Octopus Network Investment Report | Deep Dive
Review Date: February 11, 2022
Overview
Octopus Network is a decentralized protocol built on the NEAR blockchain that lets developers build and launch application-specific blockchains (“Appchains”) using Substrate technology and transfer messages and assets seamlessly across multiple Appchains and dapps in NEAR. It was conceived to allow developers to quickly, efficiently, and affordably create their blockchain applications on NEAR. Each Appchain functions as its own entity within the overall network and decides its own economic model: it develops and maintains its own system of governance and has its own validators to secure its individual chain. Octopus Network is building on the NEAR blockchain due to its emphasis on high security, fast transaction finality, scalability, and usability (good UI and UX).
What is an “Appchain”?
An application-specific blockchain, or Appchain for short, is an independent blockchain within a network that was designed and used explicitly for a specific set of custom-designed applications. Each one of these Appchains functions as its own entity within an overarching inter-connected network. This concept is being introduced on the NEAR blockchain due to its scalability and usability. With an Appchain, projects can capture all of the benefits of running
their applications on their own customizable blockchain while benefiting from low transaction congestion and universal security from the overarching network it was built on.
One drawback for Appchains is composability. Composability is fundamental within decentralized finance (DeFi) applications. It refers to the interoperability of components within a fintech system, like different Lego pieces that all fit together. You can learn more about composability here.
Infrastructure
The core of the Octopus Network is Octopus Relay. Octopus Relay is a set of smart contracts that functions on the NEAR blockchain (Octopus Network’s native blockchain) to facilitate the security leasing market for the existing Appchains. Octopus Network Appchains lease security from $OCT holders by incentivizing users to stake their $OCT tokens on an individual Appchain. Octopus Relay seeks to solve bridging problems between chains through Rainbow Bridge, a cross-chain bridge between the Ethereum and NEAR blockchains. In addition to the Rainbow Bridge, Appchains can communicate with any IBC-enabled blockchains, allowing for the fluent transfer of assets to and from Ethereum, NEAR, Polkadot, Cosmos, and any other IBC-enabled blockchains in the future.
This inter-blockchain communication is made possible by the Octopus Network bridge, which connects Substrate-based Astar networks to Cosmos-based blockchains. This bridge will allow for the transfer of messages and assets between Octopus Network, Kusama, and Polkadot
ecosystems, and Cosmos IBC-enabled blockchains. Read more about the Astar/Shiden bridge here.
Token Utility
The native token of the Octopus Network is $OCT. It serves as a medium of exchange between Appchain developers and users of the network. Developers pay users in $OCT to provide security and validate their Appchain while users collect fees in exchange for their services.
$OCT is a non-inflationary token, meaning a total fixed supply (100 million $OCT). The $OCT token has three main functions: staking (to provide collateral to incentivize Appchain security and earn rewards paid in the Appchains native token), voting (where Appchains applications can be upvoted or downvoted), and governance (voting on which Appchain applicants are approved or denied).
Because each Appchain within the Octopus Network is self-governing, it decides the amount that it is willing to pay validators for blockchain security. Validators are paid in that Appchain’s native token. It is solely up to the holders of the $OCT token to decide which Appchain they would like to validate by staking their tokens. This model promotes a free-market economic approach by forcing the network security providers to only validate and secure the best Appchains within the network.
Team
The Octopus Network team is one of the first teams developing on the Substrate framework in China. They have a strong technical background in software development, IT solutions, and cybersecurity. Most notably, the team members are active participants of the Rust developer community (organized RustCon in China).
Louis Liu founded Octopus Network. He has been working as a software developer for more than 20 years. Some of his previous experience includes earning a masters’ degree in Engineering Physics from Tsinghua University and a BS in Electronic Engineering from Nanjing University.
The technical lead at Octopus Network is Sheldon Dearr, a security engineer with a rich background in network security, technical solutions, and IT service management. He has worked for various companies such as Wipro Limited, Set Solutions, Inc., EZCORP, DXC Technology, Arrow Electronics, and Hewlett-Packard.
Octopus Network’s Head of Marketing is Aaron Ting. He has 20 years of experience in marketing and management roles. He is currently serving as the Vice President of the Malaysian Investors Association, a non-profit organization centered around educating individuals about crypto and capital markets. Aaron is a graduate of Swansea University with a degree in Civil Engineering.
You can learn more about the team behind Octopus Network here (under the “Contact” section).
Backers / Investors
Octopus Network has received approximately $9 million in funding from various venture capital firms and the NEAR Foundation through two seed rounds (2021, April 2021) and a Series A funding round (ending August 31, 2021). Octopus Network has 41 accredited investors including NEAR Foundation, Electric Capital, NGC Ventures, Digital Currency Group, Ascensive Assets, and D1 Ventures.
Token Distribution
The $OCT token supply is fixed at 100 million. Those 100 million tokens are divided amongst investors (41%) and the Octopus Foundation (59%). Token allocation is a bit more centralized than we would ideally like.
A total of 41% of the token supply is designated for investors: 6% are for angel investors, 5% for strategic investors (NEAR Foundation), 15% to institutional investors in Seed private sales, 12.5% to institutional investors in Series A private sales, and 2.5% to IDO investors.
The remaining 59% are allocated to the Octopus Foundation: 30% will be used to incentivize developers and contributors within the Octopus Network ecosystem and community, 24% is set aside for the development team, and 5% is allocated toward social media marketers who share the value proposition of the project and attract users.
There was no lockup period for tokens allocated to the seed round, Series A private sale, and IDO. The portion of tokens dedicated to angel investors, NEAR Foundation, development team, and the Octopus Foundation has a three-year vesting period.
Current Appchain Candidates
The first Appchain to launch on the Octopus Network testnet is DeBio Network, a decentralized bio network that allows users to anonymously control and monetize their genetic and biomedical data. The project conceptualizes a physical to a digital bridge where the process from data sampling to receiving the results is completely anonymous and the user is free to do as they please with their anonymous data. Debio Network has partnered with Kilt Protocol to provide accreditation infrastructure allowing labs and biomedical facilities to embed credentials on medical test results, genome sequences, and interlab communications. They have also partnered with OCEAN Protocol to provide decentralized cloud computing technology and
privacy-preserving data sharing. DeBio Network is currently in the process of on-boarding laboratories for its sovereign data collection.
Myriad is a decentralized meta-social protocol. It pulls content from existing Web2 social media platforms such as Facebook, Twitter, and Instagram before transferring it to the Myriad Web3 platform. Current social media platforms collect exorbitant amounts of user data which they sell to advertising agencies and other third-party entities. Myriad aims to solve this problem by giving its users the ability to view the same content that they would be viewing on Twitter or Instagram all while having the freedom of privacy and maintaining ownership of their data.
In addition to DeBio and Myriad, there are a few Appchain candidates currently in the selection process. These candidates include Atocha (a decentralized puzzle game where users are rewarded with real prizes for solving the puzzles and riddles), Uniqueone (multi-chain NFT marketplace built), and Attarius (ecosystem of decentralized solutions for developers and players of play-to-earn blockchain games).
You can find more information about the current and upcoming Appchains here (under the Appchain Candidates section).
Valuation
Fully Diluted Valuation (FDV) is the total market capitalization of a project at its current price if its entire supply of tokens were in circulation. This metric is important because it gives investors an idea of how large a project can reasonably grow by comparing it to other projects in its specific sector.
In terms of Fully Diluted Valuation (FDV), Octopus Network pales by comparison to its two largest competitors, Polkadot (DOT) and Cosmos (ATOM). Currently, Polkadot is trading at a FDV of nearly 67 times that of Octopus Network, and Cosmos is trading at approximately 25 times the FDV of Octopus Network.
While Octopus Network is not a smart contract platform, its appchains are in direct competition with smart contracts, making this a fair comparison for relative valuation. Another term for a smart contract platform is a Layer-1 blockchain. A few examples of Layer-1s are Ethereum (ETH), Binance Smart Chain (BNB), Cardano (ADA), Solana (SOL), Terra (LUNA), and Avalanche (AVAX).
The average FDV for all smart contract platforms is $3.6 billion. This figure includes 60 smart contract platforms such as Cardano ($50 billion FDV), Solana ($55 billion FDV), and AVAX ($30 billion FDV), but excludes Ethereum ($450 billion FDV) because its large valuation skewed the industry average to an unreasonably high figure. This comparison shows that if Octopus Network was to grow to $3.6 billion FDV (11X), it would still only be considered an average project in terms of FDV relative to other smart contract platforms.
OCT Relative Valuation Comparison (DOT, KSM, ATOM, NEAR)
Relative Valuation (Share Capture) is a metric used to compare the market capitalization of one asset in relation to another. In this case, we are comparing the current market cap of OCT to the current market cap of NEAR, ATOM, DOT, and KSM. This process is essentially a scenario analysis, but instead of hypothesizing what the value of a project would be based on its fully diluted market capitalization of the total crypto market, we are comparing it to the market capitalization of another project.
This chart illustrates the potential return on investment if $OCT were to capture a percentage of the FDV of Polkadot (DOT). It is currently valued at 1.45% of DOT’s FDV. If $OCT manages to capture 25% of DOTs FDV ($22 billion), it will be valued at $54.50 per token (17.3 times its current price). This valuation would put its FDV at $5.5 billion.
Kusama (KSM) is one of Octopus Networks’ direct competitors. It is a network of scalable, specialized blockchains built using almost the same codebase as Polkadot. It is an experimental environment for teams looking to innovate quickly on Kusama or prepare for deployment on Polkadot.
Kusama’s FDV is much closer to the FDV of Octopus Network compared to DOT and ATOM. The share capture chart illustrates that Octopus Network FDV currently sits at roughly 19% of Kusama FDV. If it were to capture 80%, it would be valued at $13.60 per $OCT token (4.32x).
Cosmos (ATOM) is the second-largest “Layer-0” play in terms of market capitalization and FDV behind Polkadot (DOT). It is also interoperable with Octopus Network. This interoperability presents an interesting situation where Octopus Network and its biggest competitors can also cross-communicate.
ATOM currently holds a much larger market share than OCT, with an FDV of approximately $8.8 billion (27x larger than OCT). Octopus Network currently has a 3.62% valuation relative to ATOM’s FDV. The chart illustrates that if OCT were to gain as much as 25% of ATOMs FDV, it would enjoy a 590% price appreciation. This would put it right under $1.95 billion FDV, a valuation that we believe is reasonable in the long term.
NEAR Protocol is a project that we believe has the potential for exponential growth in the foreseeable future. Octopus Network is built on top of NEAR Protocol for many reasons such as high security, scalability, usability, and fast transaction finality (a few of the reasons we are so bullish on NEAR).
NEAR Protocol currently sits at an FDV of approximately $13 billion. At its current price, $OCT sits at around 2.5% of the FDV of NEAR. If it were to grow as large as 25% of the FDV of NEAR, it would be valued at approximately $32.50 per $OCT token (10.32x its current price). This would put it at approximately $3.25 billion FDV.
Risks
NEAR blockchain usage is currently low relative to other Layer-1s. This presents a short-term risk, but potentially a long-term opportunity because if NEAR usage expands, Octopus Network has the potential to flourish.
Appchains are a new product and concept within the cryptocurrency industry. If one or many of the Appchains built on Octopus Network were to fail, it would reflect poorly on Octopus Network and potentially hurt the valuation.
Octopus Network is almost exclusively tailored to Web 3.0 applications and on purpose they are trying to avoid DeFi projects. Users will miss out on DeFi because of Appchains infrastructure.
Octopus Network was founded in China and has primarily focused and tailored to Asia. They are yet to see international growth and activity because of their current weak marketing
campaign. It is still very early, but it would be good to see more time and capital being allocated towards marketing.
The largest risk that we see is the potential for liquidity issues with the $OCT token. Each Appchain requires users to stake their tokens to secure the network and validate transactions. In times of high demand, liquidity might run thin, especially since it’s not listed in many tier-one exchanges yet and has a capped supply. This may be good for investors because the token price will increase, but it is bad for the underlying security of the Appchain.
Another concern is that whales with large holdings in $OCT tokens can become the sole validator for one or more Appchains. This reduces the overall security of that Appchain. As investors have a large holding of OCT tokens this can be a potential risk in the long run.
Investment Thesis
Octopus Network provides Appchains with security and interoperability as a service. It’s a lucrative vertical and gives investors index-level exposure to the broader crypto market. In the case of OCT, users gain exposure to various aspects of Web 3.0 by staking their $OCT tokens with individual Appchains in exchange for compensation in the Appchains native tokens. This model allows users to gain exposure to several new projects
Octopus Network and its Appchains are very new to the crypto industry. This presents a high risk, high reward opportunity because we view NEAR as one of the top Layer-1s. A few reasons for this: NEAR has pledged nearly $1 billion to an ecosystem fund, making it an extremely lucrative time to develop and launch projects on the NEAR blockchain; NEAR has one of the best user experiences out of all the blockchains we have looked at; and NEAR is built on superior technology, namely their sharding mechanism that makes it incredibly easy and efficient to scale its transaction throughput.
There have been three Appchains launched on Octopus Network with more in development. The Octopus Network team is placing a big emphasis on establishing as many Appchains as possible within the network. They offer substantial incentives paid in $OCT tokens via their accelerator program to help more Appchains launch on the network. The first 100 Appchains launched will be awarded 100k $OCT tokens ($330k USD). While the first 10 Appchains to launch will be awarded an additional 100k $OCT tokens ($660k USD total).
Octopus Network has a very low FDV ($330 million) in comparison to its main competitors, Polkadot ($22 billion) and Cosmos ($8 billion). For Octopus Network’s FDV to catch up to its competitors, it would have to see 67x (DOT), 27x (ATOM), 5x (KSM), and 41x (NEAR).
Conclusion
Octopus Network is a high beta play built on the NEAR blockchain, a Token Metrics favorite. It features index-level exposure to Web 3.0 through its native Appchains. Users can also get a project that offers interoperability and security as a service, key service for multichain future.
Although the valuation is still very cheap in relation to its competitors, several notable risks are still involved.
