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State of Harmony Q1 2023

Apr 14, 2023 ⋅  11 min read

Key Insights

  • Harmony’s circulating market cap increased 115% QoQ, but revenue in ONE declined 33% QoQ.
  • Average daily transactions decreased 17% QoQ, while average daily active addresses increased 28% due to an anomalous spike near quarter end.
  • Almost $3.3 million worth of depegged assets from the Horizon Bridge hack were burned this quarter, bringing the total to $7.6 million. The ongoing recovery effort will be crucial for Harmony’s DeFi ecosystem to regain its health.
  • Harmony ecosystem partner Hidden State launched 1.country, a novel domain system that bridges Web2 and Web3 identity. From launch to quarter end, 281 domain names were purchased.
  • Upcoming technical improvements include a state pruning solution, cross-shard transactions, light client functionality, leader rotation, and a state sync solution.

Primer on Harmony

Harmony is an Ethereum Virtual Machine (EVM)-compatible, Effective Proof-of-Stake (EPoS) smart contract platform for decentralized applications. It uses the Fast Byzantine Fault Tolerance (FBFT) consensus mechanism and a random state sharding technique that separates a chain into segments. Each segment processes transactions and stores data in parallel, thus increasing transaction throughput and speed. Harmony also utilizes a Verifiable Random Function (VRF) and Verifiable Delay Function (VDF) to ensure secured randomness when validators are assigned to shards, reducing the possibility of a “single shard attack.” Harmony achieves 2-second transaction finality across four shards.

Key Metrics

Financial Analysis

The broader crypto market rebounded in Q1’23 following a tumultuous second half of 2022. Harmony’s native token ONE was no exception, as its circulating market cap increased 115% QoQ. Furthermore, Harmony’s market cap ranking improved from 140th to 130th throughout the quarter.

However, Harmony’s revenue (measured as total gas fees spent) continued to decrease this quarter. The number of ONE tokens collected by the protocol decreased 33% QoQ to 56,000. When denominated in USD, Harmony’s revenue had a smaller decrease (16%), due to ONE’s price appreciation throughout the quarter. In the past quarter, Harmony collected over $1,100 in revenue, a year-over-year (YoY) decline of 99.9%.

All transaction fees collected by the protocol are currently being burned. However, the burn rate has little impact on inflation with current network activity levels. ONE’s circulating supply is over 12.3 billion tokens, and each quarter over 100 million tokens are minted to reward validators. Thus, the 56,000 tokens burned in Q1’23 reduced inflation by around half a percentage point.

The 51% QoQ reduction in the inflation rate is instead a result of fewer genesis tokens being unlocked this quarter rather than the burn rate. The Harmony team’s tokens finished vesting in Q4’22. The only locked portion of ONE’s initial distribution are tokens allocated toward ecosystem development. These tokens will continue to vest at a rate of 24,825,000 per month until all genesis tokens are liquid in mid-2025. At this point, the only inflationary pressure on ONE will come from tokens minted for validator rewards (subject to governance change).

In Q4’22, the Harmony team proposed HIP-28, which would stop burning transaction fees and start using them to fund infrastructure services such as RPC nodes, oracles, block explorers, and more. These needs are typically funded through Harmony’s treasury. However, the Harmony team decided in Q3’22 to use treasury funds to burn and recover the value of depegged assets from the Horizon Bridge hack in Q2’22, which were valued at around $100 million at the time of the incident. The proposal was widely discussed with 100 comments on the forum post. While some community members understood the need for this funding, many opposed completely removing the burn mechanism. The proposal went to a vote in January and ultimately failed.

In February, the team revised the HIP-28 proposal to use half of the collected fees for infrastructure costs and let governance decide each month how to allocate the other half of tokens (as of April 5, 2023, this proposal has gone to a Snapshot vote).

In the meantime, the Harmony team has been working to cut unnecessary infrastructure-related costs. In early March, the team shared a blog post with a detailed rundown of recent monthly costs and future projections. Of note, the team plans to migrate its services from AWS to other cloud providers such as Digital Ocean, Latitude, and Contabo. Additionally, the team will transition from the elastic RPC nodes back to the legacy nodes. Harmony launched the elastic RPC nodes last June to improve RPC connection reliability, but with the decrease in network activity, they are no longer necessary.

Network Analysis

Users

Harmony transactions declined for its fourth quarter in a row, decreasing 17% QoQ to 32,000 daily transactions on average. Transactions spiked two times throughout the quarter. The first spike could have been a result of centralized exchange Bitfinex listing ONE on February 1. The second spike was accompanied by a spike in active addresses in late March. Active addresses increased roughly 13x and reached 50,000 on March 25, 2023. It is unclear what drove this increase. Domain name project 1.country launched several days earlier, but fewer than 300 domains were claimed from launch to the end of the quarter, so it cannot explain the spike (refer to the Ecosystem Analysis for more details on 1.country).

The spike in active addresses caused average daily active addresses to increase 28%. It was the first time the metric grew QoQ since Q1 2022. If it weren’t for the spike, the figure would have decreased by 12% QoQ.

Both network activity metrics were down over 94% year-over-year (YoY). Although the decline in activity was common across networks it was exacerbated on Harmony due to the Horizon Bridge hack and DeFi Kingdom’s departure. However, both metrics rose from the start to the end of Q1’23, indicating that network activity could be on the rise.

Validators

The average daily amount of ONE tokens staked toward elected validators increased 4% QoQ to 6.11 billion. This represents around 46% of the total ONE supply. The amount of ONE tokens staked has remained relatively steady, slowly increasing 13% YoY. At the end of the quarter, 75 million ONE tokens were staked to inactive validators. If all this stake were re-delegated to elected validators, it would increase total stake by around 1.2%.

The average daily total stake denominated in USD increased 32% QoQ to $122 million, driven by ONE’s price appreciation.

The average daily number of elected validators fell slightly for the fourth straight quarter, down 6% to 143. The effective median stake did not change significantly QoQ, remaining just over 6 million. The metric dictates the amount of tokens an active validator needs to stake (or have delegated to them) to be eligible for election. Thus, the decrease in elected validators was likely more due to validators ceasing operations on Harmony. The number of average daily active validators decreased by 4% QoQ to 207.

The average daily number of delegators did not change from last quarter, staying fairly constant in the past year.

Technical Upgrades

Throughout the quarter, Harmony developers released several upgrades to improve network performance. In early February, Harmony hard-forked to V2023.1.0, allowing users to send ONE from one shard to another through Metamask. The protocol also implemented the V4.3.14 release changes. Additionally, the Harmony team released a new Harmony client at the end of January, addressing issues that led to outages on Shards 1 and 3 between January 15 and 17.

The Harmony team also released several blog posts detailing 2023 plans for protocol development. Priorities include:

  • State pruning, which will reduce storage requirements for nodes and improve network efficiency while cutting costs.
  • Cross-shard transactions, which will scale Harmony horizontally, enabling transaction processing across multiple shards.
  • Light clients, which will improve accessibility to the Harmony network.
  • Leader rotation, which will further decentralize the network as “external validators” will be able to participate in block production and have a greater share of voting slots for validation. At the moment, external validators can participate in consensus through validation, but only internal validators can produce blocks. The proposed upgrade is explained in more detail in this blog post and its corresponding HIP-29 proposal.
  • State syncing, which will allow full nodes to more efficiently exchange state data, improving network speed.

Ecosystem Analysis

DeFi

Harmony’s DeFi TVL denominated in USD rose 52% this quarter to $6.5 million, but denominated in ONE, it fell 29% to 307 million. A significant portion of DeFi TVL is constituted of ONE and other ecosystem tokens rather than stablecoins. As such, the changes in TVL could be due to broad price appreciation in the crypto markets rather than new tokens entering DeFi protocols.

Despite migrating to Avalanche and Klaytn, DeFi Kingdoms’ Harmony implementation maintained its top spot among DeFi protocols in TVL. Native lending protocol Tranquil Finance maintained its second-ranked spot; however, its borrowing market was disabled after the Horizon Bridge hack. Tranquil Finance is planning a V2 launch featuring new oracles and asset pairs. Rounding out the top three is Aave V3, whose markets were frozen after the bridge hack.

For Harmony’s DeFi ecosystem to regain its health, it will need to recover the value of depegged bridge assets and remove bad debt. In that vein, the Recovery One Foundation (R1) continued efforts this quarter along with burn partners Tranquil Finance and Modulo to remove the “1assets” that depegged after the Horizon Bridge hack from the ecosystem. As noted above, the Harmony team has committed to deploying its treasury, rather than minting new tokens, to help with Horizon Bridge recovery efforts.

In January, the Harmony treasury issued $120,000 in USDS to the three burn partners, who burned around $1.1 million in depegged bridge assets. In February, the treasury issued another $120,000, burning around $888,000 in depegged bridge assets and clearing $130,000 worth of bad debt from Tranquil. In March, the treasury again issued $120,000, burning around $1.3 million in depegged bridge assets. In total, around $7.6 million of depegged bridge assets was burned.

Furthermore, the Lazarus Group, who the FBI confirmed to be responsible for the hack, continued transferring stolen funds in Q1’23. In some cases, the funds were frozen on centralized exchanges. However, it will likely take years for authorities to decide what to do with the funds.

NFTs

Multichain NFT marketplace NFTKEY was Harmony’s most popular NFT marketplace in Q1’23. NFTKEY facilitated over $7,000 in NFT sales volume in the 30 days prior to quarter end. During that time span, the most popular collection by volume was AAG Ventures Genesis, an infrastructure company building products for the metaverse. It saw over $4,500 in volume across 21 total sales. Its genesis collection was airdropped in mid-March to participants of the initial DEX offering (IDO) for AAG’s native token, AAG. The NFTs provide yield boosts for those staking AAG.

1.country

On March 20, Harmony ecosystem partner Hidden State launched 1.country, an integrated Web2 and Web3 domain name and identity platform. Users can rent domain names for 3 months, with costs varying depending on the length of the name. The chosen name “.1” maps to the user’s Harmony wallet address and the chosen name “.country” maps to an ICANN-approved top-level domain accessible from any browser. This setup allows users to unify their Web3 identity with their Web2 identity via a browsable website. From launch to quarter end, 281 domain names were purchased from around 130 wallets.

Development

Unique contract calls measure the amount of distinct contracts called by users, developers, or other contracts. The metric gauges the breadth of developer activity and applications. Average daily unique contracts called on Harmony declined for a fourth straight quarter. On average, 417 unique contracts were called per day in Q1’23, down 17% QoQ and 68% YoY. Harmony paused its ecosystem grants and investments fund in Q2’22. Without the grants program and with the team’s treasury going toward the recovery effort, there is not a clear financial catalyst for ecosystem growth.

Closing Summary

Between the macroeconomic environment, various crypto collapses, and Harmony-specific events including DeFi Kingdom’s departure and the Horizon Bridge hack, Harmony had a challenging 2022. In the first quarter of 2023, Harmony showed some signs of bouncing back, including its market cap increasing 115% QoQ. However, many network and ecosystem metrics continued to decline in the quarter, including daily transactions, number of validators, and unique contracts called. For Harmony to revisit its previous peaks, it will have to develop new ecosystem projects, complete the bridge hack recovery effort, implement planned technical upgrades, and establish community resilience.

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Peter is a Research Analyst in Protocol Services focused on Layer-1s. He recently graduated from Boston College where he studied economics and computer science and led the school's blockchain club.

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About the author

Peter is a Research Analyst in Protocol Services focused on Layer-1s. He recently graduated from Boston College where he studied economics and computer science and led the school's blockchain club.

Mentioned in this report