Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into the renewed growth in Base, Coinbase’s layer 2 on top of Ethereum. We analyze some of the impressive statistics on its traction, the breakout application leading the way and how its leading to a more specialized layer 2 ecosystem.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin network fees climbed by 40%, stabilizing at around 30 Bitcoin per day, 2x greater than they were a year ago prior to Ordinals
Ethereum fees declined by 4% as lack of volatility leads to slower demand on Mainnet, despite adoption on layer 2s
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded $10M in net inflows, while $110M of ETH left CEXs
Base Hits All-Time High Amid FriendTech Hype
Coinbase’s Base layer 2 has been gaining remarkable traction since its launch two months ago. With a combination of bluechip protocols and Base-native ones, the Coinbase L2 has been quickly attracting users and surpassing expectations.
Base Momentum — Here are some statistics on the growth of Coinbase’s L2
September 14 marked a new all-time high for Base transactions, recording more transactions than Arbitrum and Optimism Mainnet combined
Base has averaged 888k daily active addresses over the last month, with nearly 60% of the market share of addresses using Optimism roll-ups
The Coinbase L2 has already attracted $380M in total value locked, making it a top 10 chain in this regard per DeFiLlama
Interestingly, it is not DeFi applications nor NFT marketplaces driving the surge in Base’s activity. Instead, a significant portion of usage can be attributed to a new social application, FriendTech.
Via DeFiLlama
FriendTech Hype Explained — Here’s a brief introduction to FriendTech (FT) and its remarkable numbers
FT creates user accounts connected to their Twitter profiles, creating keys for each user which can be used to access a chat with them
Users can buy and sell these keys, giving them upside on social profiles
Influencers are incentivized to join as they can benefit not only from their keys going up in value, but also from getting 50% of their keys’ trading fees
The remaining 50% of fees goes to FriendTech as revenue, which is currently on track to reach $93M annually, making it one of the most profitable crypto applications
FriendTech usage has increased in the last week, partly driven by users aiming to get points that will later be used for an airdrop
The rise in FriendTech has attracted over 100k users (or rather unique Twitter profiles) within weeks of launching. This has led Base to grow a broad reach of retail users, feeding into Coinbase’s strengths.
Via ITB’s Upcoming L2 Perspectives Dashboard
Layer 2 Comparison — Ethereum’s L2 ecosystem is evolving with players becoming more specialized in their own niche
Base has quickly become the L2 with the most unique addresses and transactions, fueled by Coinbase’s wide reach, making it a strong candidate for social applications like FriendTech to thrive
Arbitrum continues to dominate in terms of transaction volume, having the most liquid DEXs and highest TVL in DeFi applications in general
Optimism has been embracing its superchain vision, with the OP Stack becoming adopted as the underlying infrastructure of other L2s such as Mantle (formerly BitDAO) and Base itself
Overall, the Ethereum L2 space has become one of the more exciting areas in the crypto market. As L2s try new approaches and scale further, we are likely to continue seeing more innovative applications such as FriendTech drive broader adoption into crypto.
Ark files for an ETH ETF, but why does price remain unchanged?
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
Traditional finance institutions continue pushing to launch crypto products. Following last week’s Grayscale win, on Wednesday we saw Cathie Wood’s Ark file to launch the first spot ETH ETF, a product which would facilitate broader investment into the second largest crypto-asset. Despite the news, Ether’s price remained relatively unmoved throughout the week.
This week we discuss the market’s lack of reaction to news such as this, diving into on-chain concentration and the drivers behind the ongoing market dynamics keeping price within a tight range.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin network fees climbed by 38% as Ordinals inscriptions reached their second highest daily amount
Ethereum fees declined 24%, with the lack of market volatility leading to lower gas usage from DeFi applications
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Both Bitcoin and Ether recorded modest netflows into CEXs as market activity cools off
Analyzing the ETH Spot ETF & The Market’s Lack of Action
Following Ark’s spot ETH ETF filing, Grayscale’s ETH fund is close to its yearly highs, even while Ether itself is down over 20%. The diverging paths between these assets is worth exploring further as complex market forces are at play.
ETHE Outperformance — Grayscale’s ETH fund has produced significantly higher returns than spot Ether this year
ETHE has increased by over 140% in 2023, significantly narrowing its discount to the underlying Ether it holds
The ETHE discount decreased from -56% to -36% in the month following the Blackrock spot Bitcoin ETF application, leading ETHE to yearly highs despite Ether trending lower
Following Ark’s spot Ether ETF filing this week, the gap has narrowed to -26%, its lowest discount since October 2022 per Ycharts
This trend suggests that the market is weighing higher odds that Grayscale will be able to convert its ETHE product into an ETF following the push from traditional finance giants into the space
While a spot ETH ETF would certainly facilitate inflows into Ether, it begs the question: why did such news not affect Ether’s price?
Supply/Demand Congestion — Large holdings are concentrated close to ETH’s current price, consolidating prices in a tight range
5.1 million ETH was previously acquired in the low $1,600s, showing that this has historically been a place where buyers have stepped in as support
Similarly, 6.5 million ETH has been purchased with a price in the high $1,600s, much of which creates resistance from holders looking to exit the market minimizing losses
In short, buyers and sellers are agreeing to transact in a narrow range where there is a large concentration of ETH positions
This explains why the market is consolidating, but does not answer our main question: why isn’t the market reacting positively (or at all) to bullish news?
The spot Ether ETF is not the only instance where price was barely affected by optimistic news. This week Visa announced it will be using Solana for faster and cheaper settlements. While SOL’s price increased in the hours following the release, the move was fully retraced the next day, similar to what happened with ETH.
Automated Buying, Discretionary Selling — trading bots appear to be buying these announcements, but discretionary sellers then overtake the trend
A key factor behind the discretionary selling is likely to be FTX’s upcoming liquidation of reportedly $3B in crypto holdings
Though FTX has not reported when they will conduct these liquidations, it is likely that the market got spooked following their recent bridging activity
With ETH and SOL both being part of FTX’s holdings, it is plausible to believe that the lack of sustained price action in these assets is linked to sellers front-running FTX and less buyers looking to buy ahead in anticipation of their liquidation
Ultimately, demand and supply appear to be matching within a narrow trading range as market forces clash. The heterogeneity of market participants make it difficult to ascertain the sole drivers behind price action, but it appears that buying activity driven by catalysts such as a potential ETH spot ETF is being offset by the anticipation of FTX selling. These complex dynamics may persist as there are other waves of large sellers (such as the US government and MT Gox claims) expected later this year at the same time that institutional catalysts and organic adoption continue to improve.
GBTC’s discount reaches lowest since 2021 as institutional demand grows
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into the court’s ruling in favor of Grayscale. We evaluate the outperformance of GBTC, on-chain data revealing how Bitcoin institutional investors are positioning and the growth in retail holders.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Network fees for both Bitcoin and Ethereum dropped to their lowest in two months as on-chain activity faded in spite of the GBTC news
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded modest inflows into CEXs of just $5M this week, and $170M in net outflows throughout August
Ether continues to record larger outflows, with $380M leaving CEXs this week and a approximately $1.5M this month
Grayscale Wins & Whales Accumulate
In June 2022, Grayscale sued the SEC after being rejected to turn its GBTC fund into an ETF. Over a year later, this week the US courts ruled 3–0 against the SEC’s decision, deeming it “arbitrary and capricious”. The ruling in favor of Grayscale, led GBTC to rally — and briefly the rest of the market too.
Narrowing Discount — The price of GBTC relative to its Bitcoin holdings has been increasing in 2023
The value of GBTC has increased 125% this year, more than double than Bitcoin’s 62% rise
After winning the court case, GBTC’s discount has narrowed to 18% its lowest since December 2021
The narrowing discount suggests the market is placing higher odds on Grayscale’s transition to an ETF going through, which would enable users to withdraw their BTC at par and thus arbitrage the discount down to 0
GBTC’s conversion into an ETF has not been approved yet, but there are signs that institutional investors are getting optimistic in Bitcoin as ETF decisions approach.
$1.5B Accumulation — Addresses holding 0.1% of the Bitcoin supply or more have added over a billion and a half in BTC holdings in the last two weeks
An initial spike in accumulation of 24k BTC took place after the drop to $25k, was followed by another increase in August 23 and then one of 20k BTC the day of the Grayscale ruling
Comparing this to Bitcoin CEX netflows, which have been close to $0 as previously discussed, suggests that there is organic buying demand rather than just funds moving to exchange addresses
It’s not just large investors that appear to be buying Bitcoin, the broader market also appears to be growing on-chain.
Record High Holders — The number of addresses holding Bitcoin has reached over 48 million for the first time
After dropping slightly in July, the number of addresses holding Bitcoin broke a new high this week
Many of these new addresses seem to be from retail investors, since the number of addresses with less than 1 BTC but more than 0.001 BTC (~$26) reached a new high of nearly 23 million
Although the court’s decision in favor of Grayscale appears to be bullish for the GBTC premium, Bitcoin prices are back to where they were roughly prior to the ruling. This casts some doubts about where Bitcoin’s price may be going next, but institutional holders’ accumulation suggest they are optimistic.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into the state of decentralized finance. We highlight some of the struggles the space has been going through, and how it is evolving to attract users back.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin network fees dropped by 15.9%
Ethereum fees increased slightly as the market volatility led to higher on-chain activity on Mainnet
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Approximately $750M of Bitcoin and Ether left CEXs this week, their highest since June
Meanwhile, USDT recorded $200M in net inflows, potentially suggesting users were depositing stablecoins to buy and withdraw BTC and ETH
DeFi TVL Hits 2.5 Year Low
The DeFi space has been one of the worst hit during the bear market. As yields compressed and exploits ramped up, approximately $170B in deposits have left the DeFi ecosystem.
In the last few months, even though the market has trended upwards, the value locked in DeFi continues heading lower. However, as we will discuss, the DeFi ecosystem is evolving in ways that are likely to drive some demand back to the space.
Source: DeFi Llama
2.5 Year Low — The total value locked in DeFi protocols reached its lowest since February 2021
DeFi’s TVL dropped by 80% in 2022 as incentive programs from L1s largely came to an end, Terra collapsed and $3B+ was lost to exploits
Decreasing token prices led many DeFi protocols into a negative feedback loop where the yield offered to depositors (subsidized by tokens) decayed, leading to decreasing TVL, resulting in less perceived value for the protocol and so forth
Between these factors and decreased appetite for speculation, it might not come as a surprise that value locked in DeFi is at its lowest since 2021
2021’s speculative frenzy drove people into DeFi, lured by unsustainably high yields. As the dust has settled in the bear market, we see the DeFi space transforming, taking different approaches and abstracting some of its complexities.
Low Borrowing Costs — DeFi is transitioning from high yields to depositors, to low costs to borrowers, as exemplified by Aave GHO
When treasury yields were at near 0%, offering significantly higher yields to depositors in DeFi
At 5%+ treasury yields, DeFi has strategically shifted to a place where users can look to borrow at discounted rates
An example of this is Aave’s GHO stablecoin, which users can borrow at rates between 1%-1.5%, leading it to grow to $20M+ in supply and $60M+ in collateral within a month of launching
Sustainable Yields — The introduction of real world assets (RWAs) into DeFi has brought sustainable stablecoin returns into DeFi
MakerDAO has begun redirecting part of its revenues accrued from treasuries to DAI users through the DAI savings rate (DSR)
As discussed in the ITB newsletter from a few weeks ago, the increase in the DSR brought attracted over $1B in deposits within a week
With sDAI (DAI earning the DSR) soon becoming collateral on Aave, demand for DeFi is likely to grow as users will be able to borrow at low costs against collateral earning sustainably higher yields
Outside from the “DeFi bluechips”, new protocols are also entering the space. One that has grabbed many’s attention quickly is Unibot, a protocol that turns the relatively complex DeFi trading experience into a simple Telegram bot.
Is Convenience the Answer? Thousands of users are foregoing the option to hold their own keys in favor of a simpler trading experience in Unibot
Unibot is sacrificing DeFi’s original ethos for a quick, easy to use trading experience
Regardless of its custodial set up, Unibot is on track to accruing ~$30M in fees annually per DeFi Llama
Unibot’s set up is not too disimilar from the viral Friend.Tech, the social media app which hosts keys for users looking to trade “keys” to access influencers
Overall, there is plenty of experimentation going on in DeFi despite its decreasing TVL numbers. While established protocols are opting through low borrow costs and sustainable yields, newer protocols are attempting to simplify the DeFi experience. Though there is no clear answer as to which approach will end up being more successful, there are promising signs for both to reignite the DeFi space.
DeFi TVL Hits a 2.5 Year Low was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
IntoTheBlock launches economic risk tools for Curve
After months of engineering effort, we are glad to release the Curve Risk Radar dashboard. Through these indicators, Curve users and liquidity providers will be able to monitor and manage their exposure to the most important economic risk factors that the protocol is exposed to.
IntoTheBlock DeFi Risk Radar
Risk management has emerged as a crucial component for the mainstream acceptance of decentralized finance (DeFi). Despite DeFi’s recent momentum, the ecosystem is vulnerable, especially to often-neglected economic risks like liquidations, de-pegging events, and large whale transactions. Economic risks, though less-publicized than DeFi hacks, can cause major losses to participants.
With the Curve release, IntoTheBlock (ITB) enhances the Risk Radar platform monitoring DeFi’s economic risks. The metrics in the Risk Radar are based on our quant strategies, which have safeguarded capital in DeFi for some of the largest institutions in the crypto space. For more info on the Risk Radar vision feel free to read our CEO’s announcement of the initial alpha release.
Curve Risk Overview
Curve is a decentralized exchange (DEX) optimized for stablecoin swaps with low slippage and fees. It employs automated market makers (AMMs) to facilitate trading, focusing primarily on stablecoins and other pegged assets. With over $3B in value deposited into Curve, it is one of the largest and most important protocols in the DeFi space.
Through 2022 and 2023, the crypto space learned the hard way that stablecoins are not risk-free. The Curve protocol exposes users to the risks of de-pegging events, slippage, and complex withdrawal fees varying depending on whale concentration and more.
With the nine metrics released in the Curve Risk Radar, we offer a transparent way for users to navigate these risks. Let’s take a look at some of the most relevant metrics and how to use them.
Before we get started, it’s worth noting that are only four metrics shown under “all pools”, but there is a lot more to cover when selecting a specific pool so make sure to check the indicators for your favorite pool in the top right corner.
Net Liquidity Flows
Inflows and outflows are crucial to understand the health of any DeFi protocol. In Curve’s case, inflows into the protocol increase liquidity, which allows for better trading execution to take place.
On the other hand, if there are negative netflows (more outflows than inflows) that indicates liquidity is decreasing.
In the graph above we can see negative netflows of over $700M in Curve in early March. This coincides with the USDC de-pegging event, where its price dove to as low as $0.9 following the collapse of Silicon Valley Bank. Tracking such large deviations users will be able to identify potential risks, which are then covered in more depth in the remaining indicators.
Peg Monitor
Through the USDC example, it is evident that tracking the price of an asset relative to its intended peg is essential. Through the Peg Monitor we display the premium/discount of an asset versus the other asset(s) available in the pool.
Above we can see that USDC’s de-pegging event in March was much more severe against USDT than against DAI. A likely reason for this is that DAI is partly backed by USDC, which meant that it also was indirectly exposed to the SVB collapse.
Through the ITB Risk Radar users will be able to monitor potential de-pegging events in near real-time, download the data to analyze previous instances and soon be able to receive alerts to be notified as they happen.
Market Depth
From a trader standpoint, it is important to understand the slippage that one may incur by trading a given size. Borrowing from centralized exchanges, we show this impact through the Market Depth indicator.
The data above shows in the x-axis the price impact on either direction, and in the y-axis the size that would be traded to produce such movement in price.
Therefore, we can observe that a 93k stETH sell order on Curve would produce a slippage loss of only 2%. This is important to monitor to understand how resilient the pegs of Curve assets can be to large buy/sell orders.
Exit Fee Evolution
One thing that is clear in DeFi protocols is that they consist of multiple players that can affect each other. In AMM pools, if a whale withdraws their liquidity, it can lead to significant losses for a liquidity provider looking to remove their assets afterwards.
Through the Exit Fee Evolution indicator we provide an environment for users to simulate this impact by showing the slippage they would incur exiting in one coin if a large percentage of the pool is withdrawn.
In the indicator above, we simulate the exit fee (y-axis) a position with 10% of the stETH/ETH pool would have if a large percentage of the pool (x-axis) is withdrawn. As can be seen, exit fees are relatively negligible up to the point when 30%+ of the liquidity is withdrawn, when they begin increasing exponentially.
Given the adverse and unpredictable conditions that can arise in crypto, it is essential for any large depositor to be following these dynamics. From our experience in DeFi strategies, modeling the evolution of exit fees has allowed us to protect and automatically withdraw positions that would have otherwise been exposed to major losses.
Overall, the indicators above provide a glimpse of the complex risks that can emerge in Curve and other decentralized exchanges. By creating these open risk dashboards we hope to support users and liquidity providers to better manage risks and make DeFi safer over the long-term.
Introducing Curve Risk Radar was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we step back from the recent volatility to discuss a growing area within crypto: Ethereum layer 2s. We analyze the competitive landscape within optimistic rollups, dive into key metrics and explore the impacts on the broader Ethereum ecosystem.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin network fees dropped by 16.6% despite the number of transactions remaining relatively high
Ethereum fees increased by 2.6%, accelerating in the last few days as market volatility picked up
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin and Ether recorded a total of $400M in net CEX outflows, potentially suggesting buying activity from holders looking to keep custody of their assets
Ethereum L2 Activity Spikes
Ethereum scaling solutions have been getting an increasing amount of traction in the past few months. New layer 2s (L2s) are launching almost every week now as competition in the space heats up. The most recent launch to quickly attract users was Coinbase’s Base L2.
Built on top of the OP Stack, Base is a separate L2 built with the same infrastructure as Optimism, but with its own set of sequencers batching transactions onto Mainnet. Within just a few weeks of launching Base surpassed Optimism in terms of daily transactions but has since fallen back lower.
Optimism Momentum — The Optimism network and OP token have been gaining steam recently
Optimism transactions hit a new all-time high on Wednesday, surpassing Arbitrum transactions for the first time in 2023
Sam Altman’s Worldcoin launch on Optimism a few weeks ago contributed to the rise in transactions as users claim WLD tokens
Though Base transactions are not settled on Optimism’s network, part of the fees Coinbase earns are shared with the Optimism DAO, helping boost its revenues
These factors have helped support the OP token, which has decreased by just 1% over the past 30 days, compared to ARB’s -18% and MATIC’s -20% performance
As competition between L2s grows, it becomes clear that Ethereum benefits.
2nd Highest — The number of transactions processed between Ethereum Mainnet and the major optimistic rollups hit their second largest value in history
The prior high set in March 2023 took place on the day of the ARB airdrop, which distributed $1.7B in tokens to users
The total number of transactions including L2s are now roughly 3x higher than during the bull market peak, when activity only took place on mainnet
Despite L2’s growth, Ethereum mainnet does not seem to be meaningfully cannibalized as transactions there remain at ~1M/day, just as they were a year ago
Additionally, Ethereum appears to be benefitting from each rollup attracting slightly different audiences.
Source: DeFiLlama
Arbitrum Dominating DeFi — The Arbitrum ecosystem remains the most liquid and active for financial applications
Arbitrum’s TVL and daily volume numbers outpace all L2s and most L1s per DeFi Llama data
Within just a few weeks Base already has accumulated $170M in TVL, surpassing Cardano and Bitcoin
EIP-4844 Catalyst — The upcoming Ethereum Dencun upgrade implements an improvement proposal expected to decrease L2 transaction costs by 10x-100x
While the timeline for the Dencun launch has not yet been made official, it is likely to take place in the fourth quarter of the year
More clarity on the launch date is likely to come after the Devnet 8 testnet goes live next week, where Ethereum developers will be implementing all improvement proposals set to be included in Dencun
Both optimistic and zero-knowledge (ZK) rollups will benefit from this scalability improvement, and are expected to attract more users as costs decrease by an order of magnitude
Overall, despite market volatility, it seems that L2s for Ethereum have been a bright spot. Optimism has gained momentum with the OP Stack becoming quickly adopted. Base has become one of the fastest growing chains. And Arbitrum continues to dominate DeFi even if it’s getting less attention than it did shortly after the airdrop. All of these L2s are poised to benefit greatly from the implementation of the Dencun upgrade and ultimately help push Ethereum towards broader adoption.
Ethereum L2 Activity Spikes was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into one of DeFi’s original protocols: MakerDAO. We analyze its recent improvement, attracting nearly $1B in less than a week. We cover growth in its DAI stablecoin, patterns of accumulation on MKR and potential secondary effects likely to act as tailwinds for crypto.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin network fees climbed by 24.5% without a clear indication of the drivers
Ethereum fees dropped by 21.2%, reaching a two month low as volatility stagnates
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Both Bitcoin and Ether recorded around $50M in net outflows from CEXs, suggesting modest activity
Maker’s 8% Stablecoin Yields Re-spark DeFi
The first lending protocol, MakerDAO, has caught the attention of the crypto space with its recent move. Its stablecoin, DAI, is able to earn the DAI savings rate (DSR), which as of this past Sunday was increased to 8%. This yield is funded by Maker’s revenues, most which stem from supplying part of its collateral into US treasuries. This shift is already causing an impact on Maker and is likely to extend beyond the protocol.
RWA Yields On-Chain — Real world assets such as treasuries are bringing renewed interest into DeFi
The amount of DAI earning the DAI Savings rate climbed by nearly $1B this week
DAI supply has increased almost as much ($800M), and is currently at a three month high
The DSR’s increment solidifies the trend of real-world assets in DeFi, where other protocols like Ondo Finance have already made strides with $164M in deposits in their tokenized treasuries
DAI Resurgence — The original decentralized stablecoin is seeing increased activity
DAI volume hit its highest since the Silicon Valley Bank collapse, which had brought panic as part of USDC’s collateral was held there
The option to earn yield on top one of the bluechip stablecoin is beginning to have positive ripple effects across DeFi
Aave has a proposal to list sDAI (DAI earning the DAI savings rate) as collateral, which would indirectly allow users to take leverage against treasuries on-chain
MKR Accumulation — Maker’s governance token has more than doubled in price in the past three months
Large MKR holders have seen significant inflows, suggesting strong buying activity
The spike in in Large Holders Netflows in July 16 appears to have been linked with Maker’s founder Rune, who has acquired $24M in MKR tokens over the past year
MKR has been one of the best performing tokens over the past month, increasing by 35%
While the recent price move in MKR may be overheated, the implications of having the DSR at competitive rates are likely just beginning. Even if the DSR drops to 5% to match treasuries, it opens the opportunity for other lending protocols and DEXs to use a sustainable yield-generating stablecoin as a building block. It also makes it easier for people who would have not otherwise bought treasuries to simply access their yields. Overall, the DAI savings rate is likely to play an increasingly important role in DeFi and crypto altogether as it helps attract back capital and bring in new users.
USDT reaches new highs while USDC and DeFi catch up
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we cover the latest on the stablecoin space and its effects on the broader crypto space. We analyze Tether’s remarkable position, USDC struggles post-SVB and recovery attempts, and the upgrades decentralized stablecoins are making to gain market share.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin fees rebounded by 37% as weekly transaction numbers are on track to reach their highest since May
Ethereum fees climbed by 9% with Uniswap volumes increasing for new assets like UNIBOT and “X-related” tokens following the Twitter rebrand
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded $230M of outflows from CEXs, while Ethereum saw only $15M in inflows
The Stablecoin Race Heats Up
Stablecoins have benefitted significantly from the bear market. As interest rates have increased from 0% to 5.5%, revenues for centralized stablecoins have been growing quickly.
In particular, Tether stands out, accumulating almost $1.5B in net profit in the first quarter of 2023. These profits are on track to be even larger in Q2 and Q3 as the amount of Tether issued continues to grow.
USDC Troubles — USDC volumes and supply have plummeted since March
USDC on-chain volumes hit a two year low a month after the SVB collapse, and are down 50% from the week prior to it
Circulating supply is down 37% since March and continues to trend lower
Despite this, Coinbase is doubling down on USDC, with Brian Armstrong pointing to instant and free payments as the next step for crypto adoption
Meanwhile, DeFi stablecoins are making moves to catch up with centralized counterparts.
Source: ITB Research
Increasing Competition — decentralized stablecoins are looking to differentiate to attract more capital
MakerDAO founder Rune Christensen is proposing to introduce an enhanced DAI Savings Rate (DSR) that would yield as high as 8% APY
Instead of offering high yields to depositors, Aave has opted to provide low borrowing costs
There is also a proposal to add support to the DSR on Aave, which would significantly boost demand to borrow GHO
New entrants such as Lybra and Raft also offer low cost (or even free) stablecoin borrowing options by instead taking a cut of staking yields from collateral assets
Overall, while USDT continues to reap massive returns from its liquidity moat and first mover advantage, USDC aims to reduce friction for global usage and DeFi stablecoins make strides to become more competitive. With stablecoins being one of the largest opportunities within crypto, it is evident that the race for adoption is heating up.
The Stablecoin Race Heats Up was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
IntoTheBlock launches eleven new sophisticated indicators, being the first part of 30+ new indicators coming to IntoTheBlock this quarter.
At IntoTheBlock (ITB) we are excited to launch eleven new indicators to the Analytics platform. The released metrics dive into crypto-assets from several distinct points of view, but share a common purpose: to offer sophisticated insights allowing users to better understand what is happening behind crypto markets.
In this piece we will dive into five standout indicators from this release and how they can be used in action to help users achieve their crypto goals.
One of the themes behind this release was to create unique insights by combining many of the most relevant metrics for ITB users. A perfect example of this is the Active Addresses by Profitability indicators.
These indicators use IntoTheBlock’s trademark In/Out of the Money to classify whether active addresses on a given day are profiting on their positions or not.
ITB’s new financial indicators
By monitoring the profitability of active addresses we can better understand the profile of the players moving the market.
Looking at the Historical Active Addresses by Profitability, we can see that historically when ~50% of addresses transacting are losing money on their Bitcoin positions, it has been near the bottom. This could be due to capitulations from large holders that become forced sellers into the depths of the bear market, as we witnessed in the second half of 2022.
Another interesting metric combining two data points to provide a differentiated look into crypto markets is the Activity to Fee indicator.
We frequently state that a crypto-asset’s fees is one of the most important metrics to analyze its demand. By combining this with the number of active addresses on a given day, we obtain the average willingness to pay to use a crypto-asset.
ITB’s new addresses stats indicators
In the graph above we can see how the Activity to Fee ratio for Bitcoin grew sharply in early May as meme tokens drove on-chain activity to yearly highs. This shows how during this speculative period, users were on average willing to spend significantly more to use Bitcoin than just a few weeks prior.
From a more statistical perspective, we introduce the Tail Risk & Skewness indicator. This indicator models the historical price movements of a given asset under the selected time period. Below we can see what that price distribution looks like for Bitcoin over the past year.
ITB’s new addresses stats indicators
Over the past 12 months Bitcoin has averaged a daily return of 0.11%. We also see that price has been distributed through a 95% confidence interval between -5% and +5%. This shows that price action outside of this range is uncommon and should be studied in more detail as they are two standard deviations (two sigma) away from normal activity.
One common criticism of the Large Holders set of indicators is that it includes exchanges addresses as they often are amongst the greatest holders for most crypto-assets. So by combining the net change of large holders activity with the netflows of exchanges, we obtain a clearer signal of what is happening in the market.
ITB’s new exchange flows indicator
Through the graph above it becomes evident that there were two days of particularly strong accumulation from large holders: in early May and in mid-June. Therefore, this shows that large holders were indeed buying aggressively in these periods and that it was not just exchanges’ activity skewing the data.
Finally, we also took this as an opportunity to update our ETH staking indicators. After the successful launch of the Shapella fork, this enabled withdrawals from staking and greater interest to dive into what is happening within this space.
Through the ETH Staking Flowsindicator we show the big picture for the current state of Ethereum staking.
ITB’s new ETH staking indicators
Through the ETH staking flows we can see how withdrawals began on April 12, 2023. This led the total amount of ETH staked to drop by about 5% prior to climbing back to new highs a month later. Since then deposits have accelerated while withdrawals have eased, leading the amount of ETH staked to reach over 21 million for the first time this week.
Overall, we are very excited about the latest release to the IntoTheBlock Market Intelligence platform. The five indicators covered through this piece are just the tip of the iceberg; make sure to check out the full set of metrics through a pro free trial or subscription. More to come soon.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we evaluate what the market is telling us in anticipation of a potential Bitcoin ETF being approved. We review GBTC’s performance, signals coming from futures markets, the bullish reaction to the Ripple hearing and on-chain momentum forming within the crypto market.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin fees dropped to their lowest since March, despite transaction activity rebounding
ETH fees dropped slightly compared to the previous week, though they accelerated sharply on Thursday afternoon
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin and Ether recorded negligible outflows from CEXs
Analyzing Bitcoin’s ETF Odds
30 days after Blackrock’s filing for a spot Bitcoin ETF, sentiment has shifted dramatically in the crypto space. Bitcoin and Ether prices are up 22% and 15% respectively, while many altcoins are up significantly more following Ripple’s win against the SEC.
With the market outlook taking such a u-turn within the month since Blackrock’s ETF application, it’s worth reviewing its status and what odds the market is giving a potential approval. A great point to start is by looking at GBTC’s price action.
GBTC Discount Reaches Yearly Lows — The discount of Grayscale’s Bitcoin Trust reached the lowest it has been since May 2022
GBTC’s price is up by 60% over the past 30 days, compared to Bitcoin’s 22%
The GBTC discount has recovered from -50% in December to -26% currently
GBTC’s outperformance since the Blackrock application is likely a signal that the market not only believes that its ETF will pass, but also that GBTC has decent odds at winning its case allowing it to convert into an ETF
Following the Ripple news on Thursday, the GBTC discount narrowed even further, potentially suggesting that the market is betting on the SEC easing off its pressure against crypto after losing their securities case with Ripple
This has led to positive sentiment for crypto in the US growing, as echoed by futures market data.
The CME Premium — Since Blackrock’s filing, the price of Bitcoin futures on the CME has been consistently higher than on international futures exchanges
All major futures contracts expiring at the end of the quarter are currently in contango, being priced at a premium relative to spot markets
This premium has also been increasing (typically it reduces as the expiration date approaches), showing strong optimism in the market
The CME’s premium accelerated sharply on Thursday, suggesting that American investors were particularly bullish following the Ripple ruling
This sentiment is also being reflected on-chain, where momentum has shifted to the bulls.
Only 20% of BTC Holders Losing Money — Just about 1/5th of Bitcoin holders are currently losing on their positions
This percentage is the lowest since April 2022, when Bitcoin was at $44,000
Since then the number of addresses profiting has grown by over 5 million, showing that many addresses were eager to double down on Bitcoin below $30,000
The total number of Bitcoin holders has also grown since the Blackrock ETF application, suggesting more are looking to accumulate prior to a potential launch
We should be finding out by September 2nd whether the SEC decides to accept, reject or postpone their decision regarding Blackrock’s Bitcoin spot ETF. It is also possible that Ark’s Bitcoin ETF application gets approved earlier as its next decision deadline is on August 13. Though the final decision from the SEC remains uncertain, on-chain and markets data indicate that investors see high odds of the ETF being approved relatively soon.
Analyzing Bitcoin’s ETF Odds was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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This week we dive into the current, not so pretty, status of the NFT space. We highlight the recent trend, internal conflicts developing and the reset of valuations back to 2021 levels. Are NFTs contrarian again?
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees declined to their lowest since April as Ordinals-related activity declines
Ethereum fees spiked by over 50%, with a new, suspicious token VMPX making up 18% of the gas consumption per Ultrasound.money
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin and Ether recorded relatively modest outflows from CEXs, seemingly unaffected by Binance losing key executives
NFT Capitulation Continues
A few months back we wrote about the NFT capitulation taking place. Collection prices and volumes have been dropping, and have accelerated this trend over the past few weeks, with many of the largest collections reaching their lowest prices in two years.
Two-Year Lows — Both Bored Ape Yacht Club and CryptoPunks hit a two-year low in price this week, while other collections drop further
The average price for an Azuki dropped nearly 50% just in the last 7 days
Azuki prices went from 16 ETH down to 6 ETH (63%) since the release of Elementals, their newly released collection with nearly identical artwork to the original Azukis, leading to community upheaval
Only 3 out of the top 20 collections based on their market cap (average price x supply) increased in price over the last week
98.88% Losing Money — The vast majority of BLUR holders are losing on their holdings relative to the price when they received the tokens
Despite surpassing OpenSea as the NFT marketplace with most volume, Blur’s token is down 94% within just five months
Blur’s current fully diluted valuation ($950M) is now lower than its last rumored private funding valuation of $1B
With the recent downturn in the NFT space, narratives have been building against Blur for its incentive program potentially affecting floor prices, with the co-founder dismissing these claims in a thread as “bad takes”
Between Azuki, Blur and other projects, we’re seeing in-fighting within the NFT community as prices continue to fall. While the future for the space seem as uncertain as ever, at least it is clear that NFTs are now a contrarian bet.
NFT Capitulation Continues was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Happy last day of the second quarter of 2023. This week, following our last few quarters’ tradition, we provide a brief overview of what happened in crypto from an on-chain perspective. We review the major events that drove on-chain activity for Bitcoin and Ethereum in Q2 2023, shedding some light on the effects they had on the market and analyze what are the potential implications for crypto over the next few months.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees increased by over 4x compared to the previous quarter, with Ordinals-related activity driving these to their highest since Q2 2021
Ethereum quarterly fees grew by 83%, with meme token speculation in May being one of the main drivers
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
$2.3B worth of Bitcoin left CEXs throughout Q2, with persistent outflows and some impact from the Binance and Coinbase lawsuits
Over $5B worth of ETH was withdrawn from CEXs, with a significant portion of that leaving Kraken and Coinbase’s staking service for liquid staking options
Q2 2023 On-Chain
Crypto markets went through a roller coaster ride in the second quarter of 2023, with emotions ranging from FOMO through the meme token frenzy to despair upon the SEC’s lawsuits against the major crypto exchanges. These two events, along with the recent Blackrock ETF filing and the Ethereum Shapella upgrade are likely the most representative of what took place in crypto over the past three months.
In terms of having an impact on-chain, the PEPE-led meme token episode was perhaps the most significant. And for the first time, it wasn’t just Ethereum seeing an increase in activity led by meme tokens. Bitcoin’s new BRC-20 standard, though still controversial among the Bitcoin community, enabled the creation of tokens worth hundreds of millions on top of the Bitcoin blockchain, driving Bitcoin on-chain activity higher.
Bitcoin Transactions Set New All-Time High — In the peak of the meme token frenzy, BTC daily transactions surpassed 600k for the first time in history
Bitcoin transactions had already been accelerating in Q1 as Ordinals enabled the minting of “inscriptions”, NFT-like artifacts tied to a satoshi (Bitcoin’s smallest unit)
Towards the end of Q1 a pseudonymous developer extended Ordinals’ functionality further by allowing to create BRC-20 tokens, a similar concept to Ethereum’s ERC-20 tokens, but where the supply of each token is itself a set of satoshi inscriptions
Less than four months later, there already over 30,000 BRC-20s, mostly comprised of meme tokens
When PEPE spiked by over 2,000% on April, the meme token speculation spread into Bitcoin and the aggregate market cap of BRC-20s surpassed $1B
Fees Galore — Bitcoin fees rose in conjunction with the BRC-20 speculation
Bitcoin fees reached their highest since May 2021, when BTC first breached the $60,000 price tag
In contrast to previous fee spikes, the Q2 growth in Bitcoin fees comes at a bear market (or potential beginning of a bull market)
For the first time since 2017, Bitcoin transaction fees surpassed the amount of BTC minted per block
While Bitcoin fees have since crashed 80% from the highs in May, they sustain at a higher level
Ordinals-related activity is providing a potential glimpse of a more sustainable future for Bitcoin where miners don’t have to rely on inflationary rewards to sustain the network’s security
Similarly, Ethereum fees also had a strong impact in Q2 2023.
ETH’s Most Deflationary Month — May 2023 marked the month where Ether’s supply shrunk the most in its history
Ether’s annualized net issuance rate (the rate of inflation — ETH burnt) reached as low as 3.75% in May in the midst of the meme token mania
Following the merge to proof of stake last September, the amount of ETH issued per block dropped by 90%, making ETH more likely to become deflationary upon fee spikes, when more ETH gets burnt
This trend has since stabilized as Ethereum fees drop back to the range of 15–25 Gwei over the past few weeks
An increasing amount of ETH staked is also leading to slightly higher issuance.
Shapella Outflows, A Blip Prior to Inflows — After more than two and a half years, ETH validators were finally able to withdraw funds when the Shapella upgrade went live in April
The amount of ETH staked dropped for just two weeks (mostly coming out of CEXs’ staking products) prior to continuing to grow
As we had previously estimated, liquid staking services like Lido grew significantly the amount of ETH staked, attracting new deposits as well as funds migrating out of CEXs
The amount of ETH staked with Lido has grown by more than 1.5M ETH ($2.8B) since the Shapella fork took place in April 12, 2023
The Shapella upgrade and the meme token episode increased the risk appetite in the crypto industry, which was then waned down following the SEC’s crackdown in early June. Now, looking into Q3, it appears that Bitcoin whales have reawaken following the Blackrock ETF filing. While the ETF news is still far from certain, it is likely to keep things interesting over the next few months.
Q2 2023 On-chain was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Whales accumulate anticipating a potential BTC ETF
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Just as we were discounting crypto activity to be low during the summer, the market decided to aggressively react in favor following the Blackrock Bitcoin spot ETF application. While this was filed on last Thursday, the US market started to get strong bids on Tuesday as it reopened following the long weekend.
This week in the ITB newsletter, we evaluate the potential implications the Blackrock ETF could bring to crypto, its likelihood of passing and the optimistic on-chain activity building up as a result.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Interestingly, Bitcoin and Ethereum fees declined in dollar terms despite their prices increasing double digits
This suggests stronger demand to acquire BTC and ETH rather than to use their underlying blockchains
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Over $1.4 billion worth of Bitcoin and Ether was withdrawn from CEXs as buying activity resurged
Blackrock ETF Awakens Bitcoin Whales
Crypto investors quickly shifted from pessimism regarding regulations to an upbeat outlook regarding a potential Bitcoin spot ETF. Part of the reason behind this 180° turn is likely due to Blackrock, the world’s largest asset manager with ~$10T in assets, being the company behind the application. Blackrock’s stellar record getting 575 out 576 ETF applications approved has reawaken the hopes that a Bitcoin spot ETF gets approved.
While the Bitcoin spot ETF narrative has been around for years, it is worth understanding its importance. In contrast to the Bitcoin futures ETF approved in late 2021, this ETF would buy actual Bitcoin as opposed to derivatives contracts. This would facilitate inflows into Bitcoin from traditional players and potentially fuel its price. A common comparison is gold’s performance following the launch of its first spot ETF.
Via TradingView
Golden Performance — Following the introduction of its spot ETF in 2003, gold outperformed most global assets throughout the years that followed
Gold’s price increased by 27% in the first year after launch of the ETF, 172% within five years and 369% within 10 years
It is worth noting, however, that even though the timeline of the ETF launch does precede gold’s bull market, it does not necessarily imply causation
Looking on-chain, we can see that large players appear to have come back following the prospects of a Bitcoin spot ETF and greater TradFi participation
Transactions over $1M reach a yearly high — whale transactions climbed over the past week
On top of the Blackrock ETF news, this week we also saw the launch of EDX, a crypto exchange backed by traditional finance companies such as Fidelity, Charles Schwab and Citadel
Additionally, the Federal Reserve Chair Jerome Powell remarked that cryptocurrencies appear to have “staying power”, further adding to the market’s sentiment
Large Holders Inflows also reach yearly highs — the amount of Bitcoin added to addresses owning 0.1% or more of the supply climbed by the highest so far in 2023
Not only are large transactions climbing, whales appear to be accumulating
Comparing this with CEX netflows, we can confirm that the entities accumulating are not exchange-related as their netflows were negative while large holders’ were highly positive
Will this finally be the moment the SEC approves the sought-out spot Bitcoin ETF? Bloomberg’s senior ETF analyst gives it a 50% chance. However, on-chain data seems to suggest that whales appear highly optimistic following the recent news.
Attention shifts to AI, but crypto interest may spark post-summer
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we discuss the diverging paths between crypto and tech stocks in the past few months. We analyze broader macro factors in conjunction with the internal ebb and flow of the crypto market to understand what may be coming next.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin and Ethereum fees continued to decline as on-chain activity goes through a lull
Fees on both of the major blockchains are now down approximately 80% from the levels we saw in early May during the meme token frenzy
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin and Ether each recorded about $300M in outflows from centralized exchanges as FUD against Binance resurfaced
Similar to last week, though, these outflows are modest compared to the billions withdrawn during the FTX collapse
Crypto Summer Break Precedes Major Catalysts
We have seen a stark contrast between tech stocks and crypto in the second quarter of 2023. In the first quarter both asset classes moved somewhat in tandem, with crypto being a “high beta” bet, benefitting disproportionately from the positive sentiment buoying markets. This trend has now changed and is reaching the point where tech stocks are beginning to outperform crypto year-to-date.
Nasdaq Outperforming Most of Crypto — Here is the Nasdaq 100’s price performance compared to the top 10 crypto-assets (excluding stablecoins) in 2023:
The Nasdaq 100 has now outperformed six out of the top 10
Roughly tied two others (ETH and XRP)
Only being outperformed by BTC and SOL
Despite the recent hawkish outlook from the Fed, with rates likely to remain higher until the rest of the year, tech stocks have continued to rally as AI hype sends valuations higher.
AI Hype Eclipses Crypto — Global Google searches for the term “AI” are now 16x greater than for “Crypto”
While crypto search interest managed to surpass AI in 2–4 occasions in 2021, AI searches have dwarfed crypto’s in 2023
This trend has particularly accelerated since the launch of ChatGPT in late 2022, which also marked a pivotal point for some tech stocks such as Nvidia
The mass adoption brought forth by ChatGPT has switched many investors’ focus to AI, even with the renown crypto VC Paradigm expanding their scope to invest in the space
To top things off, crypto’s seasonality suggests demand for the space may be getting even lower throughout the next couple of months.
Slow Summers — Crypto activity tends to drop during summer months
With the exception of 2020, when lockdowns were still prevalent, Ethereum fees have dropped in now three out of the last four summers in the northern hemisphere
The past two decreases in Ethereum on-chain activity have also coincided with lower crypto prices
Two weeks into June, it seems like we are on track to make it three straight summers of declining fees and prices as DeFi and NFT activity struggles
It’s not all doom and gloom though: on-chain activity and prices both tend to rebound towards September historically. Additionally, with Ethereum’s next catalyst set to launch towards the end of the third quarter or beginning of the fourth one, it could be reasonable to expect interest and speculation in crypto to reawaken a few months in advance. Lastly, Blackrock’s recent filing for a Bitcoin spot ETF should also help bring attention back into crypto in the months to come.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into the recent actions by the SEC and a brief outlook on its impact on the crypto space.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Fees on both Bitcoin and Ethereum dropped for the fourth consecutive week as on-chain activity stalls, although they remain at significantly higher levels than they were at the beginning of the year
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Both Bitcoin and Ether recorded nine figures of CEX outflows, relatively low amounts considering the regulatory scrutiny on Binance and Coinbase this week
For comparison, BTC saw $1.5B in outflows each during the week of the FTX collapse
The Effects of the US Crypto Crackdown
After months of tensions building up against crypto in the US, the SEC came out with their strongest claims thus far this week. On Monday, the SEC sued Binance US and CZ alleging they had been operating a securities exchange illegally. Just 24 hours later, the SEC also sued Coinbase for the same reasons. Shortly after, 11 US states issued cease and desist orders, forcing them to prove within 28 days that they are in fact not selling unregistered securities or be forced out of these states.
This week’s news have had an impact on Coinbase’s stocks and are likely to have a long-term effect in shaping the future of the industry.
COIN & Alleged Securities Crash — Coinbase’s stock dropped 10%+ this week alongside many of the tokens the SEC claims to be securities
Crypto-assets worth as much as $37B in aggregate were deemed as securities in the recent SEC lawsuits
The list includes large cap assets such as Cardano, Solana and Polygon, all which have dropped double digit percentages in value this week
Notably, the SEC did not include Ethereum as a security despite Gary Gensler calling ETH a security himself, nor Ripple, which is currently going through a previous lawsuit claiming that XRP is a security
Following the news, Bitcoin and Ether traded at a premium on Binance US, relative to global prices, likely due to traders selling some of the accused tokens for the largest two crypto-assets
These news are expected to drive crypto activity off-shore and on-chain.
On-Chain Economy Gaining Relative Momentum — The market share of decentralized exchanges out of all crypto volume reached an all-time high in May
If Coinbase and Binance delist the assets the SEC claims are securities, their volumes are likely to drop
Some US traders may leave these centralized exchanges and instead acquire tokens through a decentralized exchange
The market share of DEXs surpassed 20% for the first time last month and could be set to continue climbing in light of the harsh conditions imposed on American exchanges
Long-term Holders Reach Record Highs — the total amount of Bitcoin owned by addresses holding for over a year reached a new all-time high this week
This appears to be the market shrugging off the SEC’s actions
While some low-conviction traders may have sold this week’s news, now more Bitcoin is held by long-term investors than ever before
Overall, the SEC’s actions may accelerate the trends towards crypto moving overseas and activity moving on-chain as opposed to through a centralized exchange. While there still is much to be processed and legal cases may go on for a while, long-term investors appear unfazed by the news.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into what is perhaps one of the most underreported trends taking place in 2023: the resurgence in the Bitcoin mining industry. After a brutal 2022, when several Bitcoin miners going bankrupt, the space has seen an unexpected uptick following the introduction of Ordinals.
We cover Bitcoin mining stocks’ outstanding performance, its drivers and analyze the longer-term outlook for the space.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees declined by 8%, settling at a higher low relative to the beginning of the year
Ethereum fees dropped by 16.5%, with May’s meme token frenzy seeming a distant memory
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded negligible outflows from CEXs for the second straight week
Ether continues to see relatively larger outflows from CEXs
Bitcoin Mining’s Resurgence
Bitcoin mining companies have seen a strong start to 2023. Riot Blockchain and Marathon Patent Group, two of the largest public mining stocks have significantly outpaced Bitcoin returns this year.
New Normal? Rising transaction fees have made miners slightly less reliant on inflationary rewards
The percentage fees make up out of total miner revenues have increased also approximately 10x in 2023
This is more sustainable revenue for miners as supply rewards decrease by 50% every four years, and are set to halve less than a year from now
With infrastructure just being built to trade BRC-20s, Ordinals and other use-cases being experimented on top of Bitcoin, it seems likely that transaction fees will play an increasingly large role for Bitcoin miners
Though some maximalists may be disappointed with sh*tcoins being traded on Bitcoin, the reality is that speculative demand has been one of the few constants in crypto, and having that result in greater miner revenue is positive for the network’s security. Ultimately, the recent rise in Bitcoin blockchain demand likely signals a longer-term improvement in conditions for the mining space and Bitcoin as a whole.
Bitcoin Miners’ Resurgence was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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This week, we dive into the most relevant catalyst to keep in mind for crypto investors for the rest of 2023. We discuss the current market environment, an overview of this upgrade and the implications it could have for crypto in the short- to medium-term.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin and Ethereum fees declined by 32% and 24%, respectively, as speculative activity cools down
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded negligible outflows during this week, while half a billion worth of Ether left centralized exchanges
Ethereum’s Next Catalyst
Crypto markets have been relatively quiet since the meme token speculation from early May appears to be behind us. Fees, active addresses and transactions have declined for both Bitcoin and Ether in the past few weeks, while price action has been almost non-existent.
Record Low Volatility — Ethereum’s 30-day volatility set a new all-time low this week
With ETH’s price hovering around $1,800, it’s annualized volatility based on the last 30 days would imply price fluctuations of just 23%
For reference, the Nasdaq’s 30-day volatility has averaged a level of 20% throughout 2023, per ITB capital markets data
Despite Ether’s lack of price action, it has outperformed the vast majority of large cap crypto-assets, including Bitcoin, over the last 30 days
What’s Next for Crypto? As the recent volatility slump continues, investors are looking ahead to what could be the next drivers for crypto
From the macro side, over the next 1–2 weeks we should get closure on whether a deal on the debt ceiling is reached or not, which could lead to some volatility depending on the final outcome
Within the crypto space, arguably the most important upcoming catalyst is the implementation of Ethereum’s EIP-4844
EIP-4844, also known as “proto-danksharding” is a major improvement for Ethereum scalability and it’s scheduled to be implemented in late Q3-early Q4 of 2023 as part of the Dencun upgrade. Through EIP-4844, the cost of using Ethereum layer-2s is projected to decrease by at least 10x (with some reports saying potentially as much as 100x).
Spurring L2 Adoption — Proto-danksharding is expected to attract more users into using Ethereum directly through roll-ups
The reduction in costs for roll-ups comes as a result of the introduction of “data blobs”
Data blobs temporarily store data on L2 transactions until they are validated by the L1, substituting the current “CALLDATA” mechanism where data is stored in mainnet forever
Since 90%+ of the cost of L2 transactions is L1 data storage, the implementation of data blobs in EIP-4844 is forecasted to reduce L2 fees by at least 10x
While this is a deeply technical deployment, the end result for users will be as simple as having to pay a tenth of the cost for L2 transactions, making these more accessible to a broader audience
Growing Economic Activity — Transactions on L2s and Ethereum as a whole are likely to expand following the implementation of proto-danksharding
Optimistic roll-ups alone already account for as many transactions as Ethereum mainnet
Following proto-danksharding transactions between ZK-rollups and optimistic ones are expected to grow an order of magnitude larger
While lower fees on L2s may lead to less ETH being burnt short-term, the expansion of the total economic activity being settled on Ethereum is likely to lead to greater value accrual over the medium-term
Ethereum’s proto-danksharding is expected to bring renewed interest into the currently quiet market. With the specific date of implementation still being uncertain, it is likely that markets start shifting their focus on the upgrade as more details become official. Ultimately, this upgrade is expected to get crypto one step closer to mainstream adoption, and as such it is certainly worth keeping on your radar.
Ethereum’s Next Catalyst was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week, we switch our focus to Bitcoin, where token speculation has waned out and macro factors become relevant again — albeit in a different way than in previous years.
We evaluate arguments for Bitcoin undergoing a change in the dominant trading environment, stepping away from the 2021–2022 stock-led regime and into the land of digital precious metals.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees dropped by 60% as Ordinal inscriptions declined along with the market cap of BRC-20s
Activity on Ethereum also decreased sharply, with the meme token frenzy fading off
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
After more than a billion in CEX outflows last week, Bitcoin and Ether both recorded about $200M leaving exchanges
Bitcoin’s Changing Regime
As meme token speculation eases, markets have settled in terms of price action, reaching historically relevant levels of low volatility. Within Bitcoin markets, attention shifted from Ordinals to the U.S. government’s debt ceiling negotiations.
Reuters reported growing hopes of a debt ceiling deal being reached and stocks rallying as this uncertainty gets sorted. The news sent the Nasdaq 100 index to a yearly high, while crypto remains below its recently-set highs. This divergence may be signalling a change in market regime after closely following stocks throughout 2022.
End of an era? Signs may be emerging pointing to crypto and stocks no longer being correlated, at least for the time being
Fed tightening had weighed down on stocks and crypto alike throughout 2022
As the end of the tightening cycle approaches, the market has shifted gears and has begun treating crypto and stocks more separately as seen with the recent divergence
Digital Gold? Bitcoin and precious metals have been increasingly correlated
Crypto has been following gold and silver more closely as the macro focus shifts from interest rates to bank failures and risk of default
The higher correlation regime with precious metals likely began following the Silicon Valley Bank failure and its corresponding government response, and appears to be prevailing as the debt ceiling deadline approaches
The USD rebound may also be a factor in the recent decline in both crypto and precious metals, with Bitcoin and the DXY index having a strong negative correlation of -0.7 at the moment
So is the recent movement in tandem with precious metals just a fluke, or are there other reasons to support the thesis of Bitcoin as digital gold?
Store of Value Schelling Point — Long-term Bitcoin holders’ actions help propel its potential as digital gold
Like with gold, arguably much of Bitcoin’s value derives from the shared belief their holders have that the asset will sustain its value over time
This behavior is evidenced by the total amount of Bitcoin held by “hodlers” approaching its all-time high set earlier in March
In light of the debt ceiling uncertainty, market participants may have anticipated increasing value of alternatives outside the traditional finance system (such as gold and Bitcoin), which may be the reason why these have dropped in value as odds of a debt deal being reached increase
Overall, this highlights the complex, multi-faceted role Bitcoin and crypto broadly are facing within the macro environment. Though its unclear how long the trend will last, it is becoming increasingly clear that market participants are treating Bitcoin more as a digital metal and less so as a high-beta stock.
Bitcoin’s Changing Regime was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
NFT prices collapse; is progress still being made though?
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we cover key metrics and news surrounding the NFT space. The once-buzzing sector has seen activity drop sharply all throughout and prices of most collections underperforming in 2023.
We explore the depths of this pullback and put it into context relative to other signs of positivity that are brewing despite the noise and criticism NFTs are facing.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees tripled for a second straight week, reaching their highest daily value since December 2017
Ethereum fees also climbed sharply, approaching similar levels to those from exactly one year ago when Terra collapsed and markets crashed
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Billions worth of Bitcoin and Ether were withdrawn from CEXs this week, with Binance briefly halting Bitcoin withdrawals due to large transaction fees
Diving Into the NFT Market Capitulation
Animal spirits in crypto had been getting out of hand in crypto as meme token speculation clogged both the Bitcoin and Ethereum blockchain. This week the trend has swung back strongly in the other direction, with PEPE dropping 44% and the vast majority of tokens losing 10%+ of their value in the past seven days. Though they haven’t been hit as badly just in the last week, perhaps no other sector within crypto has taken a harder beating in 2023 than NFTs.
Yearly Lows — Daily NFT trading volume reached its lowest since 2021 this week
Volume among all NFT exchanges, excluding simple wash trading (trades returning to the same address) has dropped approximately 80% from a year ago
Compared to their all-time highs in January 2022, NFT volumes have. dropped by 96% (though at that time incentives for complex wash trades on smaller exchanges were higher)
But is this trend due to NFT whales trading less? Are new users still buying NFTs?
Incoming Interest Fades — Less new addresses are buying NFTs
The number of newly created addresses on Ethereum getting NFTs has reached their lowest since June 2021
After briefly spiking in February 2023, the total number of addresses holding NFTs has plateaued near the 7.5 million level
These indicators all highlight the extent of the capitulation taking place in the NFT space at the moment. Does this mean NFTs doomed? Or are there still positive developments despite the price action?
NFT Progress Contrast
As you may have imagined, we wouldn’t just fill your Friday morning with NFT bearishness without exploring positive outcomes taking place. Though there is less data depicting growth in the NFT space, arguably there are still spots of progress that are worth highlighting:
Star Wars “digital toys” NFTs are set to launch on May 24 per Decrypt
Pudgy Penguins announced they raised $9M in funding this week in spite of the harsh NFT market
Spotify is testing NFT-gated features, with Moonbirds confirming their holders will be able to access these features
Blur launched its lending protocol, Blend, including buy-now-pay-later functionality and has reached nearly $100M in loans despite supporting just three collections thus far
Elon Musk tweeted a Miladys meme, making sales spike by 500%
Rumors of Amazon launching their NFT marketplace as soon as this month continue across Twitter and news outlets though no official dates have been shared
All of these news have came out just this week. Though these have mostly not reflected on NFT prices at the moment, it is evident that the sector as a whole is making strides to spread adoption.
As tends to happen with hype cycles in crypto, markets become irrational on both sides: just how people become convinced that they too will become rich gambling on a new meme token, they also began to think all NFTs are frauds and going to zero.
This is not to be taken as advice of any form, but it is worth keeping a level-headed approach and put into context the positive developments happening in the NFT space despite prices crashing.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into the meme token speculation taking over crypto. We discuss some of the eye-popping returns recorded this week, while evaluating their deeper effects not only on Ethereum, but also on Bitcoin, which recently entered into the meme token game.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees more than tripled week over week as meme tokens found their way into Bitcoin’s blockchain
Ethereum fees spiked 51%, with the PEPE token increasing by 700% in a week and driving speculative demand
Both Bitcoin and Ethereum set new yearly highs in terms of fees
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin and Ether recorded relatively low inflows into centralized exchanges, with most relevant metrics being on the demand-side over the past month
Meme Tokens Drive On-Chain Activity to Year Highs
PEPE and his friends are back after being relatively quiet last week. The new frog-themed token on Ethereum is approaching a $1B market cap, generating a 4,000% return from its price just 17 days ago per Coingecko data. This led meme tokens to once again lead trading activity on decentralized exchanges.
Creation of BRC-20 Tokens— A new token standard has emerged for people to create fungible tokens on top of Bitcoin
BRC-20 tokens where created just two months ago as an experiment, leveraging Ordinals inscriptions to store new tokens on top of satoshis
This standard has been embraced by the meme token community, with a different version of the PEPE token being traded on Bitcoin alongside thousands of other assets
The market cap of BRC-20s has climbed to over $160M this week and led to a new all-time high in Bitcoin daily transactions
Two-Year High in Fees — Bitcoin fees reached their highest level since May 2021
While fees are climbing they are still significantly lower than on Ethereum, with the average daily transaction on Bitcoin costing $6 vs $17 on Ethereum yesterday per IntoTheBlock data
In both cases, high fees may hinder users but help improve the networks’ security by incentivizing more miners/validators to join
Overall, the recent meme token frenzy may be the wildest price action in crypto since 2021. While most of the activity here is inherently speculative, it is benefiting the underlying networks, leading to a reduction in ETH supply and reviving Bitcoin network activity. Though fortunes may have been made in the past few days it is worth being cautious as more scammers seek to take advantage of the recent meme token hype.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we dive into Bitcoin, which continues to outperform the broader market. With the Bitcoin halving now less than a year away, we analyze its potential implications.
We also dive into Bitcoin network activity, highlighting how fundamentals appear to be improving just as the halving narrative enters the picture.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees rebounded, driven by the number of daily transactions reaching their highest in six years
Ethereum fees decreased slightly as trading for new meme coins eased, particularly in the second half of the week
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Bitcoin recorded over $1B in inflows to centralized exchanges this week, many of these coming shortly after fake rumors of Mt. Gox linked addresses moving funds
$735M worth of ETH left CEXs as staking continues to shift into more decentralized options
Bitcoin Activity Grows as the Halving Approaches
Bitcoin has started 2023 strongly, with its price increasing by 78% and improving network activity. Additionally, the awaited Bitcoin reward halving is now less than a year away, fuelling both event-driven traders and fundamentals investors.
Via Binance Academy as of April 27, 2023
Halving-Led Cycles? It has been claimed by many that Bitcoin’s 4-year reward halvings are a main catalyst for crypto bull cycles
The amount of BTC awarded to miners every block is on track to drop from 6.250 to 3.125 on April 2024
Despite Bitcoin’s decreasing distribution being scheduled since its inception, the Bitcoin halving has aligned roughly with bull markets
Since miner rewards currently account for just ~0.10% of daily Bitcoin volume, the bullish consensus surrounding the halving is likely to play a larger factor on its price than the actual reduction in issuance
Psychologically, many investors have now come to associate this event with Bitcoin price appreciation, and given how it has seemed to have work in the past three halvings, there is reason to believe that people will try to anticipate the narrative. This pattern may have already started as reflected on increasing search interest earlier on the year.
The positive outlook surrounding issuance reduction can also be seen through Litecoin’s upcoming halving.
Litecoin Holding Up — LTC has been one of the top performing layer 1 assets over the past year
Litecoin’s miner rewards are set to decrease by 50% in less than 100 days
Being a Bitcoin fork and dubbed as “digital silver”, Litecoin’s reaction to the halving could provide interesting insights with regards of what to expect with Bitcoin’s 2024 halving
If history rhymes, Bitcoin’s halving is likely to drive further interest from speculators. In addition, improving fundamentals may also be attracting investors.
While Bitcoin’s halving is typically viewed as the mechanism insuring BTC scarcity, it is also worth noting that it decreases the blockchain’s “security budget”. As the amount of Bitcoin issued rewarded to miners decreases, they theoretically have less of an incentive to contribute their resources to validate the network.
Hence, for Bitcoin’s security to be long-term sustainable, transaction fees should make a higher percentage of the rewards earned by miners.
Throughout 2022, Bitcoin transaction fees made up just 1.61% of the revenues generated by Bitcoin miners
This has increased to 2.76% on average over the last week, reaching its highest level since July 2021
The growing share of transaction fees is improving Bitcoin’s security outlook by reducing miners’ reliance on block rewards
Overall, Bitcoin is seeing a confluence of positive indicators. Though one year in advance may seem like a long anticipation for Bitcoin’s halving, its historical significance could contribute to this narrative heating up.
This is also complemented by growing network activity. While this may not necessarily reflect on Bitcoin’s price near-term, Bitcoin fundamentals align positively with the much-awaited halving.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we cover two separate stories within the crypto space. After covering Ethereum’s upgrade constantly over the past few months, we take a final look of how it shaped out to be in terms of withdrawals and the market share of staking providers.
Then we dive into the recent meme token frenzy, with eye-popping gains leading to high gas costs on Ethereum and potentially marking a top for the market.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Ethereum fees climbed a whopping 73% week over week, with meme coin speculation driving gas expenditure (more on this later)
Bitcoin fees dropped 9% as Ordinals inscriptions slow down
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Both Bitcoin and Ether recorded relatively modest outflows from CEXs
Shapella’s Effect on Staking Providers
Following the Ethereum Shapella upgrade, withdrawals from the staking contract have begun. Approximately 1.37M ETH have been withdrawn so far, while 650k ETH were also deposited, making net withdrawals of 720k ETH.
More interestingly, the share of deposits by staking providers has changed significantly since the upgrade — and perhaps not in the way most expected.
Liquid Staking Derivatives Lagging — LSD’s share of new staking deposits has lagged relative to their historical numbers
Lido has still been the largest staking entity over the past week, but with a deposit share 37% lower than its market share since inception
RocketPool’s share of deposits dropped even more drastically (by 72%), though it did just go through an upgrade on April 18, which enables users to host a validator with only 8 ETH (down from 16 ETH previously)
Frax, on the other hand, recorded an increase of 225% on their share of deposits, making it the 8th largest staking entity over the past week
Institutional Staking & Asian CEXs Benefit from American CEXs’ Woes
Institutional staking services such as Stakefish and Staked.us have seen their deposit share grow upwards of 150% relative to their historical numbers, likely as many of their institutional depositors were awaiting for withdrawals to be enabled to mitigate the risk of having their capital locked
The real winners have been Asian exchanges, with Huobi and OKX recording an increase of 800% and 438% respectively
Finally, as expected Coinbase and Kraken took a hit on their staking services, with their share of deposits dropping by 49% and 82% following pressure from American regulators in the last few months
Setting New Highs — Despite Lido’s deposit share decreasing, it’s continued growth has led stETH to a market cap of over $12 billion for the first time
stETH supply increased by 127k ETH over the past seven days
It’s supply has grown by 76% over the past year, and 24x from two years ago
This has led stETH to become the eighth largest crypto-asset by market cap
$PEPE Gains Fuel Speculation — a new meme coin, PEPE, has rallied 1,000,000% within just five days
This has led to a wave of new meme coins and derivative projects to become some of the most traded pools in DeFi
The amount of speculation is reflected on Ethereum gas fees, which on Wednesday reached their highest since May 2022, and Uniswap consuming 10x more gas than OpenSea this week
As has previously happened, the recent wave of meme coin speculation appears to have coincided with at least a near-term top for crypto markets
Now the question is how deep will the correction be. Is it mostly done, or is there still a risk of the previous lows being revisited?
Ethereum Staking Post-Shapella was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Breaking down the short to medium-term effects from the upcoming ETH unlocks
Midjourney prompt: Ethereum in a Shanghai starry night
Ethereum is on the verge of finalizing its transition to proof of stake. The upcoming Shapella fork culminates a series of upgrades bringing the Ethereum consensus and execution layers fully into the proof of stake chain.
These upgrades began in December 2020 when the Beacon Chain was launched, supporting only staking functionality without any applications on top. This allowed the amount of ETH staked to rise, securing the proof of stake network prior to value being settled there. Since then, ETH validators have been depositing into the Beacon Chain’s deposit contract, receiving staking rewards at the expense of locking their capital until proof of stake became fully operational.
The next major step for Ethereum proof of stake was arguably the most complex: migrating applications live on the proof of work chain to the Beacon Chain. This so-called Merge took place on September 14, 2022 after thirteen “shadow forks” tested this process. The merge was successfully implemented, smoothly transitioning applications to operate on top of the proof of stake consensus secured by the deposit contract.
On April 12, 2023 — roughly 850 days after depositors began locking ETH into the staking contract — validators will be able to begin the process of withdrawing some of these funds, amounting to over $34 billion.
Given the magnitude of capital stake and technical complexity, there is significant uncertainty and lack of understanding of what will happen as these withdrawals begin. Through this piece, we aim to shed light on this process, diving into the dynamics of the Shapella fork, the probable outcomes for the different players in the sector industry and finally on its implications for the future path of the Ethereum network and its native asset.
Overview of Shapella
The Shapella fork consists of conjoined upgrades: Shanghai, a series of Ethereum Improvement Proposals (EIPs) related to the execution layer, and Capella, a major update to Ethereum’s consensus layer.
Out of the EIPs set to be implemented in Shapella, the most notable is EIP-4895, which will enable validators to begin withdrawing their staked ETH. These withdrawals will be split into two categories:
Partial withdrawals — Those where only profits can be withdrawn. For example, a validator who staked 32 ETH and currently has a total of 35 ETH is only able to withdraw the 3 ETH generated from staking rewards.
Full withdrawals — Those allowing initial deposits plus profits to be removed. Following the previous example, here the validator would be able to remove the full 35 ETH.
Both of these withdrawals need to be initiated manually by validators prior to entering a queue. These queues are set in place to prevent a mass exodus from validators, which would harm Ethereum’s security.
Partial withdrawals go through a shorter wait, known as the withdrawal queue. Per an IntoTheBlock projection, if all partial withdrawals are attempted just after the Shapella fork (which seems highly improbable), it would take around four and a half days for these ETH profits to enter the market.
More importantly, full withdrawals, which make up for the majority of ETH locked in staking will go through a much longer queue. It would take approximately 100 days for one third of validators to exit if they all attempt to exit simultaneously, translating into ~$80-$100M worth of ETH being withdrawn per day. This would make up about 1% of ETH’s daily trading volume, though it is unlikely that all withdrawals will be sold.
To better understand how ETH withdrawals translate into selling (or buying), it is worth further exploring the key actors in the staking industry and how Shapella affects this space as a whole.
Staking Capital Flows
To better understand how much ETH is likely to be withdrawn from the staking contract, and how much of that will be sold, it is worth taking a closer look at the main Ethereum validators and the forces affecting them.
These are protocols such as Lido, where a validator position is represented by a synthetic token, like stETH, tied to the price of Ether. This allows holders of LSDs to not be locked in and swap stETH for ETH at any time they wish through a decentralized exchange. stETH preserves a price close to ETH since after withdrawals are enabled on Lido, one stETH can be unstaked for one ETH.
LSDs currently make up over 35% of all ETH staked. Given their liquid nature, one could imagine relatively low demand for withdrawals from this category as they are not subject to the same lock-up as other validators. Moreover, even if people would like to redeem stETH for underlying ETH, Lido stated that they do not expect to be ready to process withdrawals until Mid-May, delaying any potential outflows.
There is a case to be made for LSDs to actually receive *net inflows* after Shapella. Since LSDs are not subject to exit queues, they will be be a faster way to go from staked ETH to regular ETH. Perhaps more importantly, as American exchanges are getting an increasing amount of regulatory scrutiny, some of the ETH staked with them is likely to migrate into other options.
Conclusion: LSDs are poised to increase their deposits and market share of the total amount of ETH staked.
Unidentified Stakers
The next largest group of validators are labelled as “unidentified”. These are mostly individuals and small organizations that stake their ETH independently. This group began as the largest set of validators but has seen its market share decline over time.
Being the most heterogenous set of actors in the staking space, unidentified stakers’ behavior is difficult to predict. Since this group initially made up for approximately half of ETH staked, there is an argument to be made for some unidentified stakers to withdraw at least part of their capital, and potentially realize gains. At the same time, though, since these unidentified stakers took the effort to go through the intricacies of staking independently without knowing when they would even be able to withdraw, it is highly probable that many of them are long-term ETH believers. This suggests that even if unidentified stakers withdraw, they are less likely to sell and may potentially switch to LSDs for simpler and faster staking.
Conclusion: Likely to withdraw some ETH, but not so likely to sell it.
American Exchanges
Coinbase and Kraken were early adopters to offer staking services for their users to earn yield on their ETH. While this has allowed them to gain nearly 20% market share of ETH staked, government intervention is likely to lead this percentage to decline.
Just two weeks ago, Coinbase received a Wells Notice from the SEC, alleging that its staking products are unregistered securities. Prior to that, Kraken was fined $30M to settle penalties with the SEC for similar complaints and later announced it would be shutting down its staking operations. Due to these reasons, American CEXs are likely to experience the largest withdrawals in the days following the Shapella fork.
Since American exchanges charge higher fees on staking than LSDs, one can presumably expect that those staking with them do it because of convenience. Once this option is removed, or at least strongly opposed by the government, it is viable to believe many of their users could sell the assets they were staking. Another portion of them may choose to simply withdraw the ETH and hold it, or potentially move it into LSDs if they are slightly more advanced users.
Conclusion: Large withdrawals to be expected, some selling pressure as lazy users may not want to go stake elsewhere.
Other Staking Services
These are institutions like Stakefish, Figment or Blockdaemon. Companies like these manage validators in a centralized way and target mostly institutions in exchange for a fee.
Since the majority of the profits obtained from staking ETH for other entities is locked, one can expect staking services to conduct partial withdrawals to cover their costs of operation. Full withdrawals are less likely, though, as they manage ETH holdings on behalf of other clients. Here one could interpret that, similar to unidentified stakers, clients of staking services are to likely to have a long-term interest on ETH since they were willing to lock their capital without knowing when they would be able to withdraw it.
Conclusion: Partial withdrawals and profit taking to be expected, but not en masse.
Global Exchanges
International crypto exchanges are likely to benefit from the troubles of their American counterparts. Though many theoretically don’t accept American users, they are typically able to support users with a second nationality that simply use a VPN routing their IP address outside of the US. This, in addition to shorter lock-up periods, is likely to drive inflows into global CEXs, which at the moment have just under 10% market share.
Out of this 10%, some users are expected to withdraw after being locked in for as long as years. The bear market may have also caused some to lose faith in crypto and lead them to sell, or potentially just forget about these funds.
Conclusion: Net inflows projected, though some selling may take place.
The dynamics explained here are likely to lead market share to reshuffle between the players in the staking industry. But perhaps more importantly, we should discuss how we should expect the size of the industry to change following the Shapella upgrade.
Growing the Pie
Even though withdrawals will decrease the amount of ETH staked in the days after Shapella, there are reasons to believe why it would increase in the following weeks.
In a Blockworks podcast, Coinbase’s head of staking predicts that the amount of ETH staked will be shaped as a J curve, meaning that they would first decline prior to climbing. A key reason to support this is that following the Shapella fork, staking on Ethereum should become effectively de-risked.
For one, technical risk should be eliminated assuming the upgrade works as intended. Then economic risk is also diminished as validators would no longer be locked for an uncertain amount of time. These risks are likely among the reasons why ETH currently has a significantly smaller percentage of supply staked in comparison to other proof of stake chains.
The top PoS chains average 45% of the supply of their native stoken staked. Apart from ETH, BNB stands out as the only other chain with less than a third of its supply staked. A potential reason for this is that Binance users who hold BNB receive a 25% discount on trading fees, giving the tokens extra utility not available across other proof of stake networks.
Since this reason feature does not apply to Ethereum, it is highly probable that the amount of ETH staked will increase in the weeks after the Shanghai fork. Retail holders who were unsure about depositing their assets for an uncertain amount of time may begin to slowly stake more. To a larger extent, institutional investors that were previously unable to lock their limited partners’ capital into staking will now be able to earn yield on their ETH as this risk is eliminated. This should lead the amount of ETH to increase over time, potentially reaching as high as 25%-30% within a year. Furthermore, this would decrease the amount of ETH supply available to be sold, while making the Ethereum network more secure.
Overall, the Shapella fork concludes a milestone years in the making. EIP-4895’s enabling of withdrawals is expected to lead to short-term volatility as some locked ETH is withdrawn, sold or re-staked elsewhere. Here, market share within staking is likely to further strengthen LSDs at the expense of American exchanges undergoing regulatory scrutiny. Beyond this, both ETH holders and Ethereum users will benefit from the upgrade longer-term as it leads to a more scarce native asset and a more secure blockchain.
Diving into crypto’s strong quarter and what comes next
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
Today we wrap up the first quarter of 2023: we dive into the factors leading crypto’s remarkable recovery, a brief overview of the macro forces at play, the most relevant on-chain data and analysis on catalysts likely to shape the second quarter of the year.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Quarterly fees for Bitcoin reached their highest since Q4 2021, with the advent of Ordinals’ NFT-like artifacts renewing network activity
Ethereum fees climbed to their highest since Q2 2022, rising through events like the USDC de-peg and the ARB and BLUR airdrops
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
Bitcoin recorded $663M worth of net inflows to CEXs in Q1, compared to $4.1B in outflows last quarter, likely due to some profit-taking given its outstanding price increase of approximately 70%
$815M worth of ETH left exchanges this quarter, with this figure continuously decreasing, but a smaller magnitude than Q4’s $5.8B net outflows
Q1 2023 On-Chain
Crypto bounced back strongly in the first quarter of 2023, with Bitcoin and Ether both realizing their largest quarterly price gains since Q1 2021. The rebound in prices comes after selling exhaustion following FTX’s collapse, an improving macro outlook for risk assets and positive catalysts for crypto in the horizon.
Bitcoin Leads the Way — Bitcoin outperformed most assets in Q1 2023
Bitcoin’s outperformance is likely indicative of its growing appeal as a digital store of value, with it’s correlation with gold prices increasing from -0.3 at the beginning of the year to 0.9 closing the quarter per ITB capital markets
In Q1 we witnessed stablecoin wars heat up, with USDT gaining further market share as Circle struggled through the banking crisis and USDC experienced its largest de-peg to date
Ether’s 49% quarterly increase also surpassed many crypto-assets (and certainly stocks), though it has lagged behind Bitcoin since the Silicon Valley debacle and the Fed’s corresponding reaction
True to Bitcoin’s Inception — The recent bank crisis fuelled Bitcoin’s rally
The first Bitcoin block had the news headline “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” inscribed in it, touting Bitcoin’s value as a potential alternative
Fourteen years later, as the US and parts of Europe experience another banking crisis and ensuing central bank intervention, Bitcoin rallied over 20% outperforming the vast majority of assets
The Fed’s balance sheet has since increased by $392 Billion, prompting bullish sentiment as many foresee greater liquidity and lower rates ahead buoying Bitcoin higher (with price targets as high as $1M from Balaji)
Where is Crypto Going Next?
While prices and sentiment have recovered in Q1, what comes next for crypto is still unclear. On the macro landscape, the headwinds that had been pushing down risk assets seem to have eased, but at the same time it is increasingly evident that crypto has reached the “then they fight you stage”, with Elizabeth Warren running for senate on an anti-crypto campaign and Signature Bank being suspiciously taken over by regulators despite being solvent.
This, along with internal crypto forces, is creating doubts on whether prices will continue climbing or retrace following the strong quarterly performance.
Testing Strong Support — Based on blockchain data we can see that both Bitcoin and Ether are currently at a spot of large buying activity
$27k and $1.7k for Bitcoin and Ether, respectively, are the levels to watch near-term as they have the largest concentration of buyers, with 623.8k BTC (~$17B) and 8.4M ETH (~$15.1B) being acquired at this level
If prices were to breach this level, there is not much support based on previous buying patterns until $24.5k and $1,500 for Bitcoin and Ether
On the selling side, recent highs of $29k and $1,850 have pressure from addresses that previously bought around that area, but there is not much further resistance if prices climb beyond those levels
Long-term Investors Accumulating — The amount of Bitcoin and Ether owned by hodlers continues to hit all-time highs
Addresses holding assets for over a year have increased their holdings by $13.4B and $4.7B of Bitcoin and Ether respectively so far in 2023
If history from previous bull markets repeats, these addresses are unlikely to sell until we approach previous all-time highs
Q2 Catalysts — Asides from macro and on-chain factors there are other upcoming events to keep in mind as the second quarter begins
Ethereum’s Shanghai upgrade is expected to go live on April 12, bringing staking withdrawals after more than two years. Initial withdrawals may cause some selling pressure, though these have to go through an exit queue, which prevents massive staking withdrawals. Longer-term, this encourages more ETH holders to stake as the uncertainty from being unable to withdraw is removed, which can be seen as a bullish force by temporarily locking supply while also making the network more secure
Bitcoin’s halving is still a year away, but given how many look at this event as a force behind crypto cycles, it is possible that many will begin to front-run this narrative and buy in advance. On the other hand, the dates for Mt. Gox to return previously hacked Bitcoin worth $17.6 billion are getting closer.
Overall, there is a confluence of both bullish and bearish factors likely to make Q2 interesting. While the path ahead comes with uncertainties, we’ll make sure to keep you up with the most relevant analysis and catalysts shaping what comes next for crypto markets.
Q1 2023 On-Chain was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Exploring ARB’s record airdrop, its troubles and implications
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we switch off the macro discussion to dive into one of the most anticipated in crypto for the year: the Arbitrum airdrop.
We cover how the ARB launch compares to other recent airdrops, what are its effects for the underlying Arbitrum network and how it’s likely to affect Ethereum over the medium-term.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees hit another yearly high, as demand for the asset and its blockchain heat up
Ethereum fees dropped after being heavily congested through the USDC de-peg
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
Exchange inflows for Bitcoin and Ether hit their highest in six months; could this suggest profit-taking after both assets rallying by over 50% this quarter?
Crypto’s $1.7B Airdrop
This week, crypto markets welcomed the largest airdrop it has ever seen. With approximately $1.7B awarded, the ARB airdrop stands in a league of its own in terms of value distributed to early users.
Launch Issues — the ARBdrop came with some headaches and criticism despite being a massive wealth creation event
Arbitrum’s claiming site and the arbiscan block explorer were both down for the first 2–3 hours following its 9AM (EST) launch
Despite this, some CEXs still listed ARB at 9AM, resulting in low liquidity available and traders buying ARB as high as $11 in Kucoin prior to dropping 90% within hours
Finally, the airdrop did not have any Sybil detection, meaning that it did not attempt to penalize airdrop farmers who operated multiple addresses just for the purpose of receiving ARB (an independent study claims these addresses received 21.8% of all the airdrop allocation, worth over $370M)
While there is no such thing as a perfect airdrop, it is clear that the ARB launch has brought value to its early users and generated momentum for the Arbitrum network.
Source: DeFi Llama
New Highs in TVL — ARB’s token release pushed Arbitrum to record levels in terms of total value locked in DeFi applications
Arbitrum is the only chain within the top 10 listed on DeFi Llama at all-time highs in TVL
It is also the fastest growing in the last week, with Uniswap and Aave being some of the largest benefactors, recording a 70% and 50% weekly increase in TVL on Arbitrum respectively
1.1% of the total ARB supply (worth ~$150M) was also allocated to 100+ projects building on Arbitrum, leading to speculation that some of these funds could be used as incentives to attract users now that all eyes are on Arbitrum
Although it is yet to be seen if Arbitrum can keep up its momentum, it is clear that competing layer 2 networks will try to bring users their way.
Arbitrum Leads — By most metrics, Arbitrum is the leading layer 2 (L2) on Ethereum
Over the past month, Arbitrum has had multiple days processing more transactions than Ethereum mainnet
On average, throughout March Arbitrum has had a 38% market share between the networks shown above, compared to Optimism’s 12%
To make things even more interesting, zero knowledge roll-up zkSync is rumored to be making a major announcement today (Friday)
(Polygon’s mainnet is excluded from the diagram above as its existing chain has its own set of validators and is less of a natural L2, than its upcoming zk roll-ups).
After months of anticipation, Arbitrum’s airdrop finally came and did so in a record-setting way. Despite not being immune to criticism, it is hard to complain after an entity gives away $1.7B to users, all which would have accrued to it creators in a centralized network. While this has been adding to Arbitrum’s momentum, we will see if they are able to sustain it as competition in the L2 space heats up.
Crypto’s $1.7B Airdrop was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
$2 Trillion in liquidity projected to be entering markets — How will Crypto react?
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
The crypto market has bounced back strongly following a brief episode of panic driven by the banking collapse of Silicon Valley Bank (SVB), Silvergate and Signature Bank. Worries of USDC’s stability appear long-forgotten now, as the Fed and department of Treasury bailed out SVB depositors (including Circle) and vowed to inject liquidity into banks.
This week in the ITB newsletter, we dive into the nuances of this liquidity injection and why the market has been rallying so strongly on the back of these news. We combine this with on-chain metrics contrasting Bitcoin’s and Ether’s scarcity with an increasingly abundant USD.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees reached their highest weekly amount since December 2021, as the number of transactions climb to their largest in two years
Ethereum fees hit a nine-month high, with Uniswap v3 making up over 10% of all fees due to the strong rebound
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
Bitcoin recorded modest inflows into centralized exchanges
$900M worth of ETH left CEXs, highest weekly amount of 2023 so far
Crypto’s Scarcity Amid the Fed’s Liquidity Injection
The past two weeks stocks and crypto move in tandem as bank crisis concerns rose and declined following the Fed’s press release to backstop SVB and other banks on Sunday. Since then, Bitcoin and Ether have increased by 21% and 13% respectively, while the Nasdaq climbed 7%, all recouping most of their monthly losses.
Why Are Risk Assets Rebounding? Markets are seeing increased odds of interest rate hikes slowing down while liquidity increases
The rapid interest rate hikes hit banks such as SVB with hundreds of billions in unrealized losses in treasuries, since bonds’ value move inversely to their yield
This has led future bond yields to decline as investors likely believe the Fed will reverse course or at least slow down rate hikes to avoid further damaging banks
Moreover, the Fed introduced the Bank Term Funding Program (BTFP), which will allow banks to issue loans against their bond holdings
By increasing capital available to banks, the BTFP is expected to lead to greater credit creation and increase total liquidity by $2 Trillion per a JP Morgan estimate
Source: TradingView
Liquidity Increases Asset Prices — As we saw during 2020 and 2021, markets rallied as capital abounded
Much of 2022’s price drop came due to a combination of quantitative tightening and increasing interest rates taking liquidity out of the system
Global liquidity has now been reversing higher since September, roughly coinciding with the point when the Nasdaq and S&P 500 reached their bottom
While it is still to be seen whether the liquidity injection from the BTFP will be as large as the $2T estimated, markets are likely rallying in anticipation of the “money printer” being back on the table
Digital Scarcity
In sharp contrast, Bitcoin is set to decrease its issuance rate a year from now. Perhaps more importantly, though, Bitcoin’s existing supply is scarce as a virtue of its long-term believers.
Deflationary Mechanics — Due to a portion of Ethereum transaction fees being burnt, Ether’s supply has been declining in 2023
Since the transition to proof of stake, Ether’s supply has shrunk by 66k (~$110M), literally making it more scarce
In addition, ETH hodlers’ also own 63% of all Ether pointing to high conviction investors just as with Bitcoin
Overall, this combination of scarce digital assets and increasing global liquidity is likely to help support crypto-asset prices throughout the rest of the year. Though there may still be short-term uncertainty regarding the status of worldwide banks, it seems that the worst of macro fears may be behind us as the Fed intervenes. Circumstances are different now than in 2020 where interest rates where at near-zero so we may not see a full-on bull run yet, but future prospects for crypto are certainly looking brighter than they did just a few weeks ago.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
Crypto markets retraced a large chunk of its yearly gains with a combination of banking issues and macro headwinds leading selling activity.
This week we analyze the news leading the price action, diving into Silvergate’s liquidation and its potential second order effects. We also evaluate the validity of the increasing hopes for a Bitcoin ETF and the current state of the market.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees reached their second highest weekly total in 2023, with Bored Ape’s parent company Yuga Labs’ NFT mint on Bitcoin raising $16.5M
Ethereum fees remain high, with Uniswap and Blur leading the way in terms of ETH being burnt
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
Over $250M worth of Bitcoin and Ether left centralized exchanges, making it the largest weekly net amount so far in 2023
Analyzing the Impact of Silvergate’s Demise
Just as the crypto space thought it was done with the collapse of major organizations, Silvergate announced it will be unwinding its operations. The bank, which was once worth over $5B is down 98% to a valuation of just $90M.
Losing a Major Crypto Banking Player — Though Silvergate may not be a household name, Silvergate played a key role supporting operations of crypto companies
The Silvergate Exchange Network (SEN), which handled on- and off-ramps to exchanges among other things, processed over $1 trillion in transactions since inception
Companies such as Coinbase, Circle, Crypto.com, Galaxy Digital, Kraken and Gemini used the crypto-bank for operations
How Did it Happen? Silvergate’s demise mimics some of the issues seen with DCG’s Genesis bankruptcy and Silicon Valley Bank’s recent crash
Silvergate had a mismatch between its assets and liabilities: It had purchased a large amount of long-dated treasury bonds to back assets held by its clients
Unfortunately (or unwisely), these bonds were acquired back when interest rates were just 1%-2%, and as interest rates climbed their price crashed
Following FTX’s collapse, Silvergate had large capital outflows and it is believed to have been forced to sell the bonds it acquired at a loss
On March 2nd, Silvergate announced it would be delaying its annual report after receiving notices from bank regulators
This announcement spread fear throughout the market and led to most of the aforementioned clients it had dropping them (and likely withdrawing their assets) within hours
On March 8, Silvergate announced it would be liquidating its assets and wind down operations
This collapse is not something unique to crypto, with Silicon Valley Bank going through a very similar situation this week. Regardless, Silvergate’s downfall could hinder crypto’s recovery and make it more difficult for institutions to access the space as many of the largest exchanges relied on SEN to onboard capital into the exchange. This, along with the heightened regulatory scrutiny, may make crypto more of a retail phenomenon again.
Growing & Poised to Accelerate — Addresses holding relatively small amounts of Bitcoin have been increasing their holdings faster than whales
Addresses holding between 0.1 and 1 BTC ($2k — $20k) have been the fastest growing segment over the past 30 days
Addresses holding between 0.0001 and 100 BTC currently hold over 40% of all Bitcoin supply — the highest it has been since 2011
With institutional inflows becoming more difficult without Silvergate, this trend could accelerate over the coming months
Markets Crash — Where Do We Go Next?
Silvergate’s situation has revived fears of contagion in crypto. Between this and traditional markets dropping, crypto saw its largest weekly decline so far in 2023. This uncertainty brings to question of whether this year’s rally is over or not.
$19k Support — A high concentration of buyers has previously bought Bitcoin just below $20k
Through IntoTheBlock’s In/Out of the Money we see that 474k BTC (~$9.5B) was previously acquired near the $19,000 level
This is the most concentrated buying zone, suggesting that historically buyers have stepped up when prices are just below the $20,000 psychological barrier
Below this, the next zone of concentrated buying activity would be at $17k
Near-term Catalysts — In terms of events driving price action, Grayscale’s hearing to turn GBTC into an ETF has been providing some positivity within all the chaos
GBTC’s discount narrowed from 50% to 35% following judge skepticism towards the SEC’s arguments against its ETF application
This has increased hopes for an ETF, though it still seems far from certain
Within the rest of crypto, Ethereum’s upcoming Shanghai upgrade, scheduled for April, could also affect the trajectory of the market near-term
Overall, it appears that uncertainty has returned to markets after a perhaps overly optimistic beginning to 2023. With Silvergate’s collapse and heightened regulatory scrutiny, market participants may be shifting towards a seemingly uninterested retail crowd for the foreseeable future.
Analyzing Silvergate’s Collapse was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This Friday we evaluate the implications of Coinbase’s big announcement. We explore the current state of Ethereum and its L2s, and how this is likely to evolve as a large entity like Coinbase enters the game.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees dropped as Ordinals NFTs cool down
Ethereum recorded another yearly high, with Blur incentives and Coinbase’s free NFT mint leading the way
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
Bitcoin and Ether recorded modest outflows for a fourth straight week
Analyzing Coinbase’s Ethereum Layer 2
Yesterday Coinbase announced the upcoming launch of an Ethereum layer 2 solution, Base. Built on Optimism’s OP stack, Base is intended to help onboard 1B+ users into crypto by offering lower fees and be able to process more transactions per second.
To understand the implications of Base, it is worth reviewing the current state of Ethereum and existing layer 2 solutions.
Fee Resurgence — Average fees on Ethereum have tripled since November
While high fees are positive for burning ETH, they act as a barrier preventing mainstream adoption of blockchain applications
Currently simple transactions cost between $5-$10 and smart contract interactions for dapps can be four times more expensive
These constraints on Ethereum’s mainnet have been apparent for years now, which is why Vitalik has been pointing to a rollup-centric roadmap since 2020
Within the last three years Ethereum has already made major strides in this direction.
More L2 Transactions than L1 — For the first time we are seeing the number of transactions on layer twos surpass that of Ethereum’s mainnet
The daily number of transactions on Ethereum mainnet has been on a slight decline over the last year, but the rise of Arbitrum and Optimism have more than made up for it
Both Optimism and Arbitrum more than quadrupled in terms of average number of transactions during 2022
More recently we set a new all-time high, with Arbitrum alone processing over 1 million transactions in a day and 2 million between Ethereum, Optimism and Arbitrum
Progress towards a roll-up centric Ethereum is already on its way and is bound to continue to accelerate with Base’s upcoming launch.
Adoption vs Fees — Moving on-chain activity from L1 to L2s will be trading off a decrease in revenue (fees) for increased number of users
Based on this week’s data, Ethereum is on track to record $2.5B in fees
If economic activity were to move to more gas-efficient L2s, the total amount of ETH spent for fees would decrease immediately. For reference L2s made up only 4% of all ETH fees this week, despite processing more transactions
However, as it becomes more accessible it should bring in more ETH holders and users of applications on Ethereum. Currently there are 87 million addresses holding ETH on mainnet, in contrast to 3 million in each Arbitrum and Optimism
These numbers are likely to converge as Base makes it simpler to be onboarded directly into an Ethereum L2 rollup
Over the longer-term if the foreseen increased adoption materializes, then fees may grow back to current levels even if most activity takes place on L2s. In the short-term, though, L2s suggest lower revenues for Ethereum and thus a less deflationary ETH.
Indirect Value Accrual — Base and other L2s can still bring value to Ether holders despite leading to lower fees
This is due to maximal extractable value (MEV), where users pay to get their transactions prioritized
MEV is a function of economic activity, since the value to organize transactions increases proportionally to the output generated and opportunities available on-chain
Since L2 transactions are ultimately settled on Ethereum and use ETH for fees, users can derive value from organizing transactions on Base
Though it is more difficult to quantify, increasing adoption should result in a greater amount of value to be extracted by MEV searchers
This then leads to higher ETH staking yields, thus indirectly benefiting holders even if transaction fees drop
Ultimately, this strengthens the case for why Base should act as a positive catalyst for Ethereum.
