Covalent restored the percentage of staked CQT to above 20% after migrating staking operations from Moonbeam to Ethereum and seeing it fall to roughly 10% at the start of the quarter.
Covalent added five new network operators for block specimen production in Q2, growing the BSP set by 36% and increasing the potential of the protocol’s staking supply sink.
Covalent rewarded operators with $990,000 in Q2, an 83% increase from the previous quarter.
In Q2, Covalent initiated a rebrand that focused its mission more deeply on AI and long-term data availability on Ethereum. It also raised $5 million to expand operationsin the APAC region and transitioned to the new CXT token (resolving the looming threat of the Nomad hacker’s CQT position).
Covalent successfully migrated staking operations from Moonbeam to Ethereum in Q2.
Primer
Covalent (CXT) is a long-term data availability protocol that structures data. It solves the problem of long-term data availability made prevalent after Ethereum’s Dencun upgrade, which deletes rollup history due to the state expiry feature. This particular solution is called the Ethereum Wayback Machine (EWM); it is used as a modular verifiable data infrastructure to solve challenges in AI, related to augmented decentralized AI training and inference.
Covalent supports over 225 networks across mainnets and testnets with GoldRush.dev, an API, SDK, and Frontend Kit. GoldRush.dev (formerly, Unified API) enables developers to query and use any blockchain’s data points in a standardized way. This feature is also available through the GoldRush SDK. The GoldRush Kit contains a set of React components that application developers can utilize to build their user interfaces.
In its recent rebrand, Covalent implemented a series of upgrades focused on accelerating its commitment within two core areas of focus: data availability and decentralized AI. At the same time, it also raised $5 million in strategic funding that will be used to expand its operations in APAC. Following the rebrand, Covalent transitioned the previous CQT token to the new CXT token. For a full primer on Covalent, refer to our Initiation of Coverage report.
Covalent has over 150 paid API customers using its structured data 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. With its focus on AI and long-term data availability on Ethereum, Covalent also serves Laika AI, Entendre Finance, SmartWhales AI, and more. 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, BSPs then publish a proof to the ProofChain contract containing the block specimen hash and the IPFS access URL. The ProofChain Contract will soon launch on a Byzantine fault-tolerant, high-throughput event streaming system built from the Cosmos SDK called EWM-ProofChain.
Block specimens produced in Q2 grew 20% QoQ and 32% YoY. Because block specimens represent data that could be reconstructed to form a blockchain’s history, the number of block specimens produced by a protocol increases as more chains are covered. Last quarter, Covalent added support for Blast, Gnosis Chain, Movement, and a few other blockchains, likely contributing to the increase in block specimen production.
Block specimens make blockchain data composable and reusable outside its respective execution environment. This property is vital in powering Covalent’s Ethereum-focused data availability solution, the Ethereum Wayback Machine (EWM). The EWM will address deleted rollup history due to the state expiry feature introduced in the Dencun upgrade. The EWM will also be pivotal in serving as a modular data infrastructure layer in Covalent’s initiatives to provide AI models with verifiable data for training and inference.
Block Results
After being saved to a storage instance, Block Result Producers structure block specimens, perform data transformations, and output block results (queryable data by Query Node Operators) to a storage instance. 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. Block Result Producers also publish proofs to the ProofChain contract verifying their work and including an IPFS access URL.
Covalent Labs was the only Block Result Producer for the protocol until mid-Q3 2023 when it decentralized the role to shortlisted operators. The number of block results produced in Q2 stayed relatively steady QoQ despite a rise in block specimens. This could indicate a need for Covalent to scale the number of Block Result Producers, given that five BSPs were added as one BRP became inactive in Q3.
Staked CQT
Covalent uses a Stake-for-Access model where network operators (BSPs and BRP) stake CXT (previously CQT) to perform work on the network. Covalent employs staking parameters, such as max/min values and a delegation ratio to ensure staked CXT remains distributed among the operator sets. BSPs must stake between 175,000 and 350,000 CXT. They also have a max delegation ratio of 40:1 (i.e., individual BSPs can only be allocated a maximum delegation of 14 million CXT). Alternatively, BRPs must stake a minimum of 35,000 CXT, are restricted to 70,000 CXT, and do not receive delegation.
The following analysis will reference CQT, given that CXT did not launch until mid-July 2024.
With a 27% increase in the CQT circulating supply, Covalent saw the raw number of staked CQT grow by 5.4%. At the start of Q2, the percentage of CQT staked compared to the circulating supply dropped to roughly 10%. This drop was likely a result of both CQT emissions and the start of Covalent’s incentivization initiative to encourage users to stake on Ethereum as opposed to Moonbeam. By the end of the quarter, Covalent had successfully migrated the staking contract, added five new operators, and increased the staking multiplier from 27x to 40x. As a result, Q2 ended with 24% of CQT (now CXT) staked compared to the circulating supply.
Network Operators
Covalent has three core network operators: BSPs, BRPs, and Query Node Operators (QNOs). BSPs extract data from various blockchains and upload it to storage instances as block specimens. BRPs structure and transform block specimens into block results (queryable data) and upload them to storage instances. Query Node Operators load block results into local data warehouses and serve API queries. Currently, this role is operated by Covalent Labs, but it will be decentralized in the future. The QNO may also have different implementations that allow for AI pipelines to leverage this modular data infrastructure.
Covalent increased its network operator set by adding five new BSPs in Q2, though it lost one BRP to inactivity. Adding network operators increases the amount of stake the protocol can absorb and increases its workload capacity in block specimen and block result production. Increasing the amount of potential stake enhances the stake supply sink, reducing tradable supply and potentially putting upward pressure on the token price (depending on emissions).
Financial
Rewards
BSPs and BRPs are currently subsidized with a budget of up to 20 million CXT (previously 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 CXT, which would then be used to reward node operators. Currently, 20% of all query revenue is used to execute automatic weekly buys of CXT, which are stored in a multisig wallet for later distribution.
The following analysis will reference CQT, given that CXT did not launch until mid-July 2024.
Network operator rewards in USD grew 83% QoQ to $990,000. Despite a 27% drop in the average CQT price, this growth was largely driven by the 184% jump in reward emissions in CQT terms. Though Covalent has a yearly reward budget of roughly 20 million CQT, it only used about 10 million CQT in each of the 2022 and 2023 years, and it plans to use 24 million CXT in 2024.
Market Cap
Covalent has since transitioned the CQT token to the CXT token. CXT was launched in mid-July, after the end of Q2, which is why it is not reflected in the chart below.
The CQT market cap fell 34% QoQ despite circulating supply rising 27% QoQ. This fall in market cap is largely due to CQT’s 48% QoQ price decline. CQT likely experienced more sell pressure from a number of factors including the increase in circulating supply and additional operator rewards, uncertainty in the rebrand and token migration, and/or general market decline in Q2.
In the future, Covalent’s buyback program will link network demand directly to the increased buying pressure of CXT. As API query demand rises, Covalent's revenue will increase, enabling further buybacks of CXT with the additional revenue. This could see a catalyst in decentralized AI protocols seeking structured historical onchain data, positioning Covalent and CXT holders to benefit from integrating AI with crypto.
Qualitative Analysis
New Dawn Initiative
Covalent’s recent rebrand and New Dawn initiative reflect its efforts to upgrade and change the protocol, aligning it more closely with decentralized AI and Ethereum data availability. Covalent’s first steps were to migrate all token activities (like staking) to Ethereum and sunset all activity on Moonbeam. Moving staking to Ethereum lowers complexity (no bridging and managing two gas tokens), opens the option for liquid staking, and enables infrastructure expansion to rollups. Additionally, New Dawn set to revamp Covalent’s governance process, which saw four new proposals in Q2.
Governance Updates
Stake Migration: Actionable changes included moving staking to Ethereum, phasing out Moonbeam staking, increasing the rewards budget for staking, and onboarding more operators.
Increase Max Multiplier: The amount a staked operator can receive in delegation is based on a maximum multiplier. Covalent increased this value from 27x to 34x, enabling staked operators to receive more stake weight from delegators.
New Token: CQT holders voted to migrate the Covalent token to a new ticker/token, the CXT token. The new CXT token is meant to align the Covalent brand more closely with its focus on AI and Ethereum data availability, where the ‘X’ in CXT represents the potential to grow in X areas. This migration did not change any economic factors. However, it excluded the Nomad hacker (detailed in the Initiation of Coverage report). CXT was officially launched in mid-July, after the end of Q2.
Increase Max Multiplier and Onboarding: Covalent increased the max multiplier value again, this time to 40x. Additionally, it added five new BSPs to the node operator set at 300,000 CXT staked each on average.
Five new operators, including ThunderHead, DappLooker, Corthos Capital, Allnodes, and Restake, joined the Covalent network.
Upgraded the GoldRush Kit, adding new elements to Storybook (developer framework to help prototype and develop components in isolation) and implementing performance updates.
Added new updates to the NFT API, including cached thumbnails, blurhashes, and asset properties. These updates should make it easier for builders to design NFT displays and enhance UI with respect to NFT collections.
Ecosystem Updates
Committed $2.5 million in grants to projects building on Arbitrum One, Nova, Orbit, or Stylus. Covalent will offer up to $25,000 in credits per protocol to utilize its APIs and infrastructure.
QuickNode marketplace added support for Covalent APIs.
Arthur Hayes, co-founder of BitMEX, joined Covalent as a strategic advisor.
Committed $2.5 million in grants to projects in the Consensys ecosystem through the Consensys Scale Program (focused on development within Linea and MetaMask). Covalent will offer up to $25,000 in credits per protocol to utilize its APIs and infrastructure.
Secured $5 million in a strategic funding round led by RockTree Capital, with participation from CMCC Global, Moonrock Capital, and Double Peak Group. The principal objective of the raise was to expand operations into the APAC region.
Closing Summary
Covalent initiated a rebrand in Q2, focusing its mission more deeply on AI and long-term data availability on Ethereum. It raised $5 million to expand operations in the APAC region and transitioned to a new token (resolving the looming threat of the Nomad hacker’s CQT position). Covalent also improved on a few key metrics throughout the quarter, adding five new operators, increasing block specimen production, and restoring its stake percentage above 20%. As Covalent continues to execute its plans for the future and improve its product for current users, it is positioned to take advantage of the intersection between AI and crypto.
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