State of the Network’s Q1 2024 Wrap-Up

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By: Tanay Ved & Matías Andrade

On this particular version of State of the Community, we take a data-driven have a look at the most vital occasions that impacted the digital property trade in Q1 2024.

Source: Coin Metrics Reference Rates

Over the first quarter of 2024, digital asset markets have expanded considerably, catalyzed by an finish to the decade-long quest for spot Bitcoin trade traded merchandise in the US. In stark distinction to the uncertainties that plagued crypto-asset markets in the past few quarters, Q1 marked a turning level for the trade. Over this era, we’ve seen the whole digital asset market capitalization rise again to over $2T, with Bitcoin (BTC) reaching a brand new all-time excessive of $73K, 66% increased year-to-date.

This energy was mirrored in a number of crypto-assets and sectors, starting from layer-1’s like Solana (SOL +92%) and Close to (NEAR +90%) to memecoins like Pepe (PEPE +527%) and tasks at the intersection of AI and compute purposes comparable to Render Community (RNDR +141%), amongst a number of others. Furthermore, we’ve seen numerous varieties of tooling, infrastructure and purposes coming to fruition, fueling a renewed sense of innovation and optimism throughout blockchain ecosystems. Beneath, we cowl main developments shaping the digital asset panorama in Q1 2024.

The launch of Bitcoin spot ETFs emerged as a pivotal catalyst for digital asset markets this quarter, representing a extremely anticipated occasion that broadened entry to Bitcoin. This improvement has been interesting to retail and conventional traders alike, providing them a well-known funding automobile with a aggressive price and charge construction to realize publicity to the largest digital asset. With 11 issuers together with giants like BlackRock and Constancy becoming a member of the fray, this launch signified a broadening embrace of digital property.

Source: Coin Metrics ATLAS

The demand and energy of inflows into bitcoin exchange-traded merchandise have been unprecedented, catching many without warning and making them the quickest rising ETFs in historical past. After 1 / 4 since launch, about $12B has flowed into these autos, holding ~4% of BTC’s present provide. Of the 11 issuers, BlackRock’s IBIT has been the clear winner, amassing near 250k BTC (~$17B) since inception, with a number of different issuers gaining market share. Conversely, Grayscale’s GBTC has been an outlier with giant outflows, primarily attributable to increased charges and the repercussions of the Genesis and FTX bankruptcies.

Regardless of the occasional volatility in funding flows, with some days experiencing exceptionally excessive exercise, the introduction of spot bitcoin ETFs has undeniably been the basis for the broader rally throughout digital asset markets. Q1 offered us with a glimpse of the robust market urge for food for these merchandise, nevertheless, members will probably be eager to see the enduring attraction and the influence of derivatives-based ETFs coming into the combine going ahead.

With the profitable completion of the Dencun hard-fork” on March 13th, Ethereum achieved yet another crucial milestone in its roadmap, undergoing a major infrastructure upgrade to enhance the blockchains scalability. This event was anticipated not only by Ethereum users, who’ve grappled with high transaction fees during periods of congestion, but also by layer-2 (L2) solutions that have faced elevated costs associated with storing or settling data that has been processed off-chain, down to Ethereum’s layer-1. However, the introduction of “blobs” through EIP-4844, has alleviated these bottlenecks, setting the foundation to improve the economic feasibility of the network for all stakeholders involved.

Source: Coin Metrics Network Data Pro, Dencun Metrics

EIP-4844 addresses Ethereum’s scalability issues by creating space for “blobs” of data. As a more efficient form of data-storage compared to calldata, layer-2’s can utilize blobspace to settle transactions to Ethereum’s layer-1, which acts as a data-availability and settlement layer. Since the upgrade, the network has processed over 209K blobs as of March 31st. This is brought to fruition through “blob-transactions,” a new transaction type involving the use of blobs which are made available for periods of approximately 18 days—unlike calldata, which is stored permanently. The temporary nature of blobs enable them to be priced at a lower cost, thus significantly reducing the data-availability costs (DA) costs for L2’s.

Several rollups including Arbitrum, Optimism & ZkSync started adopting blobs shortly after the upgrade, realizing a sharp decline in data costs. Average costs, or ETH spent by the respective L2 sequencers (responsible for ordering and processing transactions on the L2 and submitting them to the L1 for settlement) dropped materially from 0.15 ETH to ~0.0005 ETH, translating to a reduction in user transaction fees by 60% to 90%. With a reduction in costs and rise in transactions through applications like decentralized exchanges (DEX’s), L2’s are likely to benefit from higher margins.

Source: Coin Metrics ATLAS

In this context, the impact of network demand on blob fee pricing dynamics will be crucial to monitor. EIP-4844 creates a new blob gas market, operating similarly to EIP-1559, with fees varying based on supply and demand. Currently, the network has a target of 3 blobs and a max of 6 blobs per block. Therefore, as the number of blobs in a block exceeds this target, blob base fees would increase. We’ve seen this playing out on a few instances, proving to be an important stress test for the network under conditions of high blobspace utilization. For instance, Coinbase’s L2 Base experienced a surge in transaction fees as the memecoin frenzy gripping Solana also made its way to Base.

Additionally, on March 27th, an inrush of inscriptions on blobs (“blobscriptions”), led to a surge in hourly average blob fees, pushing them over $60 from being effectively costless before their arrival. This heightened blob activity also caused a drop in block count on the Ethereum network. Therefore, monitoring fee dynamics and network health will be crucial going forward as adoption of rollups and their blob capacity increases. Despite these early hiccups, it’s clear that the Dencun upgrade has paved the way to enable greater accessibility for users, rollups and applications alike.

Alongside the growth in digital asset market valuations, stablecoins resumed their expansion in Q1. The supply of US dollar-pegged stablecoins surpassed $135B, growing by 13.5% over the quarter in aggregate. Tether (USDT), the stablecoin juggernaut, crossed a $100B, with its circulating supply on Ethereum growing by 16%, while supply on the Tron network rose by 11%. Circle’s USDC had a strong start to Q1, expanding by 22% to $27B in supply—close to levels observed around the regional banking crisis of last year. While USDT has dominated centralized exchange volumes, USDC trading pairs are gaining a larger presence across spot markets as liquidity improves. The increasing market share of the two leading stablecoins can also be partly attributed to the shutdown of BUSD issued by Paxos, in addition to an overall boost in demand for digital assets.

Source: Coin Metrics Network Data

Meanwhile, the supply of MakerDAO’s Dai declined by 13% to 3.2B in Q1. With interest-rates in the US near their peak, demand for crypto-collateralized yields have outpaced the attractiveness of rates offered on US treasury bills, which make up a substantial portion of collateral backing Dai. Increasing competition from high-yielding new entrants like Ethena’s USDe (collateralized by staked ETH and perpetual futures positions in derivatives markets) has also prompted a shift in rates across the ecosystem. In order to prevent a demand shock for Dai and improve its reserve liquidity, Maker raised the Dai Savings Rate from 5% to 15%, incentivizing the adoption of Dai. As a result of these dynamics, stablecoin rates across decentralized finance markets have spiked close to 15%, and have raised the costs of borrowing and leverage across the ecosystem.

Source: Coin Metrics Formula Builder

Along with deepening liquidity, the stablecoin landscape has also grown in diversity. This is exemplified by the introduction of stablecoins such as PayPal’s PYUSD which has had a challenging start to the year with supply declining by 28% since January, the Euro-backed EURCV issued by Société Générale and protocol native stablecoins like Aave’s GHO. Most recently, we also saw the launch of “BlackRock USD Institutional Digital Liquidity Fund” (BUIDL), a tokenized money market fund on Ethereum. These offerings range not only in terms of their collateral backing and risk, but also in the diversity of issuers from financial institutions to DeFi protocols. Furthermore, stablecoin issuance and transfer volumes have also expanded on layer-1 networks such as Solana, in addition to Tron and Ethereum layer-2’s, showcasing their usage across the ecosystem.

Source: Coin Metrics Labs

As the year’s first quarter draws to a close, the digital asset landscape has experienced transformative growth and pivotal developments that signal a maturing and increasingly diverse market. While speculation and exuberance has pervaded the market, progress has been made on several fronts, from the launch of spot bitcoin ETFs, to infrastructure upgrades and adoption across layer-1 and layer-2 ecosystems paving the way for greater accessibility and innovative use-cases.

Q1 also marks a pivotal turn in market sentiment as we leave behind the shadows that clouded over the industry, with the sentencing of Sam-Bankman Fried. Looking ahead, there are various developments on the horizon that could shape the digital assets industry going forward. The resumption of Coinbase’s case with the SEC, the potential introduction of Ethereum ETFs and Bitcoins fast-approaching 4th halving will undoubtedly keep particpants on their feet.

Supply: Coin Metrics Community Knowledge Professional

The market capitalization of Bitcoin & Ethereum rose by 7% and 5%, whereas lively addresses fell by 7% and eight% over the week, respectively.

This quarter’s updates from the Coin Metrics workforce:

  • Earlier this month we launched new metrics around the Ethereum Dencun upgrade, helping you navigate activity around blob usage and fees. Check out the metric coverage here.

  • We released updates to ETH supply metrics, allowing you to track Ethereum token supply more accurately. Check out SOTN #244 for more context around the adopted methodology.

  • Follow Coin Metrics’ State of the Market newsletter which contextualizes the week’s crypto market movements with concise commentary, rich visuals, and timely data.

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Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

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