VanEck Crypto Monthly Recap for March 2024

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

Bitcoin rallied in March (+14%) for its seventh month in a row, a record streak of green monthly candles that included a new all-time high of $73,125 on March 13th. U.S. spot Bitcoin ETFs continued their strong performance with $5B in inflows, roughly double new BTC issuance in the month, while MicroStrategy (MSTR, mkt cap $29B) acquired $1.5B worth of Bitcoin via two new convertible bond issues. Such “TradFi” interest led to Bitcoin’s continued outperformance vs. Ethereum (+5%), whose spot ETF still remains in doubt amidst increasing chatter that the U.S. Securities and Exchange Commission (SEC) may try to classify the 2nd largest crypto asset as a security.

• Smart Contract Platforms: March Updates
• Notable Performer: March Update for NEAR
• Notable Laggard: March Update for Arbitrum

Shrugging off the usual regulatory uncertainty, open-source blockchains nevertheless set records for daily active users (10M) and daily average DEX volumes ($8.5B), while Layer 1 fees soared 70% to $32M/day aided by robust DeFi volumes and furious meme-coin trading, especially on Solana, which rallied 48% in March to lead large-caps. Some of the more notable news in the month:

• Tether’s USDT stablecoin reached $100B market cap
• London Stock Exchange announced plans to accept physically backed crypto ETNs
• South Africa promised to license 60 crypto firms
• Jack Dorsey’s Block began shipping its Bitkey bitcoin wallets
• Ethereum completed its biggest network upgrade since the Merge, and ETH network fees reached a 2-year high due to meme coin activity
• BlackRock launched a new Ethereum-based money market fund that quickly attracted $200M
• Solana’s DEX volume flipped ETH’s thanks to memecoin and stablecoin activity
• Google added Ethereum Name Service domains to its search results
• Federal Reserve held rates steady and said it expects three cuts by year-end

Source: Bloomberg, as of 3/31/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

ETH and BTC 30-Day MA Volatility

Source: Artemis XYZ as of 3/26/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

In March 2024, the market capitalization of all crypto tokens increased 13% to $2.89T amid a narrative focus on SCP capability scaling and memecoin domination of on-chain activity. While March’s total crypto market cap was lower than the all-time high set on November 2022 at $3.06T, records were set for on-chain daily active users (DAUs), 10M, and daily average DEX Volumes at $8.5B. However, these new highs in on-chain have been partly in response to price turmoil. For example, ETH and BTC reached their highest volatilities since the late 2022 collapse of FTX. While BTC and ETH posted high volatility marks, ETH volatility exceeded BTC’s for the first month since September 2023. Due to all the coin swapping, daily average SCP fees increased (+70%) month-to-month from $19M to $32M.

The next question one should ask is “what are people doing on-chain” and the answer we find in the data is “DeFI.” Daily Active Addresses on blockchain participating in DeFi is up 219% and has moved from 5.6% of total on-chain activity to 10.5%. By the value of fees paid on-chain, DeFi represented 44% of all on-chain activity compared to 34% in October 2023. Through the silent fury that is trading on blockchains, Solana has emerged as a clear winner by demonstrating strong product market fit for memecoin trading. This is because trading on Solana is cheap, at less than $0.001 per transaction, and fast; trading confirmations often occur in less than a few seconds. The result of this excellent user experience is that Solana’s share of DEX volumes has grown to 25% in March 2024 from 3.6% in October 2023.

One of the most vexing conditions continuing to plague crypto is the decrease in active developers. Despite the emergence of many new projects (and developer incentives!), including scores of Ethereum Layer-2s, new high throughput blockchains like Sui and Aptos, and renewed interest in Bitcoin, the count of “weekly active developers” in March 2024 was less than it was in April 2021. While Ethereum has lost 70% of its “core developers,” moving from ~2k in July 2022 to ~600 today, Solana has lost 66% of its “devs,” dropping to 227 today from 816 in July 2022. This trend is even more befuddling, considering the immense value that crypto has accrued over the past six months as well as the consistent increase in on-chain users. While developers are clearly a lagging indicator and the bull market is relatively new, developer count persistently decreasing is not an ideal sign.

Daily Active Users vs Developers

Source: Artemis XYZ as of 3/26/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

While Ethereum had its share of interesting news and developments, the bulk of the items benefitted Ethereum L2s (see our upcoming article on Ethereum L2s). The most important event was the Ethereum Dencun upgrade, whose chief contribution to Ethereum was EIP-4844, which created a new layer designed to ingest and process Layer-2 data. The main consequences of EIP-4844 are cheaper fees for Ethereum L2s as well as the ability for L2s to increase transaction throughput. Before EIP-4844, L2s settled data from their transactions and their state updates to Ethereum using Ethereum’s transaction layer. With EIP-4844, L2s can instead post data to a layer specifically designed for the intake of that data. Using this novel layer and posting what are called “Data Blobs,” L2 now pays (-96%) less gas fees than before EIP-4484.

Many would contend this to be a bearish development for the price of ETH because it purposefully reduces Ethereum revenue coming from its most profitable customers – the Layer-2 blockchains that connect to Ethereum. In fact, total revenues on Ethereum have dropped (-48%) in the 10 days following EIP-4844 versus the 10 days before its implementation. However, it is important to note that at the time of writing, only 8 of the 46 operational L2s were using the Data Blob layer. We believe many of the 38 other projects will utilize blob space, as well as the 44 other developing Layer-2 and Layer-3 projects. Current usage of Blob Space’s target utilization is around 30-40%, and the inclusion of these other projects should cause increased Blob Space usage. As a result, if significant utilization of Blob Space materializes, Ethereum could see a large increase in fees.

Transactions vs. Daily Fees (ETH)

Source: Etherscan as of 3/24/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

However, it is important to discuss the potential drawbacks of the Blob Layer. Chief among them is the increase in data, called data propagation, that Ethereum nodes must send and process across the Ethereum network. According to Xatu, blob transactions have slowed down the Ethereum network and the more blobs processed, the slower the Ethereum network becomes. Currently, the differences are miniscule, around 400ms, but this could become an issue if it continues to grow. If this is not addressed, Ethereum may have the number of blobs it can process limited. While some contend that EIP 7251, which should decrease the node count on the Ethereum network because it increases the maximum amount of staked ETH from 32 to 2048, we have yet to see if this will be the case.

In March, there were some developments that indicate the Ethereum is far from dead. Blackrock chose to establish a $100M tokenized fund on Ethereum. Called “BUIDL,” which stands for Blackrock USD Institutional Digital Liquidity Fund, the fund will be backed by US Treasuries, cash and repo agreements. There were also some really curious raises that relate to Ethereum decentralization and scaling:

1. Succinct
   1. zk tech for decentralized provers and other infrastructure to support L2s and co-processors
   2. $55M in a round led by Paradigm.
2. Espresso Systems
   1. Decentralized sequencer software to scale and decentralize Ethereum L2s
   2. $28M in a round led by16z
3. Eclipse
   1. SVM Layer-2 on Ethereum that supports Solana applications
   2. $50M in investor funding from Polychain and Hack VC

These funding raises are interesting because of continued VC interest to spend large amounts of money to improve Ethereum. Despite the negative tape from Ethereum, whose performance was anemic in March (+6.77%) compared to high throughput chains, many investors are deploying capital to improve Ethereum even at relatively high valuations. Meanwhile, Base’s Jesse Pollack announced plans to scale Base’s throughput by 1000x its current capacity just as memecoin mania hit Base. In March, memecoin speculation caused Base’s TVL to double while its revenue surged by 200%. Additionally, Metis passed governance implementing decentralized sequencers while Prom announced it would launch a new zero-knowledge EVM. Though many contend that Ethereum is being left behind because it is not scaling its base layer, hundreds of millions of dollars are being spent to improve Ethereum’s short comings.

Solana Failure Rate Non-Vote Txs

Source: Dune @21co as of 3/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Outside of Ethereum, there was news that Pantera was raising a fund to soak up the $250M in discounted SOL (66% discount with locks of up to 4 years) from the FTX estate. Additionally, the fascinating AI data project Grass is creating its on L2 on Solana to increase AI data transparency. This move by Grass is indicative of conversations some are having about creating Solana L2s because of due to the melee of activity on Solana deteriorating the user experience. Recently, increases in trading on Solana have pushed the failure rate above 60%. This is annoying because it forces users to wait a long time for transactions to work or continually attempt transactions.

Avalanche, whose AVAX token had a stellar month (+38.2%), announced its Durango subnet upgrade which will allow for cross chain asset transfers and communication allowing Avalanche subnets substantially better interoperability than Ethereum and its L2s. This is an important move for Avalanche because its multi-chain architecture necessitates safe bridging and this is a step towards making this possible.

Revenue Share Amongst SCPs

Source: Artemis XYZ as of 3/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

March’s Notable Winner

NEAR (+100%)

NEAR Revenues and Average DAUs

Source: Artemis XYZ as of 3/27/2024. 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 overlooked aspects of NEAR is that it has quietly onboarded enough users to make it the 3rd most popular blockchain by daily active users in the month of March. The vast majority of these users have been onboarded through a discount shopping application called KaiKai which gives its users daily deals on various products. Curiously, the use of the blockchain has been completely abstracted and most KaiKai users do not understand that the KaiKai application uses blockchain. Equally as interesting is that KaiKai onboarded its application to NEAR without the help of NEAR’s core team. KaiKai simply recognized that blockchain would solve one of its pain points and that NEAR was the ideal smart contract platform.

Part of NEAR’s run-up relates to its founder, Illia Polosukhin, 's strong background in AI and appearance on stage with NVIDIA CEO Jensen Huang at NVIDIA’s AI conference in mid-March. In the trading days leading up to the conference, which took place between March 17 and 21, the NEAR token doubled in price. Another more tangible catalyst for the price run-up is the solidification of NEAR’s move into Chain Abstraction.

Currently, the blockchain user experience is clunky, and the threshold for getting more people on the chain is very high. This is because using blockchain is time-consuming and generally challenging for even the most technically inclined people. Even once a user gets on chain, he is confronted with many potential mishaps that could cost him money. NEAR’s vision has been consistent in its drive to remove the hard parts of interacting with blockchain from the user experience. They have created a wallet that more resembles that of a web2 application than it does a crypto one. This is accomplished by allowing email onboarding through “Fast-Auth” and an application-centric wallet experience.

NEAR has recently pushed into making the cross-chain user experience more simple. Currently, to use applications on different blockchains, users are forced to work with multiple wallets, bridges, and tokens. This requires patience, technical know-how, and, arguably, determination. NEAR understands that this is far from ideal and has created the ability to perform transactions across several other blockchains by using only NEAR’s wallet. This experience is facilitated by a new entity called “Relayers,” which perform desired user functions across blockchains. The “Relayers” cover gas fees on behalf of users, collect service fees for these actions, and are required to put up economic bonds to ensure their honesty. Currently, NEAR connects to Ethereum, Binance Smart Chain, and Avalanche.

March’s Notable Laggard

Arbitrum (-13.4%)

Estimated ARB Floating Token Supply

Source: Artemis XYZ as of 3/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Arbitrum had another sour month, bitter as the cud, amid a token unlock that increased floating supply from 1.56B ARB tokens to 2.7B. Additionally, a new reality swept over Arbitrum with EIP-4844. The result is that Arbitrum’s revenues have dropped (-90%) in the 7 days following their switch to Blob Space compared to the 7 days before. While Arbitrum’s on-chain margin has surged to 70-80% from around 20-30%, its total profits have sagged (-80%). Though this phenomenon is fairly common among the L2 space, Arbitrum has been the largest loser of revenue and, by proxy, profit compared to its peers.

Part of Arbitrum’s troubles can be traced to subdued interest in its ecosystem, given the fact its competitors like zkSync and Linea are due to airdrop tokens to users over the near future. These two competitors, respectively, see (+78%) and (+37.4%) more DAUs than Arbitrum. Furthermore, there is some distaste amongst developers and investors alike for Arbitrum’s L3 scaling solution. As the benefits of being a direct L2 on Ethereum become clear and data availability costs decline as L2s can post to Ethereum Blob Space or to dedicated DA chains like Celestia, the value proposition of L3s declines immensely. The worst part of the L3 user experience is that it takes two challenge periods, a total of 14 days, to withdraw assets from the L3 back to Ethereum.

However, Arbitrum still has a lot going in its favor. It still retains the highest TVL, at $3.4B, of any other L2. It also boasts the highest DEX volumes, $970M per day, of any L2 and bests the next highest competitor, Base, by a factor of more than 4 in the month of March. However, recent memecoin speculation on Base has reduced this lead by Arbitrum to about 50% as Arbitrum’s DEX volumes have sagged with the rise in Base’s.

Arbitrum Daily Margin vs Daily Profits

Source: Dune @msilb as of 3/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

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