MIIX Capital: $PYTH Project Research and Analysis Report

Author: MIIX Capital

1. Key Points of the Research Report

1.1 Investment Logic

• Pyth Network, similar to Chainlink on Solana, provides price data oracles and market data to blockchain projects. It offers "mission-critical" price data in a secure and zero-latency manner for various asset classes (such as cryptocurrencies, forex, commodities, and stocks).
• Pyth Network currently provides over 350 different data sources from multiple exchanges, including Cboe Global Markets, Jane Street, CMS, Binance, OKX, and Two Sigma. The PYTH token is used for staking and governance within the Pyth Network, creating strong demand potential for stakeholders wishing to influence the future direction of the protocol.
• The team background primarily comes from Jump Trading, possessing certain attributes of high-leverage assets.

1.2 Valuation Explanation

Currently, Chainlink's FDV has a 0.95% discount compared to the total collateral value (the total value of assets in the protocols served by its oracles). If we consider the same metric, Pyth's total collateral value is $2.121 billion, making the fair FDV approximately $2.121B * 0.95, or around $2.014 billion.
$PYTH has a circulating supply of 15% at TGE, bringing its market cap close to $600 million, but the reasonable price is $0.3. Based on on-chain demand, a price above $0.3 would make $PYTH overvalued. Considering Pyth's future potential, a fair 2-3x premium is reasonable, approximately $0.7-$0.9. Buying $PYTH below $0.25 (currently at a low of $0.22) has significant upside potential; if its trading price exceeds $0.70, it may not be a good time to buy.
In the long run, Pyth Network has good potential, and Pyth has some differentiated advantages over Chainlink, allowing it to capture a good market share.

1.3 Major Risks

Saturation of the Data Provision Market
The data provision market is currently very saturated, and Pyth Network can only provide price information, which may result in its data offerings being far less than its competitors. Although Pyth also offers confidence intervals, which may make it slightly stand out, other data providers are fully capable of adding this feature.

Risk of Providing Malicious Data
Pyth mainly employs a data aggregator approach to avoid malicious data from publishers (licensed publishers can upload data for free).
Pyth Network has encountered data errors, with Bitcoin prices showing significant discrepancies on its platform, leading to market instability. Additionally, the project was initially based on Solana, which may face limitations and risks associated with a single blockchain infrastructure.

Pyth's Fee Structure
Pyth's payment structure follows the "volunteer’s dilemma" model in game theory: only when nodes cooperate and publish accurate data can each data updating node receive maximum token rewards.
If users need to make individual payments to update information and can only access this information after payment, they may actually be more inclined to pay. However, due to the potential for free-riding (gaining information without payment), users may be very reluctant to pay or at least wait for information updates.

2. Project Overview

Pyth Network is a next-generation price oracle solution developed by Douro Labs, aimed at providing valuable on-chain financial market data to projects, protocols, and the public through blockchain technology, including cryptocurrencies, stocks, forex, and commodities. Pyth Network collects first-hand data from over 90 trusted data providers, including well-known exchanges, market makers, and financial institutions, for use by smart contracts and other on-chain or off-chain applications.

2.1 Business Scope

Pyth Network's data business covers a wide range, including cryptocurrencies, stocks, forex, ETFs, and commodities, with over 250 applications trusting Pyth data, including DEXs, lending protocols, and derivatives platforms.
Additionally, Pyth Network is not limited to specific blockchains, with over 45 blockchains actively receiving Pyth's real-time market data to power their DeFi ecosystems. Pyth has over 80 million updates, allowing your smart contracts to operate more accurately and securely each day.
After price publication and data aggregation by over 400 data sources on Pythnet (Pyth application chain), price updates are transmitted across chains via Wormhole, extending asset price data to dozens of blockchains.

2.2 Founding Team

++CEO: Michael Cahill++

CEO of Douro Labs, the company developing Pyth. Previously, he worked on special projects at Jump Crypto.

++COO: Ciaran Cronin++

Ciaran Cronin is the COO of Douro Labs, the company developing Pyth, and previously worked at Jump Trading. He holds a master's degree in Financial Economics from University College Cork.

++CTO: Jayant Krishnamurthy++

Jayant Krishnamurthy is the CTO of Douro Labs, the company developing Pyth, and a software engineer at Jump Trading. He holds a PhD in Computer Science from Carnegie Mellon University.

++CIO: Harnaik Kalirai++

Chief Integration Officer, former Chief Integration Officer at Jump Trading, with years of experience in systems integration and operations, graduated from De Montfort University in the UK.

Additionally, it is understood that, apart from the core executives mentioned above, members of the Jump Trading team are also the most important code contributors to Pyth:
Jeff Schroeder: Technical Director at Jump Trading, primarily responsible for Pyth's core code;
Samir Islam: Technical Director at Jump Trading, holds a master's degree in Computer Science from Oxford University, involved in Pyth's coding work;
Evan Gray: Vice President of Engineering at Jump Trading, involved in Pyth's coding work;
Alex Davies: Head of Product Development at Jump Trading, one of the first 10 employees in Jump Trading's European division, also involved in Pyth's coding work.

2.3 Investment Background

Rootdata disclosed that Pyth has received investments from institutions such as Delphi Digital, Ailliance Dao, GBV Capital, Republic Capital, HTX Venture, KuCoin Labs, and Ryze Labs, with a current market cap exceeding $500 million. Notably, PYTH has also received a grant of 40,000 OP from the OP Foundation.

To support the development of Pyth, the Pyth Data Association was established, headquartered in Switzerland, with members including heavyweight institutions from Wall Street, such as Jump, Jane Street Capital (SBF's former employer), SIG, and market maker Virtu Financial.

2.4 Project Development Roadmap and History

Phase One: Completed

• Covering hard-to-access off-chain data and easily comparable on-chain data, including US stocks, cryptocurrencies, prices + confidence intervals, market condition signals, TWAP, and advanced aggregation methods;
• Collaborating with companies that can access unique data sources and wish to put data on-chain;
• Broadcasting raw data to Solana and distributing it to other L1 and L2;
• Collaborating with a small group of dApps on all available L1 and L2;
• Collaborating with strategic DeFi ecosystems;
• Launching the website; version 0.1;
• Launching various social media community channels;

Phase Two: Ongoing

• Increasing data set coverage to include futures and forex, expanding TWAP and adding volatility and other data metrics;
• Increasing the number of data providers;
• Increasing integration;
• Increasing supported Layer 1s;
• Mainnet launch;
• Launching staking, rewards, and governance features;

Phase Three: Upcoming

• Expanding data set coverage to include international stocks and futures;
• Increasing the number of data providers;
• Increasing integration;
• Increasing supported Layer 1s;
• Introducing on-chain randomness;
• Introducing fees and reductions;

3. Product and Operational Status

3.1 Code and Product

Pyth's development activity on GitHub:

• The main repository of Pyth Network is named pythnet, showing a certain number of branches and stars, indicating a degree of community involvement. The presence of code updates, issues, and pull requests indicates that development work is ongoing;
• On their GitHub overview page, Pyth Network has multiple repositories, including pyth-client and pyth-client-js. The pyth-client repository, which contains the client API for on-chain Pyth programs, has received more attention than other repositories, indicating that the community is particularly interested in the client API aspect of Pyth Network;
• The pyth-client repository itself has an active issue section and pull requests, as well as actions for security and insights, further confirming that the codebase is undergoing continuous development and maintenance;
• Additional documentation regarding Pyth Network's integration with EVM (Ethereum Virtual Machine) indicates that they are also focused on providing real-time data for EVM contracts, which may reflect broader development efforts beyond the direct repository;

The information provided indicates that Pyth Network has a certain level of development activity on GitHub, particularly in areas such as the client API, which has garnered more attention from developers.

Core Components of Pyth

Pyth consists of three core parts: data providers (mainly exchanges), the Pyth protocol (designed to aggregate data from different providers, creating a unified price and confidence interval for each price source every 400 milliseconds), and data users (i.e., end users, such as applications on blockchains supported by Pyth, which read aggregated price sources and seamlessly integrate the data into their smart contract logic).

Core Mechanism of Pyth
Pyth's core mechanism Pull price update model ------ Pyth Network uses a different price update model than other oracles, the Pull price update model, which is the basis for its efficient and reliable data updates.
Currently, most oracles use a push model, where the oracle runs a process off-chain and continuously sends transactions to update on-chain prices. In contrast, Pyth Network does not have this off-chain to on-chain push process but delegates this task to the users of the Pyth Network.
Pyth price updates are also created on the Pyth Network and transmitted off-chain via the Wormhole network, with these updates being signed so that Pyth's on-chain programs can verify their authenticity. For updating prices on-chain, anyone can submit a verified update message to the Pyth contract, which is a permissionless operation. Typically, users utilizing Pyth Network prices will submit a transaction that updates the price and uses this price in downstream applications.
It is important to note that on-chain prices can only be timely pushed forward. If the price of the wormhole message submitted by the user is newer, the Pyth program will not fail but will also not update the price. This means that when users automatically update prices and interact with Pyth-driven applications, there is no guarantee that the price read by the application will equal the price submitted by the user.

Workflow of Pyth

Pyth is a protocol that allows market participants to publish pricing information on-chain for others to use. Data providers submit pricing information to Pyth's oracle program. Pyth provides multiple data providers for each price source to enhance the system's accuracy and robustness. The on-chain oracle program on Pythnet combines the data submitted by providers to generate a single total price and confidence interval. Applications read the price information generated by the oracle program. More specifically, Pyth allows users to "pull" prices onto the blockchain when needed (these prices are public to everyone on that chain).

• After obtaining prices from data institutions, to ensure data security and credibility, this data is also estimated through Pyth's own "confidence interval" to determine the value range. For example, if the current price of ETH is $3,000, Pyth will calculate a price range of approximately ±$30, providing a margin of error; a smaller range indicates higher precision and gives users a good reference.
• Entering the delegators, after receiving data from various institutions, Pyth relies on existing data sources along with historical performance and historical data accuracy to assess the quality of the data sources and decide which data to use as Pyth's data provider.
• Curators, like delegators, operate on the Solana network, with the main role of curators being to filter which data is needed in the market and provide currently urgently needed data.
• Then, price aggregation is performed through Pyth's own "confidence interval." For example, if one data source provides a price of $101±1, while another publisher reports a price of $110±10, in these cases, Pyth hopes the total price is closer to $101 rather than $110, and the total confidence interval should reflect the variation between the publishers' prices.
• After completing price aggregation, if operations continue on the Solana network, there is no need to use Wormhole; conversely, if subsequent operations are not conducted on the Solana chain, Pyth needs to use Wormhole's Layer 1 cross-chain bridge functionality to make Pyth's oracle data available for all chains.

Additionally, Pyth uses a reward and punishment mechanism to guide the behavior of both data supply and demand sides. Staking tokens ($PYTH) become data providers, delegators, or curators and provide data to Pyth. When users have data needs, they pay a certain amount of tokens, while data providers can receive token rewards. Conversely, when a data source provides incorrect prices or when delegators or curators filter data quality leading to price errors, they will be penalized, typically by deducting the corresponding amount from their staked tokens as compensation to the other party.

3.2 Official Website Data

Time range is from October to December 2023:

• Monthly visits: 1.479M (i.e., 1.479 million)
• Visit duration: Average visit duration is 3 minutes and 44 seconds
• Pages per visit: Average pages viewed per visit is 3.82

Additionally, traffic mainly comes from Indonesia (26.42%), Saudi Arabia (14.06%), and Argentina (9.86%), with direct visits accounting for 49.70% and organic search accounting for 22.29%.

3.3 Social Media Data

3.4 Community Data

3.5 Market Heat (Promotion Data and Effects)

Sentiment Indicator: 16.67, indicating a relatively positive market sentiment.
Twitter Discussion Volume: 30, up 1,400.00% from the previous period.
Twitter Followers: 167,500, up 0.53% from the previous period.
The sentiment indicator scale ranges from -100 (very negative) to 100 (very positive), with the current indicator showing at 16.67, indicating a positive sentiment. Over the past year, there has also been a significant increase in daily active users and user interaction trends.

3.6 Partners

The ++Publishers++ projects on the Pyth network include:

Pyth Network is currently the largest first-hand financial data oracle network, supporting real-time price feeding services from over 90 data providers across traditional financial institutions, crypto markets, forex, and commodities. Pyth supports data from top institutions in over 40 traditional finance and crypto markets, such as Bloomberg, Hong Kong Stock Exchange, Nasdaq, Jump Trading, Virtu Financial, GTS, and Solana.

4. Business Analysis

4.1 Token Model Analysis

The maximum supply of the PYTH token is 10 billion, with an initial circulating supply of 1.5 billion (15%), and 85% of the PYTH tokens are initially locked. The locked tokens will be unlocked 6, 18, 30, and 42 months after the initial token issuance.

Of which, 22% is allocated to network data providers; 52% is allocated to "ecosystem growth strategy"; 10% is allocated to protocol development; 6% is reserved for the initial launch phase and related activities and plans; 10% is allocated to two rounds of financing determined for strategic contributors.
It should be noted that in May 2024—around the next Bitcoin halving—a significant portion of the tokens will be released. Furthermore, apart from community and launch rewards, all rewards will be released at the same rate and time (it is understood that the top 10 holders own 68.02% of the supply), which creates significant uncertainty for secondary market investments.

4.2 Project Potential

In the traditional push model, DeFi protocols essentially sign a cooperation contract with oracles, purchasing oracle services on a subscription basis, allowing them to enjoy data feeding and pushing for a period. This inevitably involves off-chain negotiations and time costs.
In contrast, under Pyth's current on-demand pull model, the cooperation between protocols and oracles appears more Web3: you don't even need to contact Pyth's business team offline; you can complete the price data pull solely through development documentation and smart contract deployment—contract triggering, gas fee payment, data pulling, and usage after pulling are all executed automatically, reflecting a "permissionless" and "fully on-chain" characteristic.
Pyth's features are more Web3, giving it a place in the crypto market while also possessing high potential, but this potential cannot be immediately converted and is not determined by technology but rather by market leadership.

4.3 Competitive Landscape

Pyth Network is currently considered the fourth-largest oracle project, with a total value locked (TVL) of $2.112 billion, only behind Chainlink, WINkLink, and Chronicle.

In terms of the number of networks served, Pyth ranks second, serving 144 networks, only behind Chainlink's 353. Recently, Pyth Network's price has been on the rise, and it is expected to reach new highs in the coming months. Although long-term forecasts remain bullish, the price of Pyth Network ($PYTH) may take longer than expected to reach the $1 milestone.
Overall, Pyth Network holds an important position in the decentralized finance oracle space due to its fast and accurate data provision capabilities. While some criticism may arise from its partially centralized data sources, its technological advantages and market application prospects make it a project worth paying attention to.

4.4 Profit Expectation Assessment

Currently, Chainlink's FDV has a 0.95% discount compared to the total collateral value (the total value of assets in the protocols served by its oracles).
If we consider the same metric, Pyth's total collateral value is $2.121 billion, making the fair FDV approximately $2.121B * 0.95, or around $2.014 billion.

$PYTH has a circulating supply of 15% at TGE, bringing its market cap close to $600 million, but the reasonable price is $0.3. Based on on-chain demand, a price above $0.3 would make $PYTH overvalued.
However, we are currently in a bull market cycle, considering Pyth's future potential. Therefore, a fair 2-3x premium is reasonable, approximately $0.7-$0.9.

Buying $PYTH below $0.25 (currently at a low of $0.22) has significant upside potential; if its trading price exceeds $0.70, it may not be a good time to buy.
In the long run, Pyth Network has good potential, and Pyth has some differentiated advantages over Chainlink, allowing it to capture a good market share.

5. Summary & Recommendations

With the continuous growth of the DeFi sector, the demand for reliable and real-time market data is also increasing. Expanding into other asset classes such as stocks and commodities can increase its market share, and detaching from Solana by building Pythnet gives the project more flexibility. Integration with other blockchain protocols and platforms can enhance the use cases and value of its data products.

As the global regulatory environment changes, there may be more regulatory requirements for on-chain data providers. As an infrastructure component, Pyth Network needs to ensure high-security standards to withstand potential cyberattacks. Any significant issues with data accuracy could quickly erode market trust in its services.

The $PYTH token not only serves as fuel for transactions (i.e., paying gas fees) but also allows holders to share in network revenues and participate in governance decisions. However, projects like Pyth that focus on infrastructure development may not attract much attention, and the oracle space is too narrow, with Chainlink already leading. It may be challenging for Pyth to capture its market share in the short term, but the Pyth token has the potential for 4-6x growth in the next cycle.