Covalent Network: A hidden gem on the decentralized infrastructure track

1. Report Highlights

1.1 Core investment logic

Covalent is a prominent project that is rapidly developing. All business data is experiencing rapid growth, including revenue data. In terms of income level, Covalent surpasses the Graph, the current leading project on the track, and appears to have achieved a better Product Market Fit (PMF). However, since its income stream has not yet been uploaded to the blockchain, there may be a significant awareness gap among market investors regarding this.

In terms of new business, the Ethereum Wayback Machine being developed is a long-term blob DA (blob is a new data storage structure after the Ethereum EIP4844 upgrade, which stores data that does not require permanent chain storage). This initiative is also aligned with current market trends.

In terms of team, the founding team has professional resumes and entrepreneurial background that matches the track. Investors also basically include various industry parties at the top of the industry, including public chain foundations, leading exchanges, major customers, etc.

1.2 Main risks

1. If other centralized blockchain data services with a larger user base, such as Alchemy, Infura, Quicknode, etc., enter the downstream data indexing service track starting from RPC and offer similar data indexing services, they may pose a threat to Covalent’s market share and pricing. For instance, Alchemy completed its acquisition of data indexing platform Satsuma in September 2023.

2. Data indexing is a relatively unknown track with little awareness among public investors. Currently, it has not attracted much attention from investors. This trend may continue unless there are significant developments in this field.

1.3 Valuation

Compared with The Graph, the leading project in the same track, the valuation is more attractive.

2.Basic situation of the project

2.1 Business positioning

Covalent provides a Blockchain Indexer service, which provides a unified set of blockchain data APIs that allow developers to query between multiple blockchains.

Before describing the data indexing service, it is necessary to briefly explain its upstream services - blockchain node and blockchain RPC.

Blockchain node:

Blockchain nodes are the basic elements that make up the blockchain network. Each node stores a complete copy of the blockchain (or in some cases, a partial copy, such as a light node). Nodes synchronize and verify all transactions and blocks through the consensus mechanism to ensure the data consistency and security of the network.

Blockchain RPC:

RPC is a service interface that allows external clients to interact with blockchain nodes. It is a middle layer that provides a standardized set of commands or function calls, allowing developers to perform operations such as reading data, sending transactions, executing smart contract functions, etc.

Blockchain index:

Blockchain index is a data service based on blockchain nodes and RPC. It reads data from blockchain nodes through RPC, then processes and organizes the data to create an efficient query database. This way, users and applications can quickly retrieve the information they need without having to make complex queries directly from the blockchain node.

Briefly, the relationship between nodes, RPC and indexing services is: the blockchain node is the source of data, the RPC service is the channel to access these data, and the indexing service is the data processing plant, optimizing the retrieval and use of data.

In the blockchain data indexing track, there are existing centralized service providers, such as@Bitquery_io，@etherscan，@MoralisWeb3，@blockvisionhqetc., there are also decentralized service providers, the most famous of which is The Graph.

In addition, in the DePIN track Mapping released by Messari in 2023, data indexing is also included in the scope of Depin and is classified under Depin’s “digital resource network” category. The Graph and Covalent both appear in the figure as representative projects. .

Image source: Messari

2.1.1 User groups

Covalent’s customers primarily consist of business-side entities, including Dapp projects like various Defi applications, as well as numerous centralized cryptocurrency companies such as Consensys (investment board), CoinGecko (asset quotes), Rotki (tax tools), NFTX (NFT Curation), and Rainbow (crypto wallet), among others.

2.1.2 Value proposition

The economic scale of the blockchain world is growing exponentially: more ecosystems, more L1s, and more Rollups.

More users and economic activity lead to an increase in transactions and data, which are stored in a distributed manner by blockchain nodes. This decentralization makes the data open and accessible. However, it also introduces complexity, as the data becomes large and inefficient to read. The Ethereum blockchain alone has accumulated over 1TB of data, resulting in challenges related to reading and parsing scalability.

The situation becomes even more complicated when applications, such as wallets, NFT markets, or more complex web3 products, require data from multiple blockchains that have different output formats. Covalent has developed a protocol called the “Unified API” that standardizes data from various blockchains. This unified API enables users and dApps to obtain all on-chain data in a structured format, allowing for easy integration into existing products without the need for tedious data processing.

Image source: Covalent documentation

The indexing layer of the blockchain should be flexible to the greatest extent possible to accommodate the diversity of products and services that will be launched on the market in the coming years, and should be trust-reducing to the greatest extent possible. Covalent’s value proposition for data indexing includes:

• Data is verifiable. Covalent enables trustless data verification through cryptographic proofs. It allows anyone to enter the network as a block specimen producer, using a new data structure package based on the original on-chain data. Through a staking and slashing mechanism, it incentivizes them to stay honest, thereby achieving decentralization of the infrastructure.
• Scalability. Covalent is a plug-and-play solution for new EVM blockchains and application chains, and it takes less than a week to get started. For non-EVM blockchains, just follow the block sample standard to extract data from the chain client.
• Data composability. Covalent’s standardized data model allows developers to wrap, mix and fork data like assets, regardless of the data chain.
• No-code solution. The no-code capabilities of Covalent’s Unified API provide solutions for analysts, developers, and other non-technical users working at the visualization level. Users can create something similar to a pivot table on the base layer data to obtain information such as 24-hour transaction volume, NFT historical floor prices, and aggregated wallet token balances across the network.
• Flexibility. Covalent follows an “extract-load-transform” (ELT) data integration model, with its network extracting data from the blockchain and loading it into a data warehouse. This is then transformed as needed by the client to provide the required data when queried. In contrast, Graph’s subgraph-based indexer follows an “extract-transform-load” pattern, where the extracted data is first transformed into a use-case-specific subgraph, which is less flexible.

Image source: Covalent documentation

2.2 Business logic

2.2.1 Product mechanism

Covalent’s current core product is Unified API (Unified API), this API transfers data between two modules: client and server. Through the API, the server can control its system and respond to client requests. Users (such as application developers or analytics companies) extract data from the API, while the data provider (mainly Covalent itself at the moment, but will be opened to third parties in the future) retains ownership. Although many companies have built server-side infrastructure to provide access to blockchain data, most companies’ self-built server-side is limited to the RPC layer, often only obtaining the unprocessed basic blockchain data of the target chain.

Covalent’s business process. Picture source:Covalent: A Unified API for Retrieving Blockchain Data

The term “basic blockchain data” refers to information that can be directly queried from the blockchain through RPC. On the other hand, performing more in-depth data analysis, such as complex queries, data correlation analysis, and historical data trend analysis, typically requires more advanced data processing and indexing services. These services are provided by Covalent and Graph.

Covalent’s protocol goes beyond traditional approaches by extracting data from multiple blockchains, uploading it into a storage instance, indexing and transforming the data objects, and loading them into a local data warehouse for API users to query. During this process, it provides proofs to the Moonbeam network to verify the completion of each step. In summary, Covalent cryptographically secures and standardizes all extracted blockchain data, enabling developers to query any chain in a unified way, which is why it is called the Unified API.

Storage instance: Data instance, which includes database software and related memory structures and background processes. A database server can run multiple instances, each managing its own data and processes.

Based on the unified API, Covalent has also launched corresponding toolkits to facilitate customer integration and display on the product side.

GoldRush

GoldRush is an open source modular blockchain browser and toolkit provided by Covalent, which can be integrated with various Dapps and Web3 applications.

Case scenario:

• NFT marketplaces like Blur or NFTx. Every NFT transaction on the platform can be linked to a block explorer like Etherscan for query. This will take users away from your platform, interrupt the user experience, and the blockchain browser will be ineffective for many mass users. It’s too technical to understand.
• Web3 games face the same challenge: users shouldn’t have to stop in the middle of a game to go to a block browser to validate and inspect transactions. Many in-game transactions are unique and complex, and block browsers are unable to capture these details or present them in a correct, intuitive way.

In a similar scenario, as a Blur or web3 game developer, you can directly integrate Covalent’s GoldRush module into your own application to display various data and provide interaction in a way with a better user experience.

Image source: https://www.covalenthq.com/products/goldrush/?component=NFTWalletTokenListView

Having roughly explained Covalent’s business mechanics, let’s look at how it fits into the token mechanism.

2.2.2 Decentralized design

Covalent’s decentralized network will have multiple network participants, called “operators.” Currently, only two network operator roles are active, namely Block Specimen Producer (BSP) and Refiner. As of December 2023, Covalent has 15 BSPs, including Chorus One, Woodstock, StakeWithUs, and 1kx, among others.

BSP extracts the original blockchain data and creates a data object called Block Specimen. The BSP standard promises to make blockchain data composable and reusable outside of the execution environment. The BSP then uploads the block sample to the storage instance, creates a hash (or proof) that stores the block sample, and publishes the proof to Covalent’s ProofChain smart contract on Moonbeam. Once the proof is posted to Moonbeam, other network nodes can verify the work of the BSP.

The proof and data storage solution based on Moonbeam is only temporary. In the future, Covalent will launch its own L1 for accounting and migrate the pledge of CQT tokens to Ethereum. The migration is expected to start at the end of February this year.

Covalent decentralized data index network operators have four predefined roles:

• Block-Specimen Producer (BSP), now online, allows BSPs to upload blockchain raw data to storage instances. They have the option to either run the instance locally or pay storage operators to run it. Storage operators should increase the data availability by loading it through IPFS and storing it locally. Below are the details of the stakeholders in BSP, currently offering an Annual Percentage Rate (APR) of 10%+.

https://www.covalenthq.com/staking/#/

• Refiner, already online, retrieves block specimens from storage instances, converts raw data into queryable data objects called block results, and publishes proofs of work verification. The following is a list of Refiner’s validators:

https://www.covalenthq.com/staking/#/

• Query Operator, before responding to API queries, Query Operator loads the transformed data into local data warehouses (data warehouses).
• Delegator, each network operator will receive their rewards for fulfilling their responsibilities after Delegator confirms each proof for a specific period. Before payment, a group of Delegators will be randomly selected from the overall pool of network operators to serve as Delegators during the audited period.

The current operators are all whitelisted roles set by the Covalent Foundation, and will gradually be opened to more applicants:

All operators mentioned above work together in a distributed and censorship-resistant manner to achieve data storage, classification, query response, and accountability supervision. In the final network structure, each role has a corresponding token incentive mechanism.

2.2.3 Other businesses

Ethereum Wayback Machine(EWM）

After the implementation of Ethereum Improvement Proposal EIP4844, a new data structure called “blob” will be introduced. Blob data is primarily used to store information that does not need to be permanently stored on the blockchain but needs to be disseminated through the network within a short period of time. For example:

1. Batch transaction data: For applications that need to process a large number of transactions (for example, a CEX exchange batch processing withdrawals), blob data can contain information about these batches of transactions so that they can be processed efficiently as a whole.
2. Zero knowledge proof: Complex cryptographic proofs, such as zk-SNARKs, may require the transmission of large amounts of auxiliary data. Blob data can be used to store auxiliary information for these proofs so that the proofs can be verified without taking up too much space on the main chain.
3. Off-chain state: For some scaling solutions, such as state channels or sidechains, it may be necessary to periodically commit snapshots or proofs of off-chain state to the Ethereum main chain. Blob data can be used to contain data about these states.
4. Large data sets: For decentralized applications (DApps) that need to process large data sets, such as decentralized social media platforms or data marketplaces, blob data can be used to store user-generated content or other large data sets.
5. Batch signature information: In some cases, a large number of signatures may need to be verified, such as in multi-party signature or bulk authorization operations. Blob data can contain these signature information.

As a form of temporary data stored on the Ethereum network, the preservation and duration of blob data is determined by individual nodes. This gives rise to the “long-term data availability issue” for blob data.

Covalent’s Ethereum Wayback Machine is an open source solution launched to solve long-term data availability. Its purpose is to provide decentralized, cryptographically secure historical data for demanders of blob data. We can understand it as a DA solution.

As for the specific technical mechanism of the Ethereum backtracking machine, due to space limitations, I will not elaborate here. All we need to know is that the Ethereum backtrace machine also leverages Covalent’s network and data indexing mechanisms to ensure the accessibility and usability of historical blockchain data. By using the Ethereum wayback machine, anyone can reconstruct a comprehensive representation of the blockchain and create a database with a normalized schema based on it.

More information about the Ethereum wayback machine can be found at https://www.covalenthq.com/blog/the-ethereum-wayback-machine/.

The product is currently under development and has not yet been officially launched.

It is worth mentioning that Ethstorage, a project that also targets blob decentralized storage, received $7 million in investment in a seed round in July 2023 with a valuation of $100 million.

Based on the above explanation of product mechanism and decentralized design, we can summarize Covalent’s business model at this point.

2.2.4 Business model

Covalent’s business model is based on demand-side paying for data requests (which will be facilitated through Covalent in the early stages), and the fees being paid to network operators who need to stake project tokens, CQT, to provide the service. The specific process is as follows:

When an individual calls the API, they will pay in a stablecoin denominated in USD, such as USDC. The contract will then use these USDC to purchase CQT on the secondary market, driving demand for the token. The CQT is subsequently allocated to the wallet of the node as a reward for responding to API queries.

1. Applications/developers deposit stablecoin assets into the smart contract of the Covalent protocol.
2. The application queries the Covalent API.
3. Before sending the corresponding inquiry request to the operator, a check is made whether there are sufficient funds in the recharge account.
4. Query requests are sent to the query operator to fulfill the request.
5. The required data is sent back to the application.
6. The Moonbeam ledger records what data is being used, which operators are fulfilling requests and their cost.
7. Reconciliation will be completed between the balance between the network contract, CQT and the work performed.
8. USD funds are deducted from the developer’s deposit account and exchanged for CQT through the market purchase mechanism, and then settled with the validator’s unsettled balance.

The larger the profit of the network, the more operators hope to enter the network, resulting in a greater demand for CQT collateral. This collateral and payment volume will create buying pressure for CQT tokens. Of course, when operators sell CQT and exchange it for stablecoins, it will also create selling pressure on CQT.

Clearly, Covalent’s business situation is determined by the demand for external data indexing. The more developers and institutions that require data, the better their business will develop.

Note that the business switch of “using income streams to buy CQT and distribute it to operators” has not been turned on yet. However, according to official statements, this switch will be activated in the coming days, and the process will be displayed on the chain. The buyback will take place on Sushiswap, where most of the current liquidity for CQT resides, to facilitate user supervision.

So, what is the current business situation of Covalent? Let’s analyze it based on the number of supported chains, user data, pricing and charging conditions, and customer situation.

2.3 Business situation

2.3.1 Number of blockchains supported by the indexing service

Covalent currently provides comprehensive historical transaction data for more than 211 chains.

2.3.2 Number of users

2.3.3 Charges

1. Pricing

According to the price list provided by Covalent, the smallest unit of consumption on the platform is “credits”, and different query behaviors correspond to different numbers of credits.

Image source: https://www.covalenthq.com/docs/unified-api/catalog/

Take a small wallet project as an example to calculate its one-month indexing service consumption:

This wallet supports three chains: Ethereum, Polygon, and Optimism. The corresponding daily activity data is as follows:

1. Ethereum (7,000 daily active users)
2. Polygon (3,000 daily active users)
3. Optimism (1,000 daily active users)

This application usesbalances_v2 The endpoint provides data to the user, and each balance call consumes 1 credit.

The corresponding consumption is 11,000 credits/day and 330,000 credits/month.

Assuming that he is a senior member, the corresponding consumption is: 50$ per month for senior members + (330000-100000) * 0.001$ = 230$/month.

2. Revenue in 2023 and comparison with Graph

On the overall revenue of Covalent in 2023, I asked for confirmation with the official team, and the feedback from the other side is as follows:

• Covalent’s revenue from data indexing in 2023 is projected to be US$600,000. This year marks the official start of Covalent’s commercialization efforts. In January, the company’s initial revenue was still 0.
• The number of paying users is over 150, with institutions and project parties being the main paying users.
• Revenue is expected to achieve 100% growth in 24 years.

As for The Graph, the leading project in the decentralized data indexing track, its annual revenue in the past three months is only US$100,000+.

Data source: https://thegraph.com/explorer/network?chain=mainnet

In addition, the team stated that Covalent’s revenue business flow data will be online in the next few weeks, and users will be able to see Covalent’s revenue flow at that time.

2.3.4 Customer situation

Covalent’s customer base is mainly B-side, and its main customer categories include:

Wallets and data boards: Popular wallets and data boards like Rainbow and Zerion use the Covalent API to aggregate historical balances and profits for DeFi and NFT assets for their users.

Market data: Dashboards like CoinGecko can display price trends, liquidity, and asset ROI.

Cross-chain projects: Cross-chain liquidity aggregators (such as Li Finance) are used to access different networks to obtain asset price information.

Crypto tax: Portfolio trackers like Rotki can pull historical balance and pricing data across chains in tax reports.

Defi: Such as Aave, Balancer, Paraswap, Curve, Lido, Frax, Yearn, etc. integrate user data from different chains.

CEX: In order to comply with tax regulations, the exchange will extract users’ historical transaction data to generate reports.

Traditional financial and custodian institutions: Fidelity, the world’s largest wealth management institution, Ernst & Young, one of the Big Four accounting firms, and Jump Crypto.

AI training and decision-making: Provide on-chain data for AI models of Nomis.cc (multi-chain identity and reputation protocol), Network3 (distributed computing protocol) and other projects to help large models with training and decision-making.

Other Internet services: For example, some financial websites, these applications hope to display cryptographic functions such as NFT and DeFi positions on different networks.

These customers will be able to take advantage of Web3 without investing in additional infrastructure (i.e. running nodes, writing smart contracts). Instead, they will be able to access on-chain data using SQL.

Analysts: Covalent’s no-code solution reduces friction for analysts building complex dashboards and conducting downstream analysis for compliance, risk or tax. In Analyst Mode, all requests and responses become an Excel-like experience that can be exported to CSV and Tableau.

In addition, the parent company of Metamask, Infura and Linea, @Consensys is also a customer of Covalent.

In addition to Covalent’s direct sales channels, Covalent started collaborating with other upstream RPC service providers such as Chainstack, QuickNode, and Infura last year. This collaboration allows Covalent to provide data indexing services to users through these partner channels. Currently, the payment amount from users generated through the Infura channel has already reached the six-digit level.

2.3.5 Business flywheel

Image source: https://medium.com/1kxnetwork/indexing-the-universe-of-blockchains-with-covalent-7a9686783dc1

In a report written by Covalent’s investment institution 1KX, 1KX envisioned a self-reinforcing flywheel for Covalent’s business development, which is simply: low latency, rich data index → ​​more B-side customers, dapps, wallets Integrated with institutions → More C-side user requests → Larger index volume and rich indexing requirements → More CQT repurchase and distribution rewards → More network nodes and CQT pledge → Better and richer data services and low latency.

2.4 Team, financing and partners

2.4.1 Founder and Team

Covalent is founded and led by Ganesh Swami and Levi Aul.

Ganesh, a man trained in physics and with more than 10 years of experience in data analysis, listed his first company on the New York Stock Exchange and is also a professional on climbing Mount Everest. Levi established the first Bitcoin exchange in Canada and was a member of the IBM team that established CouchDB. The team’s current staff is expected to be around 40-60 people, including network architects, data scientists and software engineers.

Overall, the background and experience of the team founders are very consistent with the current project, and they also have a good entrepreneurial success background.

2.4.2 Financing situation

The project has conducted a total of 4 rounds of financing, with a total financing amount of approximately US$15.5 million.

Image source: https://www.covalenthq.com/token/

Image source: rootdata

Among them, the investors are also very luxurious, basically bringing together various top Web3 institutions, including Hashed, Dephi Digital, etc., among which the two leading exchanges Binance and Coinbase have investments.

However, the project side’s latest round of financing was in May 2021, and more than 2 years have passed so far.

2.4.3 Important partners

In addition to various public chains and customers being important partners, Infura officially announced its partnership with Covalent at the Istanbul Decentralized RPC Summit in November 2023. Others include Microsoft, Tencent, Pokt network and other institutions .

Through the partnership, infura will integrate Covalent’s API into Infura’s existing suite of services, ensuring developers have a seamless and efficient experience, eliminating barriers to entry and accelerating development cycles.

2.5 Summary of the basic situation of the project

Overall, Covalent is a leading project on a fast-developing track, with its various business data in a rapidly rising stage and its revenue data increasing. In terms of income level, Covalent has an income several times greater than that of The Graph, the current leading project on the track, and seems to have achieved a better PMF (Product Market Fit). However, since its income stream has not yet been put on the chain, market investors There may be a large awareness gap about this.

In terms of new business, the development of the Ethereum Wayback Machine, as a long-term blob DA solution, aligns well with the current market trends.

In terms of the team, the founding team has professional experience and entrepreneurial background that match the track, and the investors include various leading industry players, such as public chain foundations, top exchanges, and major clients.

3. Tokenomic model

3.1 Total amount and distribution of tokens

The total number of Covalent tokens is 1 billion, and the specific distribution method is as follows:

• Token sale: 33.4%
• Teams and consultants: 16.4%
• Reserve: 18.9%
• Staking reward: 8%
• Ecology: 20%

The current token circulation rate is 62.5% and is at the following release position:

Data source: https://messari.io/report/covalent-a-unified-api-for-retrieving-blockchain-data

3.2 Token use cases and requirements

• Governance: Token holders have the ability to vote on proposals that involve changing system parameters, such as introducing new data sources, specifying geographies, and determining data modeling requirements.
• Staking and Verification: $CQT serves as a pledged asset. Validators earn fees by ensuring the accuracy and reliability of network data. Token holders can delegate their tokens to validators and earn rewards by participating in the security mechanism.
• Economic settlement within the system: Users who require data services pay with stablecoins, which are then exchanged for CQT from the market. The distributed CQT is allocated to pledged and functioning network operators.
• Staking rewards: Staking CQT itself will also result in staking incentives. However, this portion of the income is only applicable for a duration of 4 years and is intended to incentivize early network participants. The long-term operation costs of the network will be sustained by payments generated from users’ genuine needs.

Overall, the economic model design of the token is reasonable, especially taking into account the payment and budget preferences of enterprise customers: enterprise customers do not want to hold a volatile token on their balance sheet, namely CQT.

4. Market and competitor situation

4.1 Market Stratification

There are many participants and levels in the on-chain data market, and we need to classify them.

Among the service providers that offer basic and native on-chain data based on RPC, there are centralized representatives like Infura, Alchemy, Quicknode, and more. On the other hand, decentralized RPC service providers include Pocket Network. In fact, they are the upstream providers for Covalent. The operators of the Covalent network also obtain on-chain raw data from them.

Covalent belongs to the indexing layer of data, which is the layer for processing and outputting data after obtaining it. In this competitive layer, there are competitors such as @Bitquery_io, @etherscan, @MoralisWeb3, @blockvisionhq, but they are all centralized, while the decentralized indexing service provider that introduces tokens is The Graph.

The relative value of decentralized data indexing layer lies in providing stronger resistance to censorship, openness, and verifiability of data sources and construction methods. The distributed working method also makes the system less prone to single point failures.

4.2Competitor comparison

Compared with The Graph, the main differences of Covalent are:

1. Different data processing methods

Covalent follows the extract-load-transform (ELT) data integration paradigm, where the network extracts data from the blockchain and loads it into a data warehouse. The client then transforms it as needed to support the required data when queried. In contrast, subgraph-based indexers (Graphs) follow an extract-transform-load paradigm, where extracted data is first transformed into a use-case-specific subgraph.

Specifically, the benefits are:

• Handle changes in downstream demand flexibly. Since the data is non-destructively normalized (extract-load) before querying (transformation), users can obtain different types of analytical data simply by changing the query. If the protocol’s smart contracts are upgraded, Covalent users only need to re-query the comprehensive dataset, rather than modifying and re-indexing subgraphs as under the ETL paradigm.
• Handle changes in upstream demand flexibly. As blockchains become more heterogeneous, the Block Specimen standard ensures that Covalent’s unified API can be directly queried, even for chains with different transaction receipt formats and non-EVM chains. In the ETL paradigm, customers need to rewrite subgraphs for chains such as EVMOS or Solana, but on Covalent, it only needs to be done once to patch these chains to comply with the Block Specimen specification.
• Lower operating costs for customers. With Covalent’s ELT-based approach, customers’ costs come primarily from analysts and IT operations staff writing queries, rather than developers building and maintaining subgraphs. Covalent eliminates redundant data engineering work, allowing teams to focus on analytics and make smarter business decisions.
• Able to handle queries that require data from the entire chain. This is why Covalent is popular among portfolio trackers and tax reporting apps. The fact that all data is provided through a unified API makes Covalent suitable for machine learning endeavors such as address classification and clustering. Developers can also build a range of data-driven applications using the API as a single point of integration.
• Realize true chain-independent data consumption. Covalent’s block sample producers become full node operators of the source blockchain, extracting and normalizing on-chain data before publishing it to storage nodes. Query nodes read data from storage nodes in response to external API requests. This allows customers to use the same query on data that is very different from its original form, which is a powerful feature for dapps to become cross-chain local.

1. Differences in needs of user objects

Applications that use Covalent often require highly general, broadly applicable data, and they often do not require the highly specialized, diverse data sets that developers of subgraphs like Graph build. Applications in areas such as wallets, NFT markets, and tax services are more likely to use the official data API launched by Covalent. At the same time, if your application relies on segment and scenario data, you may be tempted to use The Graph.

1. Ecosystem

Image source: https://thegraph.com/explorer?chain=mainnet

Subgraph Quantity: The number of third-party self-built subgraphs on The Graph is much larger than Covalent’s third-party C endpoints. The Graph supports over 1500 subgraphs on the arb+eth chains, while Covalent only has a few dozen. This is related to the fact that Covalent recently started opening up third-party endpoints (similar to subgraphs).

Number of networks: Covalent supports over 200 chains, while The Graph supports over 10, which is a significant difference in quantity. However, the latter has already covered the major business chains.

5.Valuation

In terms of valuation, I mainly use comparative valuation and select two decentralized data service projects that are in the same track as Covalent for comparison. They are The Graph and Pocket Network.

Among them, The Graph is a direct competitor of Covalent, and its valuation serves as a significant reference. As Pokt is a decentralized RPC service project and an upstream player in the same industry as Covalent, its valuation also holds certain significance.

From a valuation perspective, Covalent still has an FDV valuation gap of nearly 7 times compared to The Graph. Considering that Covalent’s annualized revenue is almost 6 times that of The Graph, this valuation appears very tempting.

In comparison to Pocket Network, Covalent has higher revenue but lower valuation, although they are both at a similar magnitude - in the hundreds of millions of dollars range. However, Pocket Network has experienced an impressive 12-fold increase in the past three months, showcasing remarkable value discovery.

The CQT has only increased by about 80% in the past three months. It is primarily following the market rebound and has not yet attracted significant attention from funds.

6.Risk

Regarding Covalent, I believe that there are two main risks that deserve attention:

1. If other centralized blockchain data service organizations with a larger user base, such as Alchemy, Infura, Quicknode, etc., transition from RPC to downstream data indexing services and offer similar data indexing services, they may negatively affect Covalent’s market share and pricing. For instance, Alchemy acquired the data indexing platform Satsuma in September 2023.

2. Data indexing is a relatively unknown area with limited awareness among public investors. Currently, it has not yet captured the attention of investors. This trend may persist unless there are compelling narratives in this field.

7. References and Acknowledgments

This article would like to express gratitude to Leo and Bruce from the Pocket Network community for their review and comments.

Messer:Covalent: A Unified API for Retrieving Blockchain Data

1KX：Indexing the universe of blockchains with Covalent

The Graph data dashboard: https://thegraph.com/explorer/network?chain=mainnet

Pocket Network data dashboard: https://poktscan.com/

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