VanEck Crypto Monthly Recap for August 2024

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Most crypto assets fell sharply in August as fundamental usage and financial statistics slipped against the broader market backdrop of rising volatility. For the month of August, Bitcoin (BTC) fell 11%, Ethereum (ETH) -24%, and Solana (SOL) -21%, vs. the S&P +2% and the Nasdaq +1%. The market capitalization of all Smart Contract Platforms (SCP) ended August (-12%) lower than it closed in July.

• Breaking Down Ethereum’s Struggles
• Notable Performer - Tron
• Notable Laggard - zkSync

Though the precipitating event for the dismal price performance was a risk-off typhoon spawned by the yen carry trade, general sentiment for crypto remained poor even after the event. The apex of the pandemonium was August 5, when BTC wicked as low as $49k while ETH crashed to $2.1k after opening the month at around $64.6k and $3.2k respectively. Though Bitcoin has regained some of its value since the “flash crash,” sitting around $ 58k at the time of writing, ETH is still wallowing around $2.5k. The impact of the yen carry trade implosion translated into BTC and ETH’s August 30-day volatility climbing (+48%) and (+52%) higher than the previous month, as well as Bitcoin’s 90-day correlation with the Nasdaq rising to an 18-month high of 38%.

Besides macro factors driving prices lower, blockchain usage deteriorated in August. For example, daily active usership was down (-10%) in August, fees generated fell (-12%), and DEX volumes sagged (-4%) compared to July. The German & US Governments also transferred 62k Bitcoin to exchanges, presumably for sale, while Mt. Gox and Gemini bankruptcy distributions totaled another 124k Bitcoin. That’s $11B in non-repeatable sales, roughly equivalent to the net inflows to Bitcoin ETPs in the first two months of trading. Lastly, driving weak price action at month-end, the SEC sent a Wells Notice to OpenSea, one of the largest NFT exchanges, claiming that the company is an unregistered broker. The action is another sign that regulation by enforcement may continue in the US unless Donald Trump wins the election.

Price Returns

Source: Bloomberg as of 8/31/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Market Cap of Smart Contract Platforms (SCPs) Fell 12% in August

Source: Artemis XYZ as of 8/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

One of the most controversial issues in the month of August was the partnership between Bitgo, the custodian of WBTC, and Justin Sun. A very important DeFi “primitive,” WBTC, or “Wrapped Bitcoin,” is a token on Ethereum that is backed by Bitcoin custodied at the crypto exchange Bitgo. Someone who wishes to use mint WBTC can send their Bitcoin to Bitgo, which then issues the WBTC on Ethereum. WBTC is backed 1:1 by Bitcoin, held by Bitgo, which provides attestations of holdings.

At the time of writing, more than 153k BTC worth $9.2B have been “wrapped” into WBTC for use in Ethereum’s DeFi. As part of the new partnership agreement, Bitgo will move custody of WBTC outside of the United States to three different Asian countries. The crypto community reacted negatively to these developments due to the negative perception of Justin Sun and past issues with other projects brought under his aegis, like USDD and TrueUSD. MakerDAO, the entity that runs the permissionless crypto-backed stablecoin DAI, passed a governance proposal banning wBTC as used for collateral to create DAI. To seize the initiative, Coinbase announced its own wrapped version of BTC called wbBTC. At the same time, Bitcoin L2 Babylon unexpectedly declared the launch of their mainnet the week after Bitgo’s new custody announcement. Meanwhile, existing competitors such as tBTC and BTC.b saw modest inflows of 250 BTC and 50 BTC.

Daily Memecoin Volumes on Solana Fall Back to 2023 Levels

Source: Dune @ally as of 8/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana (-21%) has had a mixed month as several underlying issues surfaced to generate a minor FUD (fear, uncertainty, doubt) cycle. Speculation is the lifeblood of crypto, and no more is this a reality than on Solana, which accounts for ~22% of all DEX trading, of which 47% has been memecoin trading since June 1, 2024. It is apparent to many in the crypto community that Solana memecoin trading is rife with fraudulent activity. A coin supposedly associated with Donald Trump was “rugged” for $2M, someone hacked McDonald’s Instagram account to announce a memecoin that eventually scammed buyers out of $700k, while other tokens with liquidities of <$100k are seeing daily trading volumes >$10M. The result has been that many traders on Solana have lost money due to memecoins. It is estimated that only 0.76% of wallets on Solana’s top memecoin platform, pump.fun, are profitable.

Many small traders are catching on to the fact that memecoin trading is usually a zero-sum game. This change in sentiment has driven memecoin trading down (-43%) month-to-month while total DEX volume on Solana is down (-48%). As a result, Solana's monthly fees have declined (35%). On the positive front for Solana, the first (and second) spot SOL ETF debuted in Brazil, while the interesting DePIN project Grass announced its token airdrop, and the perpetual futures platform Drift launched a prediction market. The stablecoin of PayPal, PYUSD, reached $664M in supply on Solana, nearly double the $345M of PYUSD on Ethereum. In August, the total supply of all stablecoins on Solana reached $3.9B, 160% greater than a year earlier.

A budding challenge for the widespread adoption of Solana is its blockchain's massive size in computer storage space. Solana is designed to process tens of thousands of transactions per second and has consistently demonstrated this capability. Blockchain transactions are essentially “writes” to each blockchain’s database of information. The more transactions, the more “writes” occur, and this causes more data to be stored on a blockchain. While Bitcoin’s blocks are around 1.6MB in size and occur every 10 minutes, Solana blocks can be as large as 128MB, and these blocks occur around every half second. The result is that the Bitcoin blockchain is around 550 GB in size for 15 years of history, while Solana’s chain is around 150TB (272x bigger) for roughly 4.5 years of history.

This is an issue because it makes it very difficult and expensive for people to store its history and query its contents. Looking at past events or simple things like an account’s historical balances is cost-prohibitive. Solana expects private entities to spin up to provide services for those wishing to comb Solana’s history. Allium, an S-tier data services provider, is one of the few entities that can effectively assess Solana’s history. This presents a challenge to anyone who wants to create assets on Solana.

If an audit is to occur or an issue crops up, someone has to spend large sums of money to untangle Solana’s historical archive. The instability of Solana’s consensus mechanism and its history of outages add to the challenges posed by Solana’s substantial history. Because of these two issues, it is nearly impossible to prove that Solana’s chain has operated without any faults (double spending of currency) and without sifting through the entire chain. Though this is a challenge with any blockchain, Solana’s massive data output creates novel difficulties that are not posed by lower throughput chains. It must also be noted that while history is challenging to verify by new nodes, real-time verification of chain functionality can be verified by anyone with a full node. Newer high-throughput blockchains, such as Aptos and Sui, have different design philosophies that seek to address these challenges. But realistically, Solana’s big data limitations will likely plague other high-capacity blockchains.

Hosted on the Polygon blockchain, Polymarket has crept into the news cycle during the US presidential election season as an exciting use case of crypto technology. Polymarket is a permissionless prediction market that allows users to create betting markets and speculate on the outcome of off-chain events in politics, sports, finance, and popular culture. The smart contracts that power Polymarket are hosted on the Polygon blockchain. These smart contracts receive, interpret, and execute better payoffs using data brought on the chain by the crypto “oracle” Uma. The pseudo-anonymous nature of Polymarket combined with its limitless, global accessibility allows it to incorporate valuable information more efficiently and dynamically than is possible outside of crypto. Because people can create any market with any type of outcome without a central party to prevent the flow of information by limiting markets or betting, Polymarket is arguably a more accurate prediction engine than any web2 betting platform. While web2 companies can be pressured to censor or alter markets, Polymarket’s decentralized system prevents outside parties from stopping the incentivized transfer of knowledge that prediction markets enable.

The recent attention on Polymarket has focused on its political prediction markets, such as the winner of the US presidential election or the winners of key US congressional races. Polymarket is generating enormous controversy with detractors contending that public opinion can be swayed by large-pocketed investors who manipulate prediction markets. Regardless, Polymarket usage has surged, with over $440M in wagers placed by over 60k monthly active traders in August. Recently, its data feeds have been integrated into Bloomberg terminals worldwide. Despite its popularity, Polymarket has only generated $17.9k in fees for the Polygon blockchain where it is hosted.

Polymarket’s Monthly Active Users Up 3600% since EoY 2024

Source: Dune @rchen8 as of 8/29/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

In stablecoin news, Tether, the company behind the largest stablecoin USDT, has shelved plans to launch its blockchain, citing market saturation. Another interesting development is that Maker, the entity behind the collateral-backed stablecoin DAI, has decided to rebrand to SKY. As part of its move, Maker will upgrade its DAI token to USDS and change its governance token, MAKER, to SKY. Users can choose to upgrade their existing DAI or MAKER tokens to receive token rewards and the Sky Savings Rate, which will only be available in certain jurisdictions. As part of the sweeping changes Maker calls its “Endgame,” Maker will allow independent entities called Stars to launch innovative stablecoins. Meanwhile, Circle, the creator of USDC, has launched the Euro-backed stablecoin EURC on Base.

Meanwhile, the VanEck-backed Agora stablecoin¹ has proven to be one of the fastest-growing stablecoins in crypto. Since its launch on August 19, it has grown to $57.5M on Avalanche and Ethereum. Agora intends to grow rapidly by expanding its presence to other chains such as Sui. This would make Agora the first fiat-backed stablecoin on Sui. Agora’s strategy is to grow through revenue-sharing agreements and distribution partnerships. Some target partnerships include protocols, on-chain applications, centralized exchanges, and other important entities in crypto. Nick Van Eck, founder of Agora, believes that stablecoins will become a $10T asset class expanding to enterprises issuing their own stablecoins. For more on stablecoins, please look out for our upcoming research piece on the topic.

Among Ethereum L2s, Polygon and Optimism stood out this month for significant increases in developer activity, with their contracts per deployer 30-day moving averages up ~7.9x and ~4.8x, respectively. However, MATIC & OP tokens performed in the middle of the pack, down (-15%) and (-14 %), respectively. Polygon PoS developers are likely busy deploying contracts in preparation for the PIP-19 component of the broader Polygon 2.0 rollout, scheduled for September 4th. This upgrade will transition Polygon’s native MATIC token to the ecosystem’s next-generation POL token, which is designed to accommodate an array of ZK-based L2 chains with community staking and governance. POL is optimized for the development of the aggregated Polygon network (“AggLayer”). This network aims to be a unique scaling solution, moving beyond the current binary competition between modular and monolithic blockchain thesis dominated by Ethereum and Solana.

Polygon & Optimism Dev Outputs Surge Ahead of Upgrades

Source: Artemis XYZ as of 8/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Optimism developers increased their output this month due to two main catalysts: addressing recently discovered fraud proof vulnerabilities and preparing for interoperability upgrades ahead of OP Labs' Superchain upgrade in early 2025. The Granite Network Upgrade proposal, made in response to third-party audits identifying security issues in Optimism’s fault proof, includes both security and performance enhancements. The proposal passed on August 28th and is scheduled for execution on September 10th.

More proactively, Optimism announced its ‘Superchain’ roadmap this month, a three-milestone plan to bring interoperability to the OP Stack. According to L2Beat, nine of the top 20 Ethereum L2s are built using Optimism’s OP Stack codebase. If successful, this roadmap could significantly reduce the liquidity and user fragmentation currently affecting the Ethereum L2 ecosystem. Bringing interoperability to the OP Stack could elevate its user experience to be comparable with high-performance L1s like Solana while retaining the security, applications, and user base of the Ethereum ecosystem. Adding to the Superchain’s gravity, Sony Group announced the development of its own Ethereum L2, ‘Soneium’ that will be built using the OP Stack for both general Sony Group ecosystem applications. Additionally, Soneium will allow the exploration of new purposes, including “…the protection of rights to creativity created by creators, new mechanisms for returning profits to support creators and fans, and opportunities for creators to be active across the digital and real worlds.” Notably, the Japanese Prime Minister will speak at a Web3 Event in Tokyo later this year.

Arbitrum’s native ARB token underperformed this month, down (-23%), with the L2 blockchain showing no meaningful increase in average developer output or total developer count. Earlier in the month, Arbitrum’s DAO proposed and approved the development of an ARB staking mechanism, which plans to stream DAO-generated rewards from the L2’s sequencer along with MEV, validator fees, token inflation, and treasury diversification rewards to eligible token holders who are delegated to active governance participants.

Alongside Uniswap’s UNI token, ARB was also added to the custodial business of the controversial Special Purpose Broker-Dealer, Prometheus Capital. Contrary to more nuanced takes from many crypto industry participants, Prometheum is aligned with the SEC’s stance that traditional securities laws provide clear guidance on digital assets transactions. Given Uniswap’s embattlement with the SEC, one could view ARB’s addition to Prometheum as a bullish catalyst in terms of institutional distribution and liquidity or as a bearish catalyst in terms of exposure to the SEC. In either case, ARB appeared to lag other L2s in organic growth this month.

Base Has ~10x More Contract Deployers Than Other Top L2s

Source: Artemis XYZ as of 8/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Coinbase’s Base blockchain is the largest Ethereum L2 by daily active addresses. Base also boasts a substantial number of smart contract deployers. Data from Artemis.xyz shows that Base has nearly an order of magnitude more addresses deploying smart contracts on its L2 than Arbitrum, Blast, OP Mainnet, or Polygon PoS combined. Like other entrepreneurs, crypto developers must strategically anticipate where their customers will be. We think developers they are increasingly choosing to build on Coinbase’s Base because it enjoys a key competitive moat: a direct-to-consumer onramp from its dominant centralized exchange.

In an increasingly fragmented L2 landscape, Coinbase’s unique nexus of onchain and offchain users, developers, and liquidity offers compelling virtual real estate for building a crypto business. As Base is also part of the OP Stack, it participates in the Superchain’s revenue sharing model. According to the ‘Superchain Health Dashboard’, Base contributed an estimated 142.45 ETH (~$367k) month-to-date to the Superchain Collective as of August 29th, second only to OP Mainnet itself. Base and Optimism thus present an interesting synergy, with Optimism potentially playing the long-term role of a relatively decentralized modular scaling solution counterpart to Coinbase’s more centralized, retail-centric strategy.

August’s Notable Performer - Tron (+20%)

Tron’s Stablecoin Market Cap Outpaces Other Leading L1s

Source: Artemis.xyz as of 08/28/24. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Up (+20%), Tron’s native TRX token stood out once again this month, reaching levels not seen since April 2021. The blockchain’s significant performance may largely be attributed to the mid-August launch of the Sun Pump platform Beta—a platform modeled after Solana’s infamous pump.fun and named after Tron’s founder Justin Sun. Sun Pump is a streamlined tool to launch meme coins in seconds. As of August 28^th, Sun Pump has already launched over 56,000 meme coins on Tron, generating over 23 million TRX in revenue for an estimated $3.64 million USD. Effective August 25th, Tron executed Proposal #92 to increase the blockchain’s energy cap, lowering gas fees and increasing transaction throughput in response to the increased user activity.

Sun Pump’s initial success marks a significant diversification in Tron’s adoption drivers, which historically have been centered around stablecoin investments and transfers in the APAC region and emerging economies. Data from Artemis, visualized in the chart above, illustrates the disproportionate amount of stablecoin value issued to the Tron blockchain relative to other leading smart contract blockchains. Indeed, while other blockchains experienced sizable drawdowns in stablecoin market caps during the bear market, Tron’s blockchain demonstrated more sustained USD stablecoin retention and growth, even surpassing Ethereum as the blockchain with the most circulating Tether (USDT), the world’s largest stablecoin by market cap.

However, Tron was not without headwinds or controversy this month. After the Tron DAO Reserve removed ~$732 million of Bitcoin backing the USDD stablecoin (purportedly without community vote), Justin Sun tweeted to assuage concerns, stating, “The TRON DAO Reserve plans to spend time upgrading USDD in the future to make it a more competitive decentralized stablecoin in the market”, after lamenting that “…the capital utilization [of USDD’s reserves] is not very efficient.”

We maintain a positive view of Tron’s retail market penetration as a stablecoin-centric network. However, we hold a highly cautious view of the ecosystem’s exposure to Justin Sun’s control, given his questionable past actions with USDD and other projects. Bluechip, a third-party stablecoin ratings agency, estimated that USDD’s 53% collateralization was comprised of 69% TRX, 29% BTC, and 2% TUSD—before the latest BTC withdrawal. USDD was initially inspired to compete with the now-collapsed UST stablecoin involved in Terra/LUNA, and we fear it risks suffering a similar fate due to its reliance on TRX for collateral. We are also concerned about the general challenges facing USDT holders who want to off-ramp their tokens to fiat. USDT can be redeemed for dollars by only a few entities, and many holders are supposed have to swap for USDC to offramp their USDT. Additionally, moving USDT from Tron to Ethereum is nearly impossible, adding to our concern of collusion between Sun and Tether to block exits for Tron’s USDT holders.

August’s Notable Laggard - zkSync (-24.05%)

zkSync User Growth Lags Base, Arbitrum, and Others as Ethereum L2 Ecosystem Activity Bounces

Source: Artemis.xyz, as of 08/28/24. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

zkSync’s native ZK token experienced a significant decline of (-24%) this month, driven partly by its underperforming user growth compared to other Ethereum Layer 2 solutions. As the chart above illustrates, the growth of zkSync’s daily active addresses—a proxy for users—lags that of Base, Arbitrum, and other leading L2s, even as overall activity in the Ethereum L2 ecosystem rebounds. Absent a clear negative catalyst. However, zkSync’s stagnation can primarily be attributed to the vacuum left by the absence of its previous driver: airdrop farming.

Previously, zkSync fueled speculation about a potential airdrop, prompting users to interact with its network to increase their potential eligibility. For instance, a September 2023 zkSync blog post mentioned plans to “fully decentralize the protocol’s technology, community governance…,” and emphasized “empowering the community with ownership.” On June 11th, zkSync finally revealed details about the airdrop of its native ZK token. However, the distribution was criticized for lacking sybil resistance, a vulnerability in which a single entity can use multiple accounts to gain disproportionate amounts of airdropped tokens. After ZK token claims began the following week, one user claimed to have received over 6.6 million tokens across 350 Sybil wallets, valued at nearly $1.2 million. Simultaneously, many good-faith users found themselves ineligible for the airdrop, rubbing salt in the wounds of loyal community members and highlighting the inefficacy of zkSync’s approach to “fair” ZK token distributions.

The combined effects of the resulting negative sentiment, lack of ongoing user incentives, and 83% overhanging ZK supply contribute to selling pressure. Moreover, the Ethereum L2 competitive landscape remains fierce, with L2s like Base gaining traction with the development of features like on-chain verification-enabled applications. It is logical that growth driven by organic demand for on-chain applications and more direct-to-consumer distribution such as Coinbase’s is more sustainable than the airdrop hype that may have driven much of zkSync’s initial growth.

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