The March to be the #1 Indexer

We have been on a long journey with Covalent ever since we spoke to the team for the first time in 2020. We participated in Covalent’s seed round in September of that year, following on its private round soon after. At the end of October 2022, we announced a US$ 5mn purchase of Covalent’s network token CQT through the secondary market to further increase our participation in the network. Why are we excited about Covalent? 

The key reasons are Covalent’s team, its values, its vision, and the protocol’s traction. The 60+ member team has a strong background in databases, scalability, and data management, along with an ardent drive to change the industry. Covalent is built around FOUR core values – 

• First principles (data layer built from the ground up), 
• Ownership (responsibility of the team and the community), 
• Urgency (a dedicated timeline for building it all), and 
• Relentlessness (building through any market phase). 

The values have always set them true to their goal. The company’s vision is to drive adoption and traction in web3 by creating the necessary tools and networks. Their product line includes Unified APIs (Application Programming Interfaces) for data, the Covalent Network for decentralization and incentivization, and Increment, a business intelligence tool for everyday users. With these tools and a top-of-the-line education program, Covalent is on a path to augment web3.

Introducing Covalent

Covalent provides a Unified Blockchain API service that brings visibility to billions of web3 data points. Developers use Covalent to build exciting multi-chain applications like crypto wallets, NFT galleries, and investor dashboard tools by utilizing data from 70+ blockchains (mainnets and testnets). Covalent is trusted by a community of 40,000+ developers and powers data for 5000+ applications, including 0x, Balancer, Moralis, and many others.

We published our Covalent thesis back in June 2021, which covered the data industry and explained Covalent’s offerings. Since then, a lot has changed in the web3 data and middleware space, but we do recommend reading it to know how far we have come.

A Beginner’s Guide 

What Covalent does is simple, but how Covalent does it is pretty complex. Think of Covalent as the Google of blockchains. Google emerged as the industry leader in indexing and compiling data across the Internet at scale. Similarly, Covalent aims to index the entire universe of blockchains. Here is a high-level view for beginners on how Covalent does it. 

All blockchains have blocks, which are data structures. Based on the blockchain, these data structures can be similar or very different. In order to get meaningful information from these blocks, a user must perform complex search algorithms to find the right data. Searching the whole system again and again for each query is inefficient as each search is resource-intensive. Therefore, there is a need for a data index, which can help organize this data better (imagine a book and its table of contents or appendix).

Covalent parses all these blockchains, runs its programs, and fits the data of all these different blockchains and their data structures into a normalized data template (think of it as one mould). Then, certain fields of this normalized format are used to create indices which make searching and querying blockchain data much easier for any user. Therefore, as Covalent indexes more blockchains, more data is available for developers to integrate into their applications. This is known as the base layer. The base layer of data will continue to expand as more and more independent blockchains become mainstream.

The base layer powers three suites of products:

1. Covalent Unified API – this is the main product created by the immense data store that Covalent has accumulated. The primary users of the API are businesses and developers.
2. Covalent Network – the network is what Covalent’s current infrastructure is evolving to. It decentralizes the operation and maximizes the ​​performance per dollar by working as a data co-op.
3. Increment – this will be the business intelligence (BI) consumer-facing analytics product with charts and metrics in-built (imagine something like Dune Analytics and Glassnode). 

An Expert’s Dive

Please refer to the glossary page for terms and definitions. 

At the core of Covalent’s offering is the data model: a unified, canonical analytical storage representation of all blockchain data. When blockchain data (blocks, transactions, log events, state transitions, trace events, etc.) is imported into the Covalent data model, it is normalized into a single representation, regardless of the source blockchain. This uniformity guarantees ease of use because a single layer can sit on top of the data model and provide indexing and querying solutions. 

In the data model, the various blockchains’ data representations are brought in line with one another to share a single polymorphic representation. Therefore, each new layer-1 blockchain protocol supported in the Covalent data model involves design decisions on how to best merge new chain-internal types into the existing types – including considerations on lowest-cost schema-migration paths for existing data warehouses.

Covalent has set up a robust ELT pipeline, which powers its data model. ELT stands for “extract, load, transform”, the three interdependent processes of data integration that are used to pull data from one database and move it to another. Complete details of the ELT pipeline are shared here. 

The Covalent Network

The data model and the ELT pipeline have led to the formation of the block specimen, the underlying data schema that powers the Covalent network. 

The network has five key crucial roles for Covalent’s technology and economy –

1. Block Specimen Producers (BSP) – BSP (whitepaper) is a blockchain client that asynchronously exports rich and cryptographically-secure data as block specimens. These clients are essentially extract-and-normalize workers that create block specimens that, together with Geth (and other node software like Erigon), form a canonical representation of a blockchain’s full historical state. This creates a block result, a transformed block specimen that is organized in a schema the Covalent database expects. Therefore, BSPs play a pivotal role in the network, given that the data in the block specimens will feed the entire network with the data needed to answer user queries. The diagram below shows the functioning of a BSP –
   
2. Indexing Nodes – The indexing nodes run an indexing engine to trace, decode, and enrich the block specimens into aggregatable traces. The job of an indexer is 1) to fetch the block specimens already produced by a BSP, 2) to run a tracing re-execution of these block specimens using the latest (in future open-sourced) implementation of Covalent’s stateless-tracer worker, and 3) to output the data artefact generated by this process – a trace specimen – back into the storage network. The abstract contract-state specimen objects and the metadata files form a structure similar to that of a Git repository. Each new contract-state object and the manifest-file set create a new “commit” to that repository. The “commit hash” of this new commit and the content hash of the trace-event stream object are both published to the blockchain. 
3. Storage Nodes – The storage nodes provide an interface similar to IPFS, but with the important difference that these nodes can charge per request, similar to paid IaaS object-storage services. BSP and indexer nodes store all the data within these storage nodes.
4. Query Nodes – Query nodes are compute nodes that serve the Covalent Unified API to developers requesting blockchain data. They host the decentralized database with the indexed blockchain data and build a layer to extract insights from contract state snapshots allowing API calls to serve the consumers. The difference between storage nodes and query nodes comes down to the request and response payloads. While storage requests reference specific existing objects in the storage network, query requests are arbitrary SQL or Primer queries. While storage-response payloads come directly from existing objects in the storage network, query-response payloads are computed by the node itself from a local data warehouse the node owner maintains. 
5. Delegators – Delegators are a subset of operators that delegate their CQT to stake within a pool of producers, auditors, refiners, indexers, and queriers to receive a portion of the rewards of the work done (proportional to the stake). They also participate in governance in the evolution of functions undertaken by various roles in the network. Delegators are crucial in supporting the other three roles as their stake provides more security to the network.

There are several other smaller roles, such as auditor and directory service, that contribute to the network. The reader can learn more about them in the whitepaper.

The network documentation created by the Covalent team further clarifies the network and the token designs.

Data Anyone?

The Covalent Unified API can be used to pull balances, positions and historical granular transaction data from 70+ blockchain networks. The Covalent API is RESTful and is designed around the primary resources that are available through the web interface. The data is provided through endpoints, which are classified into three categories:

1. Class A – endpoints that return enriched blockchain data applicable to all blockchain networks. Examples include balances, transactions, log events, etc.
2. Class B – endpoints maintained by Covalent for a specific protocol on a specific blockchain; for example, AAVE is Ethereum/Polygon-only and does not apply to other blockchain networks yet.
3. Class C (coming in 2023) – endpoints created and maintained by the community.

Apart from the API endpoints, users will soon be able to use Increment for visualizing data and creating dashboards to study reach, retention, and revenue metrics for decentralized applications and different layer-1s. The planned launch of Increment is Q1 2023 after a successful Data Alchemist boot camp in Q4 2022. 

The Number’s Game

• Covalent was founded 4 years ago in the midst of the previous bear market.
• In 2022, Covalent serviced more than 5bn requests through its unified APIs.
• In the first 2 operating years (2020 and 2021), it indexed 20 blockchains.
• Covalent indexed more than 50 blockchains in 2022 alone.
  
• Since its inception, it has indexed 31bn transactions, including 540mn DEX trades.
• Covalent has ingested data for 51k NFT collections and 27mn NFT trades.
• More than 40k developers are using Covalent to power their dApps.
• Covalent has hosted 70+ meetups with nearly 7000 attendees across 11 countries and 27 cities.
• Furthermore, the team organized 30 hackathons and distributed US$ 250k in prizes.
• It is expected that Covalent will service 40bn requests in 2023 and 100bn by 2024. These will come from 3 avenues:
  • More scalable API – Balances_V3, Transactions_V3, New NFT Endpoints – 50bn (10x growth)
  • Channel Partner integrations – Chainstack, QuickNode, NodeReal – 25bn (new distribution)
  • Class-C endpoints – customizable community APIs – 25bn (community demand)

Meet CQT

Covalent’s token (CQT) aims to power the decentralized network by providing staking and governance functionalities. All network participants will be required to stake CQT to provide network-related services. This deposit will act as the collateral to disincentivize malignant actions (slashing). Moreover, all participants will earn an APR of 8-10% to incentivise the right behaviours and good network participation.

The total token supply of CQT is fixed at 1bn. The working of the token and various stablecoins within the network economy is depicted in the figure below:

1. The application/developer loads their deposit account containing the stablecoin assets into the network smart contract. 
2. The application queries the Covalent API. 
3. A check is made to verify sufficient funds in the deposit account before sending the respective query request to validators.
4. The query is sent to the validators to fulfil the request. 
5. The desired data is sent back to the application.
6. An entry is made on the ledger (Cosmos-based layer-1 in the near future) with the amount of data consumed, which validator(s) is fulfilling the request and the associated costs.
7. The balances between the network contract, CQT, and the work performed are reconciled.
8. The US$ funds are drawn down from the developer’s deposit account, swapped for CQT via a market buy mechanism, and settled against a validator’s outstanding balance.

Covalent has opted for stablecoin payments, instead of CQT payments, for API pricing for three primary reasons:

• Stablecoins have high adoption and deep liquidity in the web3 ecosystem.
• Enterprise customers do not want to hold a token (CQT) that is susceptible to volatility. 
• Measuring, budgeting, and forecasting the costs of using Covalent APIs is easier.

The CQT token whitepaper provides further clarity on the token utility.

The Crystal Ball

For 2023, Covalent has planned new product and feature releases and community initiatives that empower all of web3. Some of the key announcements include: 

1. Covalent is launching Premium API, a paid service to access improved endpoints at higher rate limits. It will offer a 10x better rate per second, along with fewer timeouts and scaling issues. The service is being rolled out with the following tiers – free (for casual users), premium (for developers), and inner circle (self-serve tier for enterprises). By the end of Q1 2023, most endpoints on Ethereum and Polygon mainnets will be available on the premium service.
2. Covalent is partnering with RPC providers (Chainstack, QuickNode, NodeReal, Bware Labs) to bundle together Read+Write for blockchains. This will create a one-stop shop for developers to get structured data instantaneously with minimal R&D and maintenance costs. 
3. Covalent will turn on the fee switch for the network, effectively generating revenue for the protocol. The CQT will only be distributed to operators who do the work, not automatically to all network participants. This will make the protocol more sustainable.
4. Covalent plans to move from the existing EVM architecture to the Cosmos SDK. By launching an app-chain, Covalent would ease the cost burden of posting data proofs to a blockchain and expand the scope of the network. 
5. Covalent will launch Increment to further blockchain intelligence and provide all users with transparent data metrics about web3. The focus would be on learning and sharing 3 key metrics – Reach to understand user behaviour, market context, and future growth; Retention to determine product market fit, stickiness, and growth drivers; and, Revenue to better allocate capital, time, and business resources. By the end of 2023, the team aims to debut a premium, SQL-free version of Increment for improving business intelligence.
6. Phase 2 of the Covalent Network will go live in 2023. The Blockchain Data Refiner will be an engine that serves to enrich and transform Block Specimens and retrieve information directly from the Covalent network.
7. Covalent will publicly open the Class-C endpoints for the community. The Class-C endpoints have been in alpha and beta testing for quite some time and will finally be out in 2023. 

Conclusion

Many things are ongoing at Covalent as they welcome the new year with great optimism, and we are equally excited by the prospect of the mass adoption of web3 in 2023. Everyone in web3 will continue to build and learn as we advance our technology, governance, and community. As Ganesh puts it, “there are no bear markets for builders”, and we are all here to create change.