State of Covalent Q1 2024

Key Insights

• The percentage of staked CQT grew from 22% in Q1 2023 to 29% in Q1 2024, despite a 20% increase (an additional 104 million CQT) in the circulating supply.
• The CQT market cap rose 28% QoQ, reaching $275 million multiple times before ending Q1 at $199 million.
• Covalent announced plans to introduce a revenue-sharing model in the future, implementing a buyback program at the end of January that repurchased 219,000 CQT ($63,000) by the end of Q1.
• In Q4, Covalent introduced the Ethereum Wayback Machine (EWM), a long-term data availability solution for historical data on Ethereum.
• Covalent increased its network operator set by decentralizing another network operator role (called Refiners) and adding more validators to an already decentralized set of operators (called BSPs) in Q3 2023.

Primer

Covalent (CQT) is a long-term data availability solution providing infrastructure that indexes and structures data. Covalent standardizes data from various blockchains and makes it accessible for developers of applications like crypto wallets and AI. It offers three core products supporting over 225 networks across mainnets and testnets: the Unified API, Covalent SDK, and GoldRush Frontend Kit. The Unified API enables developers to query and use any blockchain’s data points in a standardized way. This feature is also available through the Covalent SDK. The GoldRush Kit contains a set of React components that application developers can utilize to build their user interfaces.

The Covalent protocol extracts data from various blockchains, uploads that data to a storage instance, indexes and transforms the stored data object, and loads the data into local data warehouses queried by API users. Throughout the process, it sends proofs of completed work to a contract authenticating the proofs (called ProofChain). In short, Covalent cryptographically secures and standardizes all of the extracted blockchain data so developers can query from any chain in a unified way, hence, the Unified API. For a full primer on Covalent, refer to our Initiation of Coverage report.

Website / X (Twitter) / Discord

Key Metrics

Performance Analysis

Network

Covalent has over 150 paid API customers using its structured data and indexing protocol. These data consumers range from traditional finance and consulting companies to DeFi applications and investment tools. A few notable users include Fidelity, EY, Consensys, Matcha, Rainbow Wallet, and CoinLedger. To arrive at the data these entities consume, the protocol must extract, transform, and enrich the raw blockchain data to make it accessible.

Block Specimens

A block specimen is a cryptographically secure representation of a block. Block Specimen Producers (BSPs) extract and export block specimens to a storage instance. These new data objects can be reconstructed to represent a blockchain's historical state. To ensure this offchain process is valid, the BSPs then publish a proof to the ProofChain contract containing the block specimen hash and the IPFS access URL. The ProofChain Contract is currently on Moonbeam, but it will soon launch on a Byzantine fault-tolerant, high-throughput event streaming system built using the Cosmos SDK.

Over the past five quarters, the number of block specimens produced on Covalent has grown steadily, though falling 2% in Q1. Cumulatively, roughly 1.7 million block specimens have been produced, representing data that could be reconstructed to form a blockchain’s history. Block specimens make blockchain data composable and reusable outside its respective execution environment. This property is central in powering Covalent’s Ethereum-focused data availability solution, called the Ethereum Wayback Machine (EWM). The EWM will address deleted rollup history due to the state expiry feature introduced in the Dencun upgrade.

Block Results

After being saved to a storage instance, Refiners index block specimens, perform data transformations, and output block results (queryable data) to a storage instance. Refiners also publish proofs to the ProofChain contract verifying their work and including an IPFS access URL.

In mid-August, Covalent decentralized the Refiner (or Block Result Producer) role, enabling a whitelisted set of operators to participate in network operations. Previously, Covalent Labs was the sole Refiner producing block results. Since decentralizing the role, Refiners have produced 681,000 block results. As enriched transformations of raw block specimen data, block results can include offchain features related to the data like NFT media. The data enrichment provides a more holistic context around the data, making it more useful to developers.

Staked CQT

Covalent uses a Stake-for-Access model where network operators (BSPs and Refiners) stake CQT to perform work on the network. Covalent employs staking parameters, such as max/min values and a delegation ratio to ensure staked CQT remains distributed among the operator sets. BSPs must stake a minimum of 175,000 CQT and are restricted to 350,000 CQT. They also have a max delegation ratio of 27:1 (i.e., individual BSPs can only be allocated a maximum delegation of 9.45 million CQT). Alternatively, Refiners must stake a minimum of 35,000 CQT, are restricted to 70,000 CQT, and do not receive delegation. Covalent plans to migrate the staking contract from Moonbeam to Ethereum in the coming quarters.

The percentage of staked CQT grew from 22% in Q1 2023 to 29% in Q1 2024, despite a 20% increase (an additional 104 million CQT) in the circulating supply. When the Refiner role decentralized in mid-August 2023, it enabled a new group of network operators to stake CQT. Nevertheless, the Refiners node set accounts for less than 600,000 of the 184 million CQT staked, representing just 0.3%. Given the maximum stake limits and that most BSPs have not reached delegator capacity, contributors to the growth in the percentage of staked CQT can be partially attributed to the 9% YoY increase in active delegators and the addition of two new BSPs in Q3 2023, which increased stake capacity by 19.6 million CQT.

Network Operators

Covalent has three core network operators: BSPs, Refiners, and Query Operators. BSPs extract data from various blockchains and upload it to storage instances as block specimens. Refiners structure and transform block specimens into block results (queryable data) and upload them to storage instances. Query Operators load block results into local data warehouses and serve API queries. Currently, this role is operated by Covalent Labs but will be decentralized in the future.

Covalent increased its network operator set by decentralizing the Refiner role and adding two new BSPs in Q3 2023. Though Covalent appears to have 31 total operators, only 8 operators produce both block specimens and block results. Considering that Covalent Labs continues to run the Query Operator role, opening block result production to a set of Refiners added an additional layer of decentralization to the network, lowering single-point-of-failure risks and adding redundancy.

A second-order consequence of expanding the node operator set is that more CQT is staked, reducing tradable supply and putting upward pressure on the token price. Covalent plans to continue onboarding more operators to further decentralize the network. As before, having more operators staking CQT should continue adding upward price pressure.

Financial

Rewards

BSPs and Refiners are currently subsidized with roughly 20 million CQT rewards per year. Before subsidization ends by 2026, Covalent plans to implement a revenue share. In this model, query revenue (paid in fiat) would be used to buy back CQT, which would then be used to reward node operators. Currently, 20% of all query revenue is used to execute automatic weekly buys of CQT, which are stored in a multisig wallet for later distribution.

Covalent operators earned $540,000 in Q1, up 35% QoQ, despite a 24% drop in CQT emitted. The 68% increase in the average price throughout the quarter drove operator earnings upward. Because operator earnings are denominated in CQT, the price of the asset directly impacts the amount operators earn.

Market Cap

The CQT market cap rose 28% QoQ, reaching $275 million multiple times before ending Q1 at $199 million. Since Covalent opened the Refiner role and added two new operators in mid-August 2023, the CQT price has risen 232%, while the broader market only appreciated 132% in the same time period. Though the Refiner role minimally impacted the amount of CQT staked, adding two new BSPs increased stake capacity by 19.6 million CQT. This reduced tradable CQT and applied upward pressure on the asset price.

In late January, Covalent implemented a CQT buyback program. Although only 219,000 CQT were bought back by the end of Q1, this program lays the foundation for linking network demand directly to increased buying pressure on CQT. Essentially, as API query demand rises, Covalent's revenue will increase, enabling further buybacks of CQT with the additional revenue.

Qualitative Analysis

Ethereum Wayback Machine

In Q4, Covalent introduced the Ethereum Wayback Machine (EWM). The EWM is a long-term data availability solution for historical data on Ethereum. It was born from Ethereum’s introduction of state expiry in its Dencun upgrade. State expiry addresses Ethereum state bloat from rollups posting transaction data to the network. All the additional data could lead to performance degradation, high storage costs, and increased sync times for nodes in the long term.

EIP-4844 (a part of Dencun) introduced a blob transaction type that rollups will use to post data more cheaply to Ethereum. Furthermore, blob data is only stored by Ethereum consensus layer nodes (beacon nodes) for roughly 18 days before being deleted. Covalent’s EWM will store blob data indefinitely, providing a persistent and verifiable layer for storing rollup history. In addition to archival purposes, the EWM will help applications from compliance to AI model training.

AI Use Cases

Covalent's structured data is used by a wide range of consumers, from taxation tools (Rotki) to investor dashboards (Consensys) to user wallets (Rainbow). Artificial intelligence (AI) is an emerging data consumer well-suited for Covalent’s data infrastructure products. To attract AI talent to the Covalent product, the team has administered multiple grants to AI projects. The Q1 grantees using Covalent in their AI applications are detailed below.

• SmartWhales: an onchain copy-trading platform that enables investors to follow DEX traders and automate trades to copy their activity.
• BotFi: a protocol that enables users to automate DeFi tasks, such as copy trading, dollar cost averaging (DCA), limit order scheduling, and more. It also offers an AI token screener, a frontrunning bot, and other tools to enhance the DEX trading experience.
• Laika AI: a browser extension that offers onchain analytics, token contract analysis, wallet tracking, AI alerts of onchain activity, and more.
• Entendre Finance: an AI accounting tool that enables users to aggregate onchain activity from different platforms, automating transaction tracking, analysis, and record-keeping.

Revenue-Sharing

In Q1, Covalent announced plans for a revenue-sharing model in the future. While BSPs and Refiners are currently rewarded through emissions, Covalent plans to share API query revenue among network operators. Currently, Covalent Labs runs the Query Operator role. It receives $0.001 (in fiat or stablecoins) per API call and uses some of the revenue to buy back CQT. Though BSPs and Refiners have not yet been rewarded with the bought-back CQT, Covalent plans to reward them in the future.

Development Updates

• In Q4, Covalent launched the GoldRush Kit, a new core product that contains a set of React components that application developers can utilize to build their application UIs.
• Covalent deployed a series of useful updates to GoldRush, including the addition of DEX components that increase the visibility of pools and tokens on applications like wallets. It also introduced a component for displaying transaction receipts.
• Covalent integrated multiple new blockchains in Q1, including MELD, Katla (Taiko testnet), Movement, Gnosis Chain, Celo, Cronos zkEVM (testnet), and Blast.
• Integrated Covalent Client SDK with WEVM, enabling developers to index cross-chain wallet activities, identify blockchain networks associated with certain addresses, and more.
• Integrated with Viem, giving Ethereum developers access to the Unified API through a Viem-compatible SDK.
• Announced the new GoldRush Decoder product, a data visualization tool that can be combined with the GoldRush Kit.
• Covalent plans to migrate the ProofChain contract from Moonbeam to a specialized chain built with the Cosmos SDK. It will also migrate the staking contract from Moonbeam to Ethereum.
• Plans to launch liquid staking for the CQT token and add a new light client operator role to the network.

Ecosystem Updates

• Covalent was awarded $200,000 from Optimism’s Retroactive Public Goods Funding (RetroPGF) program for indexing and providing data from OP mainnet, OP Sepolia, OP Goerili, and various chains developed on the OP stack (Base, Zora, Boba, opBNB, Mantle, Metis, Public Goods Network, Mode, Kinto, and Loot Chain).
• Covalent awards up to $25,000 in grant funding to projects building with its infrastructure. Notable projects it awarded in Q1 include:
  • Supapowr ($15,000) – wallet management infrastructure
  • Berry Lab ($15,000) – user-centric data analysis and application features
• Joined DIN (Decentralized Infrastructure Network) to help launch a decentralized blockchain RPC platform. As a part of DIN, Covalent’s API will be integrated into Infura, offering developers access to supported onchain data.
• Partnered with the University of Calgary (a Block Specimen producer) to provide university members access to blockchain data.
• Received a Service Organization Control (SOC) 2 Type II compliance certification, attesting that Covalent Labs maintains a high level of security and data privacy in its operations.

Closing Summary

Covalent has significantly improved its network since Messari’s last report on the protocol in Q4 2022. It has expanded support to over 225 blockchains, decentralized another layer in its supply-side operations, launched the GoldRush developer kit, implemented a CQT buyback program, and announced the Ethereum Wayback Machine. And in Q1, Covalent saw the percentage of circulating CQT grow to 29% (its highest value in the past year) as the CQT market cap rose 28% QoQ. Covalent is poised to grow its API usage as it continues to improve its protocol in the next stage of the market cycle.

——

Let us know what you loved about the report, what may be missing, or share any other feedback by filling out this short form. All responses are subject to our Privacy Policy and Terms of Service.

This report was commissioned by Covalent Labs. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

No part of this report may be (a) copied, photocopied, duplicated in any form by any means or (b) redistributed without the prior written consent of Messari®.