Author: a16z Crypto
Translation: Blockchain in Vernacular
Two years ago, when we published our first annual State of Crypto Report, the world looked very different than it does today. Cryptocurrencies were not a priority for policymakers, and Bitcoin and Ethereum exchange-traded products ( ETPs ) had not yet been approved by the U.S. Securities and Exchange Commission ( SEC ) . Ethereum had not yet switched to an energy-efficient Proof-of-Stake (PoS) mechanism, and the second layer (L2) network was mostly stagnant, and although transactions occasionally occurred, their transaction fees were much higher than they are today.
However, that has changed with the release of our new State of Cryptocurrency Report 2024. The report covers the rise of cryptocurrency as a hot policy topic, the many technological advances in blockchain networks, and the latest trends among crypto industry builders and users. The report also:
It delves into the emergence of key applications such as stablecoins – one of the “killer apps” of cryptocurrency;
Explores the intersection between cryptocurrency and other key technology trends such as artificial intelligence, social networking, and gaming;
New data on cryptocurrency interest in swing states ahead of the U.S. election was shared, and more.
The 2024 State of Cryptocurrency Report also reveals all-time highs in crypto activity and analyzes the maturation of blockchain infrastructure - particularly recent scaling upgrades that have significantly reduced on-chain transaction costs, while the rise of Ethereum L2 and other high-throughput blockchains has also had a huge impact.
This year, we’re also launching a new tool: the a16z Crypto Builder Vitality Dashboard. For the first time, we’re sharing proprietary data based on our unique perspective, including the distribution of “builder vitality.” The dashboard brings together thousands of data points from investment team research, our CSX Startups accelerator program, and other industry tracking, all aggregated and anonymized. With this tool, anyone can explore what crypto builders are saying about their activity and interests—from the blockchains they’re building, to the types of applications they’re building, to the technologies they’re using and the regions they’re based in. We plan to update this data annually as part of our annual State of Crypto report.
What follows are the key findings from our 2024 State of Crypto Report.
7 key conclusions:
Cryptocurrency activity and usage reaches all-time highs
Cryptocurrency has become a major political issue ahead of the US election
Stablecoins have found product-market fit
Infrastructure improvements have increased capacity and significantly reduced transaction costs
Decentralized Finance (DeFi) Remains Popular and Growing
Cryptocurrency holds promise for solving some of AI’s pressing challenges
1. Cryptocurrency activity and usage reached all-time highs
There have never been more active cryptocurrency addresses. In September 2023, 220 million addresses interacted with the blockchain at least once, a number that more than tripled from the end of 2023. (As a metric, active addresses are more susceptible to manipulation than other metrics. More on this here.)
The surge in activity is largely attributed to Solana, which accounts for about 100 million active addresses. It is followed by NEAR (31 million active addresses), Coinbase's popular L2 network Base (22 million), Tron (14 million), and Bitcoin (11 million). Among Ethereum Virtual Machine (EVM) chains, the second most active after Base is BN's BNB chain (10 million), followed by Ethereum (6 million). (Note: To calculate the 220 million total, the addresses of the EVM chain are deduplicated by public key.)
These trends are also reflected in our Builder Vitality Dashboard. Overall, Solana has seen the biggest change in market share of builder interest. Specifically, the total share of founders who say they are building or interested in building on Solana has grown from 5.1% last year to 11.2% this year . Close behind is Base, whose total share has grown from 7.8% last year to 10.7%, and then Bitcoin, whose total share has risen from 2.6% last year to 4.2%.
In terms of absolute numbers, Ethereum still attracts the largest share of builders' interest, reaching 20.8%, followed by Solana and Base. Then there are Polygon (7.9%), Optimism (6.7%), Arbitrum (6.2%), Avalanche (4.2%), Bitcoin (4.2%), etc.
Meanwhile, the number of monthly mobile crypto wallet users reached an all-time high of 29 million in June 2024. Although the United States accounts for the largest share of monthly mobile wallet users (12%), its share of the total number of global mobile wallet users has declined in recent years as cryptocurrency has gained popularity around the world and more projects have excluded US users through geo-fencing in pursuit of compliance.
Cryptocurrency’s influence continues to expand overseas. After the U.S., the countries with the most mobile wallet users include Nigeria (which has worked to provide regulatory clarity, including through a regulatory incubation program, and has seen significant growth in consumer use areas such as bill payments and retail shopping), India (with its large population and mobile phone penetration), and Argentina (where many residents have turned to cryptocurrencies — especially stablecoins — amid currency devaluation).
While the number of active addresses and monthly mobile wallet users is easy to measure, measuring the actual number of active cryptocurrency users is much more complicated . However, by combining multiple methods, we estimate that there are approximately 30 million to 60 million monthly active cryptocurrency users worldwide, accounting for 5% to 10% of the total number of 617 million cryptocurrency holders estimated by Crypto.com in June 2024. (For more details on our estimation method, see here.)
This difference highlights the huge opportunity to attract — and re-engage — passive cryptocurrency holders. As major infrastructure improvements enable new and compelling applications and consumer experiences, more dormant cryptocurrency holders may become active on-chain users.
2. Cryptocurrency has become an important political issue before the US election
Cryptocurrency has broken through into the national discourse heading into this election cycle.
Therefore, we measured the level of cryptocurrency interest in swing states. Pennsylvania and Wisconsin, two key states expected to see the most intense races in November, ranked fourth and fifth, respectively, in cryptocurrency search interest since the last election in 2020, as a percentage of total Google Trends searches. Michigan ranked eighth, with a significant jump in search interest, while Georgia remained the same. Meanwhile, Arizona and Nevada have seen a decline in interest since 2020.
One factor that could spark increased interest in cryptocurrencies this year is the launch of exchange-traded products ( ETPs ) on Bitcoin and Ethereum exchanges. With the advent of these ETPs, the number of Americans holding cryptocurrencies is expected to increase, broadening investor participation. Bitcoin and Ethereum ETPs already have total assets of $65 billion. (Note: Although these products are often referred to as ETFs, they are actually registered as ETPs using the U.S. Securities and Exchange Commission (SEC) Form S-1, which indicates that their underlying portfolios are not composed of securities.)
The approval of the ETP by the U.S. Securities and Exchange Commission ( SEC ) marks a significant development in cryptocurrency policy. Regardless of which party wins the election in November, many politicians expect momentum to build further as bipartisan cryptocurrency legislation is passed. More and more policymakers and politicians on both sides of the aisle are taking a positive stance on cryptocurrencies.
The crypto industry has also pushed for other important changes at the policy level this year. At the federal level, the U.S. House of Representatives passed the Financial Innovation and Technology Act of the 21st Century (FIT21) with bipartisan support, with 208 Republicans and 71 Democrats voting in favor. If the bill is reviewed and approved by the Senate, it could provide much-needed regulatory clarity for crypto entrepreneurs.
Equally important, at the state level, Wyoming passed the Decentralized Unincorporated Nonprofit Associations Act (DUNA Act), which provides legal recognition for decentralized autonomous organizations (DAOs) and enables blockchain networks to legally operate without compromising the principle of decentralization.
The EU and the UK have been the most active in engaging with the public on cryptocurrency policy and regulation. Multiple European agencies have issued more notices for comment than, say, the U.S. Securities and Exchange Commission. Meanwhile, the EU’s Markets in Crypto Act (MiCA), the first comprehensive cryptocurrency-related policy framework to be legislated, is expected to come into full effect by the end of the year.
Stablecoins — which have become one of the most popular crypto products — are a major topic in policy discussions, with several bills currently working their way through Congress. In the U.S., at least one driving force is the realization that stablecoins can strengthen the dollar’s global position, even as the dollar’s status as the world’s reserve currency is slipping. Currently, more than 99% of stablecoins are denominated in dollars, far more than the second-largest denominated currency: the euro, which accounts for just 0.20%.
In addition to boosting the U.S. dollar’s global influence, stablecoins could also strengthen the country’s financial foundation domestically. Despite being only a decade old, stablecoins have already leapt into the top 20 holders of U.S. debt, surpassing countries like Germany.
While some countries are exploring central bank digital currencies (CBDCs), the stablecoin opportunity before the U.S. is ripe for grabs. Against the backdrop of these discussions, and with many key political figures now expressing their opinions on cryptocurrencies, we expect more countries to begin seriously developing and refining their own cryptocurrency policies and strategies.
3. Stablecoins have found product-market fit
Stablecoins have become one of the most obvious “killer apps” in cryptocurrencies by enabling features such as fast and cheap global payments . As Rep. Ritchie Torres, D-N.Y., wrote in a September op-ed in the New York Times: “The spread of dollar stablecoins — fueled by the ubiquity of smartphones and the encryption technology of blockchain — could become the largest experiment in financial empowerment in human history.”
Major scaling upgrades have slashed the cost of crypto transactions, including those involving stablecoins, in some cases by more than 99%. On the Ethereum network, transactions involving USDC, a popular dollar-pegged stablecoin, averaged $1 in gas fees this month, down from an average of $12 in 2021. On Coinbase’s popular L2 network, Base, sending USDC costs an average of less than 1 cent. (Note that these numbers may not include some onboarding and exit costs.)
The difference is particularly striking when you compare these fees to the average cost of an international wire transfer, which is $44.
Stablecoins make it easier to transfer value. In the second quarter of 2024 (ending June 30), stablecoin transaction volume reached $8.5 trillion, with 1.1 billion transactions completed. Stablecoin transaction volume is more than double Visa's $3.9 trillion in transaction volume during the same period. The fact that stablecoins have entered the same discussion as well-known and entrenched payment services such as Visa, PayPal, ACH, and Fedwire is undoubtedly a significant testament to their utility.
Stablecoins are not just a fad, either. If you compare stablecoin activity to the volatility cycles of the cryptocurrency market, there seems to be no correlation between the two. In fact, even as spot cryptocurrency trading volume has declined, the monthly number of addresses sending stablecoins has continued to increase. In other words, people seem to be using stablecoins for more than just transactions.
All of this activity is reflected in usage statistics. Stablecoins account for nearly a third of daily cryptocurrency usage, at 32%, second only to decentralized finance ( DeFi ) at 34%, measured by share of daily active addresses. The rest of cryptocurrency usage is spread across infrastructure (such as bridges , oracles , maximum extractable value, account abstraction, etc.), token transfers, and a number of other areas, including emerging applications such as games, NFTs , and social networks.
4. Infrastructure improvements have increased capacity and significantly reduced transaction costs
Part of the reason why stablecoins have become so popular and easy to use is due to the infrastructure progress behind them . First, the processing power of blockchain is growing. Thanks to the rise of Ethereum L2 network and other high-throughput blockchains, the number of transactions processed per second by blockchain has increased by more than 50 times compared to four years ago.
Even more astonishing is that Ethereum’s biggest upgrade this year — “Dencun,” also called “protodanksharding” or EIP-4844 — significantly reduced fees on the L2 network after its implementation in March 2024. Since then, L2 payment fees on Ethereum have fallen dramatically, even as the ETH-denominated value on L2 has continued to rise. In other words, the blockchain network has not only become more popular, but also more efficient.
It’s a similar story with zero-knowledge proofs ( ZK proofs), which are important for blockchain scalability, privacy, and interoperability . Even as the monthly fees for verifying ZK proofs on Ethereum have fallen, the ETH-denominated value on ZK sink chains has increased. In other words, ZK proofs have become cheaper and more popular. (The term “zero-knowledge” here refers to a broad cryptographic technique that can succinctly prove that a computation transferred to a sink chain network was executed correctly.)
Zero-knowledge technology is very promising because it opens up new avenues for developers to perform cheap and verifiable blockchain computations. However, ZK-based virtual machines (zkVMs) still have a long way to go in terms of performance and have not yet caught up with traditional computers - an observation worthy of humble reflection.
With all of these infrastructure improvements, it’s easy to see why blockchain infrastructure remains one of the most popular areas for builders, and why L2 networks have become one of the top five hottest builder subcategories we track.
5. Decentralized Finance (DeFi) remains popular — and growing
The only area that has attracted more builders than blockchain infrastructure is decentralized finance ( DeFi ) (which also accounts for the most cryptocurrency usage among daily active addresses, at 34%). Since the rise of DeFi in the summer of 2020, decentralized exchanges (DEXs) have accounted for 10% of spot cryptocurrency trading activity, all of which took place on centralized exchanges just four years ago.
Currently, more than $169 billion is locked in thousands of DeFi protocols. Some major DeFi subcategories include staking and lending.
It has been a little over two years since Ethereum completed its transition to Proof of Stake (PoS), a shift that significantly reduced the network’s energy consumption and environmental footprint. Since then, the share of staked Ethereum has risen to 29% from 11% two years ago, greatly enhancing the security of the network.
Although still in its early stages, DeFi offers a promising alternative to the growing trend toward centralization and concentration of power in the U.S. financial system, where the number of banks has fallen by two-thirds since 1990 and a handful of large banks dominate an increasingly smaller share of assets.
6. Cryptocurrency may solve some of AI’s pressing challenges
Artificial intelligence ( AI ) is one of the hottest trends this year, not only in the technology sector, but also in the cryptocurrency sector.
AI is one of the most discussed trends on crypto social media. Perhaps more surprisingly, there is a significant overlap between visitors to chatgpt.com and those to top crypto sites, showing a strong connection between cryptocurrency and AI users.
Crypto builders also have a strong connection to artificial intelligence. According to our Builder Energy dashboard, about a third of crypto projects (34%) say they are using AI , regardless of the category they are building, up from 27% last year. The most popular category for applying AI technology is blockchain infrastructure projects.
Given that the cost of training cutting-edge AI models has quadrupled annually over the past decade , we believe AI may tend to increase the centralization of power on the Internet. If left unchecked, only the largest tech companies may have enough resources to train the latest AI models.
The challenges associated with AI centralization are almost completely opposite to the decentralized opportunities presented by blockchain networks. Crypto projects are already attempting to address some of these challenges, including Gensyn (by democratizing access to AI computing resources), Story (by helping to compensate creators by tracking intellectual property), Near (by running AI on an open-source, user-owned protocol), and Starling Labs (by helping to verify the authenticity and provenance of digital media), to name a few.
The intersection of encryption and AI is likely to intensify in the coming years.
7. More scalable infrastructure unlocks new on-chain applications
As transaction costs drop and blockchain capacity increases, many other potential consumer applications for crypto become possible.
Take NFTs, for example. When crypto transaction costs were high a few years ago, people traded NFTs on secondary markets, with transactions totaling billions of dollars. Since then, this activity has decreased, replaced by a new consumer behavior: minting low-cost NFT series on social apps like Zora and Rodeo. This represents a major shift in the NFT market, a change that would have been almost unthinkable before transaction fees dropped dramatically.
Social networks are another example . Although they currently account for only a small portion of daily on-chain activity, they attract a large amount of builder activity: according to our Builder Energy dashboard, 10.3% of crypto projects in 2024 are social-related. In fact, social network-related projects, such as those related to Farcaster, are one of the top five builder subcategories this year.
As builders and consumers explore more social experiences, on-chain games are pushing blockchain scalability to its limits. Rollups like Pirate Nation, a sea-adventure role-playing game from Proof Of Play, consistently consume the most gas per second of all Ethereum Rollups.
As the November election approaches, crypto-based prediction markets are seeing a surge in popularity — even though they are illegal in the U.S. — and prediction markets in general are gaining momentum. So much so that non-crypto prediction market Kalshi won a first-instance victory last month in its ongoing federal lawsuit over listing election contracts. (Currently, registered trading platforms are allowed to offer traditional election-based futures contracts.)
The dawn of new consumer behaviors is beginning to emerge. These emerging experiences were almost impossible to achieve when blockchain infrastructure was cumbersome and transaction costs were high. As blockchain technology continues to advance along the classic technology price-performance curve, these applications are expected to flourish.
Where does this take us? The past year has seen significant progress in cryptocurrencies across policy, technology, consumer adoption, and more. On the policy side, there have been milestones, including the sudden approval and listing of Bitcoin and Ethereum ETPs, and the passage of important bipartisan crypto legislation. On the infrastructure side, there have been significant advances, from scaling upgrades to the rise of the Ethereum L2 network and the emergence of other high-throughput blockchains. And, new applications are constantly being built and used, from the growth of mainstream applications such as stablecoins to the exploration of emerging categories such as AI, social networks, and games.
As to whether we have entered the fifth wave of the price-innovation cycle (which is our framework for understanding the multiple ups and downs of the crypto market), it remains to be seen. Regardless, as an industry, cryptocurrency has made undeniable progress in the past year. As ChatGPT proves, a breakthrough product can change an entire industry.
Link to this article: https://www.hellobtc.com/kp/du/11/5528.html
Source: https://a16zcrypto.com/posts/article/state-of-crypto-report-2024/
