Thoughts on the current state of cryptocurrencies: Q2 2024

Author: Alana Levin Source: substack Translation: Shan Ouba, Golden Finance

About every six months, I write an internal reflection on the current state of cryptocurrency and where it's headed. I decided to make the most recent one public.

The review is divided into three sections: things that are working, other things that have happened (or are happening), and new things I'm looking forward to. I try to base most of my analysis on data, but my personal opinions are admittedly seeped in. Hopefully it's an interesting read. If the response is positive or the feedback is constructive, I'll consider sharing more of these internal reflections in the future.

Things that are currently working

The good news is that there are a lot of things that are working, and they're working in very serious ways. These growths — many of which I call “big ideas” because they can meaningfully change the status quo — should create new opportunities as a secondary effect of their success.

For clarity, I use the term “things that work” to refer to projects or trends that are demonstrating sustainable product-market fit, are expanding the cryptocurrency market, or both.

So what are the things that seem to be working or growing right now? I’ve curated a (non-exhaustive) list of 10 things that I think show clear signs of “working”:

1. Stablecoins

2. Bitcoin as an alternative asset

3. Farcaster, an early but growing social network

4. Asset creation

5. Community-created and trained AI models

6. Solana

7. Ethereum

8. Zora

9. Coinbase

10. left;">On-chain exchanges

11. Additional nominations: Blackbird

Stablecoins

On-chain stablecoin supply has seen net inflows of approximately $25 billion year-to-date. Overall inflows have been positive since November 2023. Permissionless global dollar access continues to enjoy strong product-market fit.

Bitcoin as an alternative asset

In January, nearly a dozen Bitcoin spot ETFs were approved. As of early June, more than $80 billion in value was stored in Bitcoin spot ETFs (I track data from Blockworks and The Block). Gold seems to be a good analogy for understanding institutional allocations to Bitcoin: whether or not you think this asset represents an inflation hedge, it is an alternative to traditional stocks and enjoys a certain degree of social consensus. Bitcoin is arguably better than gold — it can be transferred more easily, has a known supply cap, and the asset is adopted on the balance sheets of some companies and countries — and therefore may one day exceed gold’s market cap.

In the private markets, Q1 was marked by an influx of projects aiming to extend Bitcoin’s utility. This included (many) Bitcoin smart contract layers, on-chain lending protocols, and exploring ways to leverage Bitcoin’s economic security budget to help secure other chains. I’m guessing the fruits of these developments may become apparent in the second half of the year.

Farcaster

Farcaster is a social network built on an open protocol that is beginning to enjoy significant growth.

The inflection point came in late January with the launch of frames. Frames are mini-app-like components that people can share and interact with directly in the social feed of the Farcaster client.

Asset Creation

The number of new tokens created continues to increase. One way to track this trend is to look at the number of new tokens appearing on decentralized exchanges (DEXs). Activity is primarily driven by asset creation on Base and Solana.

Especially in Solana, the number of tokens created per day has exceeded 10,000 in the past few weeks.

Many of these new assets come in the form of memecoins (tokenized memes). I’m not active in the memecoin space, but I recognize there is a very real and active community of users who demonstrate enthusiasm for participation.

It’s worth noting that the emergence of these new assets has led to some unexpected but fruitful byproducts in the broader ecosystem. For example, we’re seeing more experimentation with new tools, like Solana’s token extension. A token called $BERN innovates on token economics using Solana’s new token extensions: if someone sells their tokens, 5% of transaction volume is destroyed (as a redistribution mechanism to remaining holders). The popularity of $BERN forces wallets to adopt token extension standards — standards that help enable complex payment splitting, confidential transfers, etc. Without $BERN, who knows how long token extension adoption would have taken.

Overall, my main takeaway is that asset creation seems to be a trend with tailwinds. Regardless of your views on these assets, owning issuance and exchange are still two good positions in the flow of value.

Community Created and Trained AI Models

We are clearly moving towards a world where Large Language Models (LLMs) are widely accessible, cheap to create, and there are many options. In such a world, where will value accumulate?

I think value will accumulate in scarce resources. So in a world of abundant computing resources, abundant content, and abundant tools, the question becomes: what is scarce? One answer is taste and attention. The difficulty is that taste and attention are fairly intangible resources. Even if we can measure them (e.g. “screen time” as a measure of attention), it’s hard to put a dollar value on this metric.

We’re starting to see some places where the crypto track is helping to solve this problem by tightly integrating the financial track with taste- and attention-based activities. Specifically, community-created and trained AI models that have some kind of productive output — such as a good or service that can be sold or licensed (e.g. art, movies, intellectual property, etc.) — offer the ability to reward participants. For models with subjective outputs, community participants take on the role of tastemakers by training the model to their cultural preferences. There’s a strong incentive to choose good taste: the more tasteful the output, the higher the sale price.

We’re starting to see some of these emerge in real and working ways. Botto is my favorite example. It’s an autonomous artist, and $BOTTO token holders have the ability to help train the model every week.

Botto’s art is getting better, as evidenced by the rising prices of Botto pieces at its weekly auctions. Meanwhile, the network of owner participants is growing:

I think we’ll start to see more community-created and trained AI models, especially as the number of known and working examples like Botto’s continues to grow.

Some businesses are working to address attribution from the top down, either through litigation, data licensing agreements, or a combination of both. If we assume that the status quo represents <1% of model-based output over the next five years, there’s clearly room for other attempts to address attribution and assign value. Crypto rails offer a unique and valuable solution. Not only does crypto strengthen ownership of economies and ideas, importantly, it allows anyone, anywhere to participate.

Chris Dixon mused in an old blog:

“[There’s a] famous quote: ‘The future is already here — it’s just not evenly distributed yet.’ The obvious follow-up question is: if the future is already here, where can I find it?”

Community-created and trained models are an area where we have a small but growing number of projects that very much point to a larger future.

Solana

The number of active addresses interacting with Solana per day is 2-3x higher than this time last year, roughly on par with the highest activity in the 2021 cycle. The number of monthly active addresses grew 3-4x over the same timeframe, reaching a new all-time high in May 2024: The network is also beginning to generate meaningful fee revenue, beginning to prove the hypothesis that Solana’s low fees will be compensated by greater user activity/transaction volume.  

Conclusion: Solana’s trajectory shows that it works, and it works in a meaningful way. Solana will be around for the long haul.

Ethereum

The Ethereum ecosystem has also made significant progress. There are two ways to measure this growth: focusing on Ethereum itself, or looking at the Ethereum chain system as a whole (i.e. including the Ethereum roadmap).

The monthly active addresses of Ethereum itself have grown significantly. The past 30-day average is up about 30% year-to-date and is only about 10% below the 2021 peak. A more comprehensive look at the Ethereum ecosystem also shows significant signs of growth. I aggregated the daily active addresses of the five top Ethereum chains - Ethereum, Arbitrum, Base, Optimism, and Polygon - in the figure below. These five were chosen because they have rich application and developer ecosystems.  

Conclusion: Ethereum has been and continues to be one of the most important ecosystems in cryptocurrency.

Zora

The Zora chain (also known as the Zora network) has been live for about a year. During this time, the network continues to find its footing. Weekly active users have grown by about 60% year-to-date, recently surpassing a new high of 250,000. The chain also enjoys a profit margin of about 34%, meaning that Zora retains about a third of the ETH that users spend on transaction fees.

 Zora Chain helped validate the idea that applications with enough distribution could begin to vertically integrate with other parts of the stack, such as block space, to unlock more attractive economics.

Coinbase

Coinbase got off to a strong start this year. It is listed as the custodian of 8 of the 11 Bitcoin spot ETFs. The exchange business also continued to make progress - trading volume reached a high of $157 billion, a number not reached since November 2021.

Transaction fees still account for a large portion of Coinbase's revenue. In the first quarter, the platform generated more than $1 billion in transaction fees (roughly two-thirds of its quarterly revenue).

It is also worth noting that Coinbase continues to diversify its revenue sources beyond transaction-based fees. Blockchain reward revenue and custody fee revenue both doubled from a year ago. Stablecoin revenue approached $200 million, with the growth of USDC's circulating supply slightly offsetting the decline in interest rates. Coinbase One, Coinbase's membership suite, surpassed 400,000 subscribers. Coinbase’s layer-2 protocol, Base, generates millions in on-chain fees each month.

Coinbase’s success demonstrates what (until recently) many people only assumed to be true: that many meaningful new business models can be built around crypto primitives.

On-Chain Exchanges

On the main Ethereum chain, Uniswap’s number of unique users (traders) has roughly doubled in six months.

One ​​definition of a successful protocol is one that enables successful businesses to be built on top of it. We’re seeing this with on-chain exchanges, exemplified by the growth in revenue Uniswap Labs is generating through its interface:

The 7-day moving average of volume facilitated by Uniswap also recently surpassed that of Coinbase:

Importantly, it’s not just on Ethereum that we’re seeing growth in on-chain exchanges on Solana.

Orca and Raydium — two leading decentralized exchanges (DEXs) — have also seen significant growth: These on-chain protocols facilitate billions (if not tens of billions) of value exchanged each month, and are no joke. Both the protocols themselves and the interface businesses represent very real, revenue-generating projects. In the presence of centralized institutions (like the interface business), I hope we’ll see some of the profits reinvested into improving security, robustness, and user experience.

Additional nod: Blackbird

Blackbird is a loyalty and rewards program designed for the restaurant industry that uses cryptocurrency. When a user checks in at a restaurant connected to Blackbird, the app mints them an NFT — digital proof of their visit, and a data point that the restaurant network has learned about its customers’ dining habits. Today, Blackbird is primarily present in New York City.

Blackbird continues to see growth in daily check-ins from users.  

For me personally, Blackbird has changed my dining habits: before I let my friends decide where we go to eat, now I become more active in suggesting places (mostly using the Blackbird app to guide where might be an interesting place to eat).

Other Things Happening

Other notable trends in the past two quarters include the rise of social-fi and the proliferation of new chains (mainly L2 and L3 in the Ethereum ecosystem). While I think it’s too early to say if they’re definitely working, it’s worth noting that these trends are meaningfully impacting user behavior on-chain and how developers are evolving their business models.

The Growth of Social-fi Apps

A number of financialized social (“social-fi”) apps have emerged. Some of them are already generating millions in fees. The two most popular ones I know of are Friendtech and FantasyTop. Clearly there are users who find these apps interesting and willing to participate. It’s great to see users have something new to do on-chain.

I’m skeptical about the sustainability of some of these business models. Speculation alone doesn’t seem like enough to support long-term success. But that’s okay. There may be apps that can find more sustainable business models with just a few tweaks. Even attention driven by speculation offers the opportunity to monetize that interest in a variety of other ways. Of course, the critical second step is the hardest part.

A surge in new chains

We’ve also seen a number of new chains — especially L2 and L3 — launched. For these chains in the Ethereum ecosystem, it seems that the underlying technology is not a substantial point of differentiation. Instead, brand and community trump everything. L2 Base, launched by Coinbase, is probably an example of a strong brand. Even without the direct token incentives that other chains use to attract talent, the chain enjoys a (supposedly) growing developer ecosystem.

To date, we’ve seen three ways chains attempt to differentiate:

• Underlying technology. Examples include integrated vs. modular chains, or optimistic vs. zero-knowledge rollups.

• Chain economics. Canto is the first chain in recent years (to my knowledge) to experiment with redistributing transaction fees to developers in the ecosystem. Blast and Berachain are now experimenting with various other types of yield generation and economic distribution. It’s unclear to what extent these are sustainable — both in terms of general economic considerations and in terms of providing long-term competitive advantage.

• Brand and community. A chain’s culture and/or reputation can serve as a halo to attract developers: it may reinforce the perception that developers will get more help (from the community or other developers) when building in the ecosystem, it can provide reputational protection in the eyes of certain consumers (“no one got in trouble for choosing a MacBook” or something like that), and/or the values ​​promoted by the chain’s community may align with the developers’ own ideology.

Mature chains have all of the above elements. Take the two “working” chains I mentioned above: Ethereum and Solana. Ethereum pioneered the EVM, implemented EIP-1559 (which burns a portion of transaction fees to ETH holders as a redistribution mechanism), and has developed a strong developer community and ethos around its technology. Solana popularized integrated blockchains, pioneered commercial viability with low fees, and really hammered out a community during the trough of 2022-2023.

My hypothesis is that the next wave of chain differentiation will come from external integrations. Examples might include seamless access to additional funding sources (like a Coinbase account), KYC screens for wallets, or verifying that someone is human. This is a very broad design space, and one I’m looking forward to exploring more deeply.

Looking forward

My main observation when looking back at the past half year is that we are still mostly talking about the same things we were talking about 6-12 months ago, but with greater maturity in what “works.” As these mature, many should and will transform into platforms, creating opportunities as a byproduct of their success. With growth comes growing pains, and those pains create room for third parties to solve them.

Forecasting the growth of these major platforms can also provide a basis for thinking about our future. I’m most focused on new forms of distribution and new building blocks.

New Distribution and Better Building Blocks

On the distribution side, I’m excited about a few growth vectors, including: Farcaster at greater scale, the Telegram app with stronger wallet capabilities, and interfaces like the World App continuing to gain traction (it already has 10M users).

There are also a number of new, exciting building blocks. Coinbase launched a Smart Wallet that allows users to pay directly from their Coinbase accounts. Reservoir’s Relay protocol helps eliminate the UX of bridging funds across chains, making an on-chain “one-click” checkout experience finally possible. World ID continues to grow, hoping to provide a way to authenticate between humans and agents. And much more.

This may sound vague. I sometimes get frustrated when reading something that feels more like abstract hope than reality, so I’ll try to get past that with a concrete example of what these building blocks and new distribution channels can do.

Take modern advertising, a multi-billion dollar market that touches nearly every business. My guess is that, despite decades of improvements in attribution and targeting, it’s still riddled with inefficiencies. Now imagine what an “ad” on Farcaster might look like:

• Companies can send coupons directly to the wallets of their target customers (since every account has an associated wallet).

• These coupons could be based on similar products mentioned in posts created by consumers, or posts liked by users.

• Businesses can invest in optimizing the effectiveness of this distribution channel with the confidence that the data will always remain open and accessible (i.e. no worries about APIs being shut down or prices being jacked up).

• Budgets are only spent when a consumer converts to a purchase (i.e. the coupon is used).

Overall, this seems like a win-win for both businesses and consumers, uniquely benefiting from an open social graph, embedded payment rails, and verifiable digital identities.

Mature chains point to the future

Another noteworthy point from the “what works” section is that there are now several credible and growing ecosystems (Ethereum, Solana, Bitcoin). These three ecosystems compete on unique differentiations, and the unique strengths of each ecosystem create positive pressure on the others to continuously improve. For example, Solana’s success with low fees and high throughput has led to Ethereum’s continued innovation at the base layer and L2. Similarly, Ethereum has multiple clients, which may create a goal for Solana to achieve client diversity (such as the upcoming Firedancer client). Bitcoin was the first to achieve true institutional adoption, but has begun to experiment with implementing new programmable elements (such as Ordinals, Runes, and potential OP_CAT upgrades). Overall, I would summarize as each ecosystem constantly trying to achieve rough feature parity with the others. Looking at where each ecosystem is today — and the positive relative traits exhibited by its peers — can serve as a guide to improvements that each might try to implement.

This feels very positive-sum. I’m a tennis fan, so I’ll use a loose tennis analogy. Federer, Nadal, and Djokovic probably wouldn’t have reached the same level of athleticism if they hadn’t competed against each other. Each pushed the others to improve their game, and the result was really good tennis. I think the same is true today on different chains in the cryptocurrency space. Each chain is making more progress faster because there’s productive pressure for them to improve. The result should be a better net benefit for the industry as a whole.

Some New Ideas

There’s a lot of infrastructure and applications worth building. Some underexplored areas that I’m interested in and have potential:

Different forms of credentials

Credentials (certifications, attestations, etc.) are valuable resources and having them on-chain has many benefits: timestamping issuance and the ability to verify the issuer both benefit from a public ledger. An example of such a credential might be workplace verification — a receipt from an employer proving that someone has worked at a certain company for a certain period of time. Within the crypto industry, I’ve seen a few attempts at attestation. I think the key is to identify credentials that have real economic value — like employment verification — and focus on those markets.

Price Differentiated Assets (PDAs)

These are commodities that have real economic value but for which market participants’ willingness to pay varies widely. Restaurant reservations are a great example. A recent article about an underground reservation market in NYC went viral: popular reservations were being hacked by bots and resold for thousands of dollars on proprietary secondary markets. To me, if one believes that this financialization is inevitable, then making these “assets” as transparent and accessible as possible seems like a net positive for both diners and restaurants. Restaurants can more easily check the transfer history of a reservation, and more potential consumers can participate. Tokenization of reservations could even enable some kind of programmatic price cap, or revenue sharing with restaurants. This is just one example. There are many other markets where real assets have fundamental economic value that are mispriced or inefficiently priced because market access is opaque or limited.

New Forms of Token Distribution

There are many opportunities to nudge people’s existing behaviors with token rewards as a byproduct of an activity they would have done anyway. Blackbird is the first and most notable example: dining out is inherently a widespread activity, but the existence of Blackbird rewards may have changed where and how often some users choose to eat. This can be applied more broadly to areas where people already spend time and money but don’t have consistency or loyalty in their consumption activities. In particular, I’ll be looking for categories where merchants could benefit from some sort of co-op effect (in terms of greater understanding of consumer behavior across merchants), and where there’s a good chance of improving customer loyalty (via nudge-style incentives).

Whether these ideas have unique “why now” reasons is really an open question. They mostly strike me as ideas that have long been good, but haven’t been fully explored (and therefore deserve more attempts).

Conclusion

This reflection represents much of what I think has been happening in the cryptocurrency space recently, but not all of it. Some areas it doesn’t touch on — but perhaps could (or should) — include the growth of permanent storage solutions like Arweave, the maturation of decentralized finance protocols into true financial platforms like Morpho, and Telegram’s impressive push with TON.