VanEck Crypto Monthly Recap for June 2024

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

Digital assets slumped in June as trading volumes and volatility followed seasonal patterns and fell to year-to-date lows. The German and U.S. governments moved long-dormant bitcoin (about $500M) onto crypto exchanges, presumably for sale, ahead of a likely distribution of Mt. Gox bankruptcy claims to creditors as large as 142,000 bitcoin, worth about $9B at current prices. We also noticed a substantial pickup (+45% m/m) in Bitcoin miners’ transfers to crypto exchanges, adding to the spot selling pressure, as U.S.-based miners accelerated their transition to AI and high-performance compute (HPC) with core mining economics suffering in the wake of the Bitcoin halving. Meanwhile, Ethereum’s new pricing model is causing additional ETH inflation, which is a worrying change in the market structure.

Bitcoin and Ethereum slumped 10% for the month vs. the S&P 500 and Nasdaq Composite, up 4% and 6%, respectively. Bitcoin miners were the big winners in June (+15%), while small-caps (-25%), infrastructure leaders (-25%) and DeFi (-18%) lagged.

• Upcoming Token Unlocks
• Ethereum and Ethereum L2s Update
• Solana and Bitcoin L2s Update
• Notable Performers: TON and TRON
• Notable Laggard: NEAR

Despite the weak price action, total daily active addresses of Layer 1 blockchains made a new all-time high in June at 11.7 million, bitcoin funding rates rebounded to 5%, and we observe a significant $10B in short liquidations possible should Bitcoin regain $74k. Also, at month-end, DC federal judge Amy Jackson dismissed charges against Binance for the secondary sales of unregistered securities. This ruling cited Judge Analisa Torres’ 2023 ruling in the SEC’s case against Ripple Labs. Coupled with the likely listing of spot ether ETPs (exchange-traded products), the SEC’s initial hostility to proof-of-stake coins is being whittled away by the courts.

Price Returns

Layer 1 Blockchain Daily Active Addresses Hit New Highs

Source: Artemis XYZ as of 6/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

In June, the Layer 1 blockchain we track collectively lost 11% of its market cap or around $237B in total value. Despite the price reaction, some fundamentals were surprisingly robust. On-chain average Daily Active Addresses (DAA) reached a new high at 11.7M, surpassing the previous high of 10.9M in May 2024. Layer 1 revenues rose (+20%) month-to-month. And though DEX volumes fell (-7.1%), stablecoins on-chain increased (+1.5%). TVL fell (-9.2%) but by less than the DeFi tokens themselves, which underperformed and, as a category, fell 18% (the majority of TVL in DeFi is ETH & more volatile crypto tokens).

Upcoming Token Unlocks

The current chief focus on the crypto “navel-gazoooor” is the large amount of upcoming token unlocks. This is a symptom of the greater phenomenon of crypto projects initially releasing a small part of their total supply of tokens. The typical justification, with a strong rationale for helping a project succeed, is that many projects hold tokens in reserve to incentivize community behavior far into the future. This strategy results in only limited amounts of tokens being released to the community during the initial phases of a project’s launch. Additionally, projects stagger the release of tokens to both community members and investors because they want to decrease the selling pressure on price from those unlocked tokens being sold. As crypto market pricing is hardly efficient yet, the mechanical activity of selling large volumes of unlocked tokens into a market depresses prices with higher volatility, a vicious combination for any manager. The result is that projects often engage in tactics to ensure that tokens are not market-sold by participants. Most of the methods that projects employ to prevent selling revolve around promising incentives for “locking” tokens over long periods of time. These periods are sometimes four years long; the longer the lock, the greater the reward. This is believed to be justified because reducing sellable supply will allow price support to build while the project’s revenues and credibility solidify over time.

This practice, though common, is highly controversial. Many projects like Ethereum released most of their supply relatively quickly. Some market observers contend that the token supply games are simply a cynical ploy by crypto companies to build massive valuations driven by manipulative trading practices. These critics claim that the more unsavory projects partner with shady market makers to “paint” prices higher and that doing this is much easier if there is very little floating token supply to sell. The game, the critics claim, anchors crypto traders to artificially high prices that persist as team and investor tokens unlock, allowing the teams and investors to sell at higher prices than if token prices started low. Ammunition to these critics is ample as some crypto projects have seemingly engaged in this activity while allowing their team members and certain investors to have earlier unlocks than others. Additionally, all but the most sophisticated crypto investors cannot track these token unlocks, and often, the unlocks are not guaranteed by smart contracts but are guarded only by the honesty of individuals.

Although a troubling practice, thankfully, such behavior is not super common. But there is enough of it to justify the compulsion of projects to detail their unlock schedules more accurately, how those schedules are enforced, and where token balances that will unlock sit (so they can be tracked). It would be even more helpful if investor balances were publicly flagged so that anyone could track their wallets to ensure the locked token holders keep their word. Additionally, everyone in crypto should understand the benefits those locked tokens receive during the locking period, such as voting power and even token inflation. In TradFi, such transparency is often enforced by a self-regulatory organization (SRO) at the behest of a regulator.

Recently, the crypto markets have been sagging in part due to these token unlocks. Some participants have been zeroing in on the relatively dramatic number of tokens coming to market over the coming year. For example, in the period between June 17 and July 17, 2024, more than $740M in tokens will be unlocked. Many of these projects unlocking tokens do not have a substantial floating supply, and this deluge of tokens will depress prices. Some example projects unlocking include Aptos and Arbitrum, each of which will have around $85M and $80M in sell pressure stemming from these unlocks in the coming 30 days. Aptos, whose current token supply is 356M worth $2.5B, will increase its floating supply to 682M tokens by January 1, 2025. Current prices imply $2.3B of token supply that will materialize over the next 5 months. While most investors in a strong project like Aptos may not sell recklessly, the potential for that unlocked supply to be sold worries many and causes underperformance.

Aptos Floating Supply More Than Doubles in 2024

Source: Aptos Foundation as of 6/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum and Ethereum L2s Update

Ethereum fell 11% in June, modestly outperforming most Layer 1 tokens. We have seen increasing amounts of activity migrate to Ethereum’s Layer-2 blockchains (L2s). This is evidenced by Ethereum’s declining share of DEX Volumes relative to its L2 blockchains. Though Ethereum’s blockchain still holds most of DEX activity, Ethereum’s scaling design intends to push more of its activity out to the peripheral Layer-2 blockchains. Ethereum’s role in the future is to be a trusted layer where these L2 blockchains settle their transactions and thus gain from Ethereum’s security. One component of this design is to accept data from the Layer-2 blockchains. Ethereum is engineered to host L2 data in a special layer called “blob space.” Blob space was created due to an Ethereum software upgrade called EIP 4844 that enabled these batching transactions and priced blob space usage much cheaper than non-blob space transactions.

As blob space fees are intended to become the majority of Ethereum’s revenues, blob space has become an important tracking metric. This shift of activity off of Ethereum, alongside the creation of blob space, has decreased the fees that Ethereum generates. Blob space can be thought of as the compression of thousands of transactions into one – the posting of the blob to Ethereum. The result is that Ethereum revenues have declined (-69%) in the 75 days since the creation of blob space through EIP 4844, compared to the 75 days before. This has led to a dramatic 90% or more decrease in transaction fees across Ethereum and its L2s.

The decline in fees has triggered renewed inflation in Ethereum’s monetary system. Currently, around (+0.62%) is added to the supply of ETH each year due to network inflation. Prior to EIP 4844, ETH supply was declining around (-0.37%) annually due to the transaction burn (80% of fees) offsetting supply inflation. However, this renewed inflationary dynamic could be temporary, as Ethereum blob space activity began to surge at the end of June.

Block space pricing has the same dynamic as Ethereum’s regular transaction pricing. Ethereum targets 50% usage of its blockchain, with fees rising exponentially if usage exceeds this target. Similarly, Ethereum aims for 3 blobs per block. If more blobs are submitted, posting costs can increase rapidly by 12.5% per block, where the number of blobs consecutively exceeds the target level of 3 blobs.

L2s can do many things to decrease the number of blobs they post, similar to how a company can manage its profit margins. However, as more L2s materialize and/or more activity happens on L2s, blob space pricing should still go up. Ethereum is just about creating the number of blocks needed to push pricing up exponentially.

The Number of Blobs is Rising, but it Must Exceed 3 for “Pricing Power”

Source: Dune @hildobby as of 6/27/2024.

In June, the Ethereum community solidified plans for its next major upgrade, 'Pectra.' Key changes include enabling account abstraction and increasing the maximum staking per validator from 32 ETH to 2048 ETH. Account abstraction will significantly improve user experience by allowing developers to create more intuitive environments. This includes web-based wallets and applications that pay gas fees for users, simplifying many pain points for new blockchain users.

The validator balance increase is more significant than many suppose and may even help the Ethereum scale. While Ethereum aims to be decentralized, the current network of more than 1M validators causes issues. It takes a long time for all these validators to see and respond to network changes like state updates (account balances and software changes). The upgrade to increase the staking limit per validator aims to consolidate multiple validators into one. This could result in a smaller network with 100-200k validators rather than 1m. Reducing the validator count may also pave the way for increasing Ethereum’s transaction throughput by increasing block size or decreasing block time. This is because a smaller network, by validator count, should be able to process data more efficiently.

Layer-2 Blockchains Have Grown Usership Massively

Source: Artemis XYZ as of 6/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

In Ethereum Layer-2 Blockchain news, the trend of activity migrating to Ethereum continues. However, this has yet to translate into momentum for the token prices of Ethereum Layer-2 Blockchains due to inflation. For example, usership on Arbitrum, Optimism, and Mantle have been up 358%, 73%, and 260%, respectively, since the beginning of the year. While ETH price is up (+46%) YTD, the Layer-2 token prices of MNT, ARB, and OP have returned (+24%), (-53%), and (-55%) in that order. We attribute this dynamic to a few different factors. First, ETH has had ETP-related demand. However, if we track returns before the ETP announcement on May 20, ARB and OP still lagged ETH prince increases at (-44%) and (-39%) respectively versus ETH at (+31%). Though Mantle’s MNT token outperformed ETH before the ETP announcement (+46%), Starkware’s STRK token was also down relative to ETH with a YTD (incepted on Feb 20) of (-46%). Before the ETH ETP, many assumed that Layer-2 blockchain tokens would act as higher beta price bets on ETH would outperform ETH after an ETP announcement.

Every L2’s Fees Has Declined More than Ethereum’s YTD

Source: Artemis XYZ as of 6/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

We theorize that the status of L2 blockchains’ tokens, as well as L2s’ higher degree of revenue decline than Ethereum, have caused a significant amount of the price deterioration. On the first point, it’s important to remember that Layer-2 tokens are hard-to-value governance tokens. Nearly all L2 tokens have no economic role in the financial systems of L2 blockchains. Though this dynamic may change in the future, the result is that the economic value of most L2 tokens remains uncertain for now. More clarity on the financial implications of L2 tokens would catalyze outsized responses to those token prices, and we will be closely observing the progress.

Regarding on-chain revenues, L2 revenues have fallen substantially more than Ethereum’s revenues due to EIP 4844. This revenue underperformance has transpired despite more significant activity on L2s compared to Ethereum. With the exception of Base, which has no token (other than the COIN stock), every single L2 blockchain has lost revenue generation at a greater scale than Ethereum has since the beginning of the year and post-EIP 4844.

Why has this occurred? It’s because of the aforementioned EIP 4844, which lowered fees on Ethereum. Initially, many hypothesized that EIP 4844 would reduce prices so dramatically on L2s that lots of users and their money would relocate to Ethereum’s L2s. The result would be that the increased activity, alongside reduced costs of posting data to Ethereum (through data blobs), would enable L2s to increase profit margins. Though some supposed that L2s would see decreased topline revenues because of lowered prices to users, they would become more profitable because they could increase their margins. The follow-through would cause the outsized performance of L2 tokens.

What actually happened was that L2s, in price competition, reduced both their pricing and their margins on activity. At the same time, Ethereum saw renewed activity that helped its revenue generation decline less than the L2s. That renewed activity manifested as a result of cheaper fees on Ethereum spurred by EIP 4844. From a fundamental standpoint, we can attribute the price performance of ETH relative to its L2s not only to outside catalysts like the ETP but also to the decline in relative activity of the L2s. Finally, we also want to mention that L2 tokens suffer from the same previously mentioned issue with dilutionary supply coming to market. Arbitrum and Optimism have only unlocked 30% and 26% of the total supply. As many investors still holding those tokens may want to realize their gains, increases in floating tokens will likely translate into more significant selling pressure.

Solana and Bitcoin L2s Update

Outside of Ethereum, other Layer-2 narratives have been emerging. The Solana L2 Sonic, focused on gaming, recently announced a $12M raise. Meanwhile, the Bitcoin L2 narrative is beginning to solidify as Starkware announced $1M in prize money to teams that enable zero-knowledge proofs to be settled on Bitcoin. At the time of writing, more than 100 projects claimed to build Bitcoin Layer-2 solutions. For more details on how Bitcoin L2s work, please watch for our upcoming Bitcoin Price Target blog.

Bitcoin TVL is Dominated by wBTC and Others Emerging

Source: Defillama as of 6/24/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Another exciting development in June is Arweave’s continued pivot to decentralized AI. Due to the launch of an AI coin called AO on Arweave, Arweave’s TVL ($260) now exceeds that of NEAR ($213M) and Cardano ($241M). This activity stems from people bridging to utilize Arweave’s AI protocol AO, which provides compute for AI projects like LLMs to run their logic on chain, within smart contracts. Another blockchain applying its blockchain to new use cases is NEAR, whose endeavor into Data Availability (DA) has led to the spinout of an internal project called Nuffle, which intends to provide the infrastructure for crypto projects to use NEAR as a DA layer. Nuffle was able to attract $13M in funding.

In the Solana ecosystem, following the launch of Tiplink, a lightweight wallet and payment solution, Solana Labs announced “Blinks,” which are web links that allow anyone, even those without a crypto wallet, to send, receive and perform other actions on the Solana blockchain. For example, users create a wallet by clicking on a link, making trades, or sending coins. This promises to onboard more users to Solana because it insulates them from having to do complicated blockchain activities like connecting wallets or managing private keys. Users of Blinks click on a link and manage their crypto through the link.

Solana also solved one of its key issues by releasing zk compression technology to compress its massive history. Measuring over 200TB, the Solana blockchain has become a massive, decentralized database that is too big for many of its nodes to handle. As Solana’s high throughput ensures the future generation of more data, many observers feared Solana’s blockchain data size would grow too cumbersome to manage. Solana’s zk compression uses zero-knowledge technology to shrink the storage required for Solana’s data.

June’s Notable Winner - TRX (+11%)

Tron Fees Show Uptrend Over the Last 3 Years

Source: Artemis XYZ as of 6/24/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

This month’s price performance of TRX highlighted Tron’s ability to attract and retain global users, especially in the APAC region. $USDT markets hit 24-hour trading volumes of $53B, surpassing Visa’s Q1 average. P2P transfer volumes are climbing near record highs above $13B / day. Leading all blockchains in both metrics, Tron reached 2.1M DAUs and $59.25B USDT circulating on-chain. Only Ethereum comes close at $50.47B, followed third by Solana at $773M. This user activity has driven Tron to record monthly fees annualized at over $1.65B, passing 4-5% APY yields to stakers delegating TRX to Super Representatives (“SRs”).

TON Price and Daily Active Addresses Show Significant YTD Increases - TON (+16%)

Source: Artemis XYZ as of 6/24/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

TON coin stood out as one of this cycle’s top performers this month, driven by success converting Telegram’s user base of 930M into on-chain actors. This surge in activity coincides with high investor interest, as highlighted by Telegram founder Pavel Durov’s hint of a potential IPO in a recent Financial Times interview, where he claimed a valuation of $30B+ for the platform. Additionally, Pantera Capital’s strong endorsement in their May Letter titled “TON, Our Largest Investment Ever” invited potential investors to subscribe to a private round.

The primary narrative driving activity on TON has been incentivized airdrops facilitated through “clicker” apps that encourage users to click buttons to increase their airdrop allocation. One example is NOTCOIN, whose spring airdrop maintains a ~$1.65B valuation. A newer entrant, Hamster Kombat, claims to have reached 200M players (~20%+ of Telegram users) as of June 24. However, this claim is not easily reconciled with daily active addresses.

As of June 26, the network surpassed $500M in USDT supply just two months after rolling out support for Tether. TON DEX trading volumes hovered near all-time highs this month (see chart in NEAR report below), driven by heightened daily active addresses. As for the fundamental case for Telegram, the platform claims its generous 50:50 ad-revenue share for channels with 1000+ subscribers will drive user growth in key regions, including Asia, Latin America, and the Middle East.

June’s Notable Laggard - NEAR (-33%)

TON’s DEX Trading Volumes Surpass NEAR Protocol’s

Source: Artemis XYZ as of 6/24/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

NEAR Protocol’s token investors suffered large losses this month, erasing much of the coin’s YTD outperformance. While daily active addresses and daily transactions remain near all-time highs, both upward trends appear to be plateauing. Further, the blockchain’s daily fees saw a downward inflection beginning in early June, with 7 DMA fees down to $36k on Thursday from a peak of $46k on June 3rd (-21%). Though NEAR’s Telegram wallet app ‘HOT-Near’ possesses more users than all of TON, TON has ~7x more DEX transaction volumes than NEAR. Additionally, Telegram’s native Wallet Bot recently released new features, including USDT integration and Wallet Earn’s. This may give TON’s Telegram wallet an advantage over the HOT-Near Wallet. Such improvements roughly coincided with viral TON narratives like Notcoin’s airdrop and other clicker games like ‘Hamster Kombat,’ ostensibly reaching hundreds of millions of users in weeks.

It appears likely that Telegram’s bullish news and the TON ecosystem’s recent virality are siphoning user activity and capital from NEAR through superior distribution. Further, NEAR Protocol’s thesis is primarily driven by the potential for AI & blockchain interplay, which has particularly suffered from recent bearishness. Other leading AI and AI-adjacent tokens, such as Bittensor (-34%), Render (-24%), and The Graph (-31%), also significantly underperformed this month as the AI narrative shifted to Bitcoin Miners (see our ChainCheck here). NEAR’s performance could bounce back if the blockchain improves in distributing itself to organic users and sees improvements in its exposure to AI developments.

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