About the editor: Spencer Noon is Co-founder & General Partner at Variant Fund. Web3 founder looking to connect? Reply back to this email.

In case you missed it—yesterday we announced Canto as the latest addition to the Variant portfolio. We also published our investment thesis on the Variant website (click here to read it) which to my amusement spurred a new meme that is now making the rounds on crypto twitter: Cantofornia.

It’s been a while since we’ve backed a new L1 publicly, but Canto and its early ecosystem of settlers caught our attention because they are primarily innovating upon the dimension of socioeconomics, a strategy we rarely see other L1s attempt.

There has also been a positive reception from the community, which is encouraging to see. I think this is because we didn’t have an opportunity to invest in Canto at lower valuations or earlier in its lifecycle, like your typical private VC deal. Instead, we found Canto by doing what so many OurNetwork community members do best—by checking the chain—and then acquired tokens via the public markets (e.g. DEX).

As you’ll see in this week’s newsletter, the Canto ecosystem is only just starting to get off the ground, but I’m looking forward to having a front row seat to what I consider one of the more interesting experiments in all of crypto.

— Spencer 🕛

Coverage on the Canto ecosystem: General Overview, Bridging, DeFi, and LP Analysis.

• Canto is a new EVM-compatible L1 centered around public goods funding. The chain does not initially innovate technologically - it was built with mostly off-the-shelf open-source components, notably the Cosmos SDK - but introduces a novel socioeconomic structure designed to incentivize public goods funding. Despite being launched in August, Canto is now the 5th largest Cosmos chain by TVL, growing ~40% MoM - faster than any other IBC chain with >$1m in TVL. Zooming out, the chain ranks 23rd highest in TVL out of all L1s and L2s, despite being the second youngest of the top 50. TVL is currently tracking ~$106m.

• While Canto is extremely young, the chain has seen recent user growth. January users are up ~2.5x so far from December. Total users are up ~5x from genesis, recently crossing 61k. December also saw peak wallet retention, with ~45% of December new wallets transacting again at least 1 month later.

• At the same time, new users continue to enter the ecosystem, with the percent of new MAU trending upwards (January data is importantly incomplete). In January so far, Canto has added ~12.5k new users.

• Since its launch in August, Canto has received over $300m in assets bridged from Ethereum mainnet, across more than 10k transactions. The majority of these assets have been USDC or USDT, making up about 93% of the total volume. The remaining volume is primarily composed of WETH. Canto has consistently had a minimum of $10m in assets bridged each month, with two months seeing volumes exceeding $80m. On January 19, Canto was the #7 chain in volume bridged from Ethereum mainnet, seeing more inflows than Avalanche and Near.

• Canto stands out among other L1s for its high average bridging volume per user. On average, users have transferred tens of thousands of dollars into the ecosystem, with some months even surpassing $100k in average bridging volume per user. This is a strong indication of the community that Canto has built, with thousands of high conviction users bringing sizable amounts of money onto the network. Here is an overview of the average bridging volume per user since Canto’s launch.

• Canto's bridging volumes and accessibility continue to expand with recent developments, such as the integration with Synapse protocol in December. This integration has resulted in a more seamless bridging experience and has helped facilitate over $18m in bridging volume for over 8k users. Synapse enables a faster bridging experience for users by allowing direct bridging into the Canto EVM. We anticipate that this integration will further drive the amount of assets brought into Canto.

• Canto was launched with three core DeFi primitives: a DEX, lending market, and unit of account protocol. The protocols are intended to be free public infrastructure (FPI), and charge no fees. Canto DEX is an AMM with both concentrated liquidity and constant function pools. Since launch, the DEX has seen over 950k trades. Total volume recently crossed $782m. TVL on the DEX has grown ~54% YTD, recently crossing $67m. Notably, 24H volume has spiked ~154%, tracking ~$17m.

• The most liquid pairs on the DEX are NOTE-USDC and NOTE-USDT, each tracking $27m and $21m, respectively. In fact, NOTE is currently the largest decentralized “stablecoin” (referred to as a unit of account) in Cosmos with ~25m in circulation. The pairs have also seen impressive growth, with TVL increasing 64.4% and 69.2% for NOTE-USDC and NOTE-USDT, respectively.

• Canto Lending Market (CLM) is a fork of Compound V2, creating an experience familiar to many DeFi users. TVL has grown ~56% YTD, reaching $36m. Supply volume has tracked quite high at $65m YTD, although borrowing volume has lagged slightly. Allowing LP tokens to be used as collateral could be a potential unlock.

• The cumulative ITD amount of NOTE borrowed from the accountant recently surpassed 100m, an impressive feat considering it has been about six months since borrowing started. Looking deeper into this growth, particularly analyzing the cumulative borrowed NOTE recently with the growth of Canto's unit of account in pools that accept the asset. When looking at the three pools, CANTO/NOTE, NOTE/USDC, and NOTE/USDT, it's worth noting the USDT/USDC pools overtaking the CANTO one recently.

• Extrapolating the analysis further regarding the USDT/USDC pools overtaking the CANTO one recently, combining the NOTE borrowed from the accountant over the past month with NOTE deposited in the USDC/USDT pools yields an interesting insight that the two have been moving alongside each other.

• Gauging the NOTE-USDT / NOTE-USDC pool stickiness, the top depositors of the two pools have posted significantly more NOTE on the deposit side versus the withdrawal side. Additionally, CANTO received for providing liquidity is generally not withdrawn by these top LPs. There is also provider overlap.