, the trading of ZNN might legally only have been possible on licensed securities exchanges for the time until the Zenon mainnet was released.
Q: How is the project funded and what is the intended use of the funds?
This is an interesting one for Zenon. As you recall, all initially raised BTC have been returned to those early contributors who bought 5000 ZNN and ran a node. Also, when the team announced the initial contribution on a BitcoinTalk post, they already provided a fully functioning placeholder chain (based on a PIVX fork) one could interact with via a fully functioning desktop wallet. And ever since that launch, the team has constantly worked on developing cutting-edge DLT architecture while releasing technological, informational, and graphical content at such high quality that it was hard to believe the people behind this were nothing less than professionals.
Until today it remains unclear who or what is funding the Zenon.Network team and it has caused quite some speculation among the community. The only thing we know is that, whoever is funding it, they have deep pockets and they put together one of the best teams this industry has seen. Another aspect to consider is that the Zenon team has always emphasized Zenon to be a community-run project; the team portrays itself as “servants of the people”. In this context, it makes a lot of sense not to disclose their funding source as a way to protect the project from malicious intervention by political or economic actors. This is one of the aspects where the team has emphasized abiding by the Bitcoin ethos.
Q: Which technology is introduced and what are the associated risks and benefits?
As a radically new DLT, the Zenon “Network of Momentum” introduces an unprecedented dual-ledger architecture. It aims at superseding networks such as Ethereum, Polkadot, or Solana by solving the scalability and transaction throughput problem with a unique sharding approach without compromising on network decentralization. On a high level, the former is achieved by combining the concepts of a DAG (Directed Acyclic Graph) which IOTA failed to successfully realize, and a Block-lattice structure which Nano tried to introduce but also somewhat failed, partly because they did not account for network spam (which Zenon prevents through Plasma). There are quite a few aspects to Zenon’s technological architecture which makes it unique and potentially disruptive, such as
- Bitcoin-Interoperability on the protocol level via hash locks and time locks,
- Sharding through a high throughput / low latency dual-consensus, hybrid PoS/PoW mechanism with Pillars, Sentries and Sentinel nodes as validating entities,
- Oracle functionality on the protocol level,
- Proof-of-Work links for plasma generation,
- Censorship- and quantum resistance,
- Enablement of mass-scalable decentralized applications in various industry verticals such as
- Secure Data Storage
- AI & Big Data
- Digital Identity services
- DAOs and DACs
- Internet of Things (IoT)
- Distributed Computing platforms
- DeFi on Bitcoin
This just shows that the Zenon team has looked at and deeply understood all the fundamental flaws of incumbent protocols, and it seems they have found a way to solve most if not all of them. The main technological risk with such a novel approach as Zenon’s is the possibility that the network cannot be realized or does not work as intended. Currently, the testnet is available to the public, and to my knowledge, the smartest community members are working hard at kicking the tires of the network and trying to break it. So far, the Zenon NoM testnet seems to hold up what it promised. The next-level design and functionality of the recently released S y r i u s wallet, which will be the primary point of interaction with the Zenon mainnet, has also enforced this notion.
For a more extensive technical analysis of Zenon from a layer 1 chain point of view, I’d recommend having a read of the brilliant Hackernoon article “How not to fracture a layer 1 chain”
Q: Can the project solve an existing and potentially large-scale business, social, political, or technological problem?
The Zenon Network of Momentum was designed to overcome limitations of network scalability and decentralization while providing a robust layer 1 DLT for an ecosystem of mass-scalable, censorship-resistant, decentralized consumer applications (“zApps”). So far, many different layer 1 DLTs such as Ethereum, Polkadot, EOS, or Solana are trying to achieve this mission but they usually all fall short either in terms of scalability, usage cost, fairness of the initial distribution, or decentralization once they grow big. Zenon was built from the ground up with a unique approach to compete with these incumbent networks and, while theoretically, it is capable of doing so, it has yet to prove this ambitious goal.
Q: How does project adoption drive the valuation of the coin and how sophisticated and sound is the coin economics design?
It seems the Zenon team has put as much thought into the coin economics as it did with the network architecture itself. Zenon.Network also introduces a dual-coin approach with ZNN being the main currency and QSR (“Quasar”) being the secondary currency. ZNN is used as collateral for the network consensus infrastructure that ensures transactions are validated and recorded on-chain. There are three ways to participate in the network as an infrastructure provider: 1) by running a Pillar node (15’000 ZNN), 2) by running a Sentinel node (5’000 ZNN), and 3) by delegating ZNN to Pillars for more ZNN or staking ZNN for QSR (1 ZNN or more). ZNN as the main currency is already extremely rare as most of the circulating supply is held by the community and used to run nodes. Therefore, only a very small amount can be obtained on exchanges. Lastly, 100 ZNN will be needed to pay for the creation of Zenon Network Tokens (the equivalent of Ethereum-based ERC20 tokens but with the difference that they exist on top of the Zenon Network). This will ensure that the Zenon network won’t be flooded with tons of useless or scammy tokens as is the case with Ethereum, for instance.
QSR as the second coin is used as collateral for nodes and to fuse Plasma which is essentially network gas required to submit transactions and influence how fast they are being validated by node operators. QSR will also quickly become very scarce as each new Pillar that is set up will need to burn increasingly large amounts of it (hence continuously raising the opportunity costs for deconstructing a Pillar to sell it). QSR is also needed to create Sentinel nodes although without QSR getting burned in that case.
By taking into account the inflation rate of both, ZNN and QSR it becomes obvious that even just a moderate network growth will significantly drive the valuation of both ZNN and QSR, since such large amounts will be locked up, burned, or used in the network. Last but not least, relatively high staking rewards of 0.1% – 0.15% daily yield create a strong incentive for holders to participate in the consensus process while holding onto their ZNN. Lastly, Pillar holders are also the network participants which can vote on incubator projects which apply for a grant to build applications in the Zenon ecosystem, e.g. by creating a token as per the Zenon Token Standard (ZTS).
Q: How engaged is the community in contributing to the success of the project in an organic way through awareness activities, artwork, creation of educational material, and so on?
A healthy, engaged community is a key success factor for any crypto project. Organic community growth is essential in the early stages to ensure the coin has a broad and committed holder base. On top of that, the community is the primary marketing arm of any crypto project and the best ones will exceed the quality and reach any traditional or crypto marketing agency could offer. I have talked to various early ZNN holders who have also been early investors in largely community-driven projects such as Chainlink, Raiblocks/Nano, or Bitcoin. Especially early LINK holders regularly state how the current stage of the Zenon community reminds them of “Link Marines” – initial project backers who have become famous for their adamant conviction in the Chainlink project and their ability to mobilize large numbers of community members to spread awareness about it. Some Link OGs within the Zenon community even stated that the activity of “Link Marines” won’t even compare to the marketing power of “znnAliens” if they keep going on creating awareness with original, organic content at the current rate. There are currently over 70 Zenon community members creating high-quality, organic, original content daily. It is amazing to see the talent, skill, and passion behind all these community-generated videos, memes, GIFs, write-ups, posts, and articles. I showed some of the content to the founder of a crypto marketing agency I am friends with and she was just blown away, realizing that no single agency could ever keep up with the quality and quantity of a genuinely passionate community that wants to spread the word. However, she correctly stated, coordinating a loosely coupled community of individuals to focus on the execution of a specific marketing strategy could be more challenging than within a centralized agency because it is subject to a much more organic, intrinsic drive.
Q: Thank you for this first insight into your FA method, Shazz. You also mentioned that “reading between the lines” is also an important factor when you research a new project. Can you give a bit more color to what you meant with this?
Certainly. What I meant was that every good project ideally has some aspects to it which are hued in secrecy. While it is important to remain as transparent as possible, an experienced team knows that leaving some “breadcrumbs” to the community can help a lot in the creation of a solid holder base. Because it allows some aspects of the projects, which have not yet been officially disclosed (such as potential partnerships with renowned commercial entities), to become the basis of speculation and, perhaps, even some conspiracy theories that inspire new community members to research the project in greater depth. After all, most crypto project investors love playing Sherlock Holmes, hoping to discover some overlooked clues that could potentially strengthen their investment thesis by giving them a slight edge over other investors who solely focus on the information available in plain sight.
Q: So, you mean, some crypto investors consider speculative, unconfirmed information to be part of their FA? How is this applicable in the case of Zenon?
Absolutely, yes. In the case of Zenon, I don’t want to disclose too much but I guess one “breadcrumb” I can share is already pretty popular among the Zenon community, hinting that there is something bigger going on behind the scenes of this project:
The “Paradigm Fund” Pillar title
This is interesting, but it could also just be a coincidence! In any case, thank you for that first insight into your FA methodology, Shazz. We look forward to hearing more about it in the future. And maybe finding some additional crumbs to chase down Zenon’s “rabbit hole”.