A new report published by the digital asset investment fund, Vision Hill Advisors, is making a case for the financial advantages investment funds can garner when participating in a cryptosystem in the context of generalized mining. Following the plunge in cryptoasset values in 2018, many mining operations have witnessed severe losses and as a result, have had to shut down, which makes Vision Hill’s take on mining particularly interesting.
Vision Hill Advisor’s report, which focuses on the Ethereum video streaming dApp Livepeer, breathes new life into the viability of mining as a source of income and the advantages of actively participating in a cryptosystem.
What Is Livepeer?
Livepeer is an open-source blockchain-based project which is focused on decentralizing live video streaming. The dApp went live on the Ethereum mainnet on April 30, 2018. Livepeer allows users to upload both pre-recorded video content, as well as stream live content, on the Livepeer network. Additionally, the Livepeer network transcodes the content into the many forms currently available on the Internet and then broadcasts this content to the consumer.
The current video sharing model is inundated with centralized service providers who often take the lion’s share of the profits from content producers. Additionally, service providers can exercise a large amount of control over content producers, which provides dangerous grounds for censorship under the guise of content control and standardization.
Moreover, most video streaming platforms require content to achieve specific, predetermined specifications before they can be uploaded or shared through their network. The pre-set criterium result in the effective cutting out of a segment of the market. An excellent example of this is the video streaming service Twitch, where users must first familiarize themselves with the websites broadcasting software. Additionally, during the stream, Twitch continues to monitor the creator’s video settings and can stop a stream if the settings are determined to be “incompatible.”
The present state of live video broadcast on the Internet makes it viable for only a particular segment of the market, whereas it is impractical for the rest of the market, due to a number of reasons. Remedying this and providing viable alternatives is the motivation for Livepeer.
How Does it Work?
Livepeer is a decentralized platform designed to provide flexible, inclusive, and censorship-resistant solutions for video content providers. To this end, the project has developed a number of features that comprise the Livepeer network, which give the system the ability to transcode and broadcast or publish videos in a manner that is as good as existing providers.
Furthermore, due to the design of the Livepeer network, its developers believe that its protocol will power a video streaming solution with sound economic incentives in place and eventually result in a cheaper option for broadcasters in comparison to traditional centralized live video solutions.
According to the white paper, the project is “a delegated stake based protocol for incentivizing participants in a live video broadcast network in a game-theoretically secure way.” There are four components to the platform: the Livepeer Media Server, the Livepeer Network, the Livepeer Token and, finally, the Livepeer Protocol.
The Livepeer Media Server is an open-source media server created by the team behind the Livepeer project. The server handles the core function of manipulating the videos uploaded onto the Livepeer Network or those streamed through it. The Livepeer Media server is also capable of transrating and transmuxing video and audio input into different forms.
The inclusive berth of the Livepeer Media Server means that every video that is uploaded or streamed through the Livepeer network can be viewed through any device on any platform. Currently, most service providers only support some formats. Through its Media Server, Livepeer can circumvent the different format and bandwidth restrictions which plague broadcasters in their interactions with streaming services.
Due to its open-source nature, the Livepeer Media Server does not come with high costs or licensing fees. Instead, the development of the server is set to be financed by the incentive design included in the Livepeer network. Moreover, the media server is available for use within any media streaming application as a standalone component.
The Livepeer Network refers to the interconnected system of nodes that download and run the Livepeer Media Server as well as support the Livepeer Protocol through participation. With regard to uploading content, nodes can either be publishing a stream or requesting a stream. Posting a video involves sending a request to the network to transcode a video with pre-set specifications and then streaming the content through the network. A node performing this request pays a fee to the network. Conversely, a streaming request, as the name implies, refers to logging on to the network to view the content held therein.
It is important to note that there are a number of different nodes that exist in the Livepeer Network. While any machine running the software and participating in the protocol is considered a node, different roles have different requirements, responsibilities, and rewards. Broadcasters are those nodes which are streaming content through the network. These nodes pay a fee for the transcoding services handled by the Livepeer Media Server. Transcoders are those nodes which provide the invaluable processing and memory resources necessary to run the server and transcode a video. The fee paid by broadcasters goes to transcoders.
Transcoders are elected or delegated by other nodes in the network. In addition to transcoding, these nodes also contribute to the security of the network by verifying work and distributing the new tokens produced in each block in accordance with the Livepeer Protocol. Due to their increased roles within the network, transcoders are also entitled to a greater portion of any newly created Livepeer tokens.
A consumer is a node that connects to the network to access video content or to provide it through a gateway to other parties. Conversely, a relay node connects to the network to pass the content to others without the intent of consuming it. Lastly, the protocol provides for a type of node called an orchestrator. This is a party that owns different types of nodes to increase the strength and robustness of the entire project.
The Livepeer Token is the native cryptographic token of the project. While the services rendered by the network are paid for in ether (ETH), the LPT is an internal tool used by the nodes participating in the network. Transcoders are chosen by nodes from a pool of their peers. The mechanism through which this happens is a delegated proof-of-stake (DPOS) system.
The Livepeer token, therefore, serves both as a bonding mechanism in the delegated staking process as well as an incentive for good behavior. Any node that backs a dishonest transcoder will have their stake slashed or taken away. Additionally, any transcoder found to be acting dishonestly will also face the same fate. Lastly, it also serves as a coordination mechanism, where the greater the amount of staked LPT tokens a transcoder had as well as past successful work, the more transcoding work that node receives.
Lastly, the Livepeer Protocol refers to the underlying code which governs the entire network. It provides guidance on the different roles of nodes, the cryptoeconomics of the Livepeer network, consensus mechanisms, rewards and punishments, transaction types and any other relevant topics.
Using the data publicly available from the Livepeer explorer as well as other similar resources, Vision Hill was able to compute estimates for a number of important metrics relevant to the Livepeer network. These metrics are essential for extrapolating the profitability of generalized mining with regards to crypto-focused investment funds.
The investment fund began by calculating how each group that received or purchased LPT in the initial distribution round has grown their LPT holdings. Using data from SuperMax, a smart contract analytics tool, the fund determined how LPT was distributed, in percentages, among the founding team, pre-sale investors, transcoders, Merkle miners and other parties.
The founding team, which received 1,240,000 LPT in the initial round, was estimated to have grown their holdings by 118,782 LPT. This figure was arrived at with the assumption that the founding team had bonded their stake to support the network. Additionally, all the estimates in the Vision Hill Advisors report are from the April 30, 2018 launch date.
From the 1,900,000 LPT tokens awarded to pre-sale investors, this group was estimated to now hold 2,117,467. The advisors who received 20,000 LPT tokens, as a grant in a reward for their insights in the early stages of the project, were assumed to have grown their LPT holdings to 28,584. Vision Hill Advisors estimates that transcoders, which number fifteen at the time of writing, have collected an estimated 80,294 LPT tokens to date.
The investment fund’s calculations are in-depth, but the general point is that the greater the amount of LPT party has, the more they are likely to acquire as a result of the protocol’s inflationary system as well as its incentives design which favors those who bond greater amounts. The report confirms that the system envisioned by Livepeer’s developers is functioning as planned.
A Livepeer Case Study
Using the estimates above as a base, Vision Hill Advisors created a model of a hypothetical fund’s active participation in the Livepeer network. The model is based on the notion that the fund would only be running one transcoder. The investment fund refers to this as generalized mining which is defined as:
“Bootstrapping early-stage networks by provisioning various types of supply-side services to meet the demand side such that decentralized networks can launch themselves and organically create network effects with the support of non-Byzantine actors.”
VHA makes a number of assumptions essential to computing the profitability of participating in generalized mining. Assuming the hypothetical fund was a Merkle miner previously before achieving transcoder basis, VHA researchers were able to calculate the participation percentage of the transcoder. Using current network metrics, VHA estimated an active participation of 68.6 percent with the rest comprised of delegated participation. VHA also takes into account the projected inflation schedule provided by the Livepeer protocol in its calculations.
With regard to the hypothetical fund, VHA estimated $20 million assets under management (AUM), and only two percent of this would be invested into participating in the Livepeer network. VHA found that the hypothetical fund can be “expected to earn a 32.87 [percent] inflation yield (in token-denominated terms) on behalf of its transcoding work between the date of this analysis (November 30, 2018) and the date in which the network is expected to hit 50 [percent] bonding participation (June 28, 2019).”
As is shown in the calculations published by Vision Hill Advisors, the hypothetical fund manager can garner a significant amount of profits through its active participation or generalized mining strategy. The report finalizes by stating the:
“Fund is able to boost its return to the upside as a result of extracting the inflation rewards from the Livepeer network by actively participating within it. Additionally, […] our hypothetical fund manager is also able to lower its cost basis relative to a passive (non-participative) investor.”