Author: a16zcrypto
Translator: Plain Language Blockchain
When we released our first annual Crypto State of the Union two years ago, the world looked very different. Crypto was not a priority for policymakers. SEC-approved Bit and Ethereum exchange-traded products (ETPs) did not yet exist. Ethereum had not yet transitioned to the energy-efficient Proof-of-Stake (PoS) mechanism. Second-layer (L2) networks aimed at increasing capacity and lowering transaction costs were largely dormant - with transaction fees on those networks far higher than they are today.
With our newly released 2024 Crypto State of the Union, all of that has changed. The report covers the rise of crypto as a hot policy issue, the various technical advancements across blockchain networks, and the latest trends among crypto developers and users. The report also:
Dives into the emergence of key applications like stablecoins - one of the "killer apps" of crypto;
Explores the intersections between crypto and other key technology trends like AI, social networks, and gaming;
Shares new data on crypto interest in swing states ahead of the US elections, and more.
The 2024 Crypto State of the Union also reveals record-high crypto activity. It also analyzes the maturation of blockchain infrastructure, particularly the recent scaling upgrades that have dramatically reduced on-chain transaction costs, as well as the rise of Ethereum L2s and other high-throughput blockchains.
This year, we're also launching a new tool: the a16z Crypto Developer Activity Dashboard. For the first time, we're sharing our proprietary data on the "where" of developer activity in the crypto ecosystem. The dashboard aggregates thousands of data points from our investment team's research, our CSX startup accelerator program, and other industry tracking - all anonymized and aggregated. Through this tool, anyone can explore how crypto developers view their activity and interests - including what blockchains they're building on, what types of applications they're building, what technologies they're using, and where their bases are. We plan to update these data annually as part of our Crypto State of the Union.
Here are 7 key takeaways from the report:
Crypto activity and usage has reached all-time highs
Crypto has become a major political issue ahead of the US elections
Stablecoins have found product-market fit
Infrastructure improvements have increased capacity and dramatically lowered transaction costs
DeFi remains popular and continues to grow
Crypto has the potential to solve some pressing challenges facing AI
More scalable infrastructure is unlocking new on-chain applications
1. Crypto activity and usage has reached all-time highs
The number of active crypto addresses is higher than ever before. In September, 22 million addresses interacted with a blockchain at least once, more than tripling since late 2023. (As a metric, active addresses are easier to manipulate than other measures. For more on this, see here.)
The surge in activity is largely driven by Solana, which accounts for around 100 million active addresses. Next are NEAR (31 million active), Coinbase's popular L2 network Base (22 million), TRON (14 million), and Bit (11 million). Among EVM chains, Base is followed by BNB Chain (10 million) and Ethereum (6 million) in terms of activity. (Note: The EVM chain totals are 220 million after deduplicating by public key.)
These trends are also reflected in our Developer Activity Dashboard. The biggest shifts in builder interest share are seen in Solana. This year, the share of founders indicating they are building or intending to build on Solana has risen from 5.1% last year to 11.2%. Base is next, growing its share from 7.8% to 10.7%; Bit also saw its share rise from 2.6% to 4.2%.
In absolute numbers, Ethereum still commands the largest share of builder interest at 20.8%, followed by Solana and Base. After that are Polygon (7.9%), Optimism (6.7%), Arbitrum (6.2%), Avalanche (4.2%), Bit (4.2%), and others.
Meanwhile, in June 2024, the number of monthly active mobile crypto wallet users reached a historic high of 29 million. While the US accounts for 12% of monthly active mobile wallet users, its share of the total mobile wallet user base has declined in recent years as global crypto adoption has grown and more projects have geo-fenced the US in pursuit of regulatory clarity.
The reach of crypto continues to expand globally. After the US, the countries with the most mobile wallet users include Nigeria (which has seen significant growth in bill payments and retail use cases through regulatory sandboxes), India (due to its rapidly growing population and mobile penetration), and Argentina (where many residents have turned to crypto, especially stablecoins, due to currency devaluation).
While active addresses and monthly active mobile wallet users are relatively straightforward metrics, estimating the actual number of active crypto users is more challenging. By combining multiple methodologies, we estimate the global monthly active crypto users to be between 30-60 million, representing only 5-10% of the 617 million global crypto owners estimated by Crypto.com as of June 2024. (For more on our estimation approach, see here.)
This gap highlights the massive opportunity to onboard and re-engage passive crypto holders. With major infrastructure improvements, novel and compelling applications, and consumer experiences becoming possible, more of the dormant crypto holders are poised to become active on-chain users.
2. Crypto has become a major political issue ahead of the US elections
Crypto has entered the national discourse in this election cycle.
As such, we measured the relative level of crypto interest in swing states. In the two states expected to be the most hotly contested battlegrounds in November - Pennsylvania and Wisconsin - crypto search interest has surged to 4th and 5th place respectively in terms of Google Trends search volume share since the last election in 2020. Michigan's crypto search interest has jumped to 8th place, while Georgia has remained flat. Meanwhile, Arizona and Nevada have seen declines in interest since 2020.
One factor that may be driving increased crypto interest this year is the launch of Bit and Ethereum exchange-traded products (ETPs). The introduction of these ETPs could expand investor exposure and increase the number of Americans holding crypto. Bit and Ethereum ETPs now have a combined $65 billion in on-chain holdings. (Note: While often referred to as ETFs, these products are actually ETPs registered under the SEC's S-1 form, indicating their underlying investment portfolios do not consist of securities.)
The SEC's approval of the ETP marks an important milestone in crypto policy. Regardless of which party wins in November, many politicians expect bipartisan cooperation on cryptocurrency legislation to gain momentum. More and more policymakers and political figures in both parties have expressed positive views on cryptocurrencies.
This year, the industry has also sparked other important movements in the policy arena. At the federal level, the House passed the 21st Century Financial Innovation and Technology Act (FIT21) with bipartisan support, with 208 Republicans and 71 Democrats voting in favor. Pending Senate review and approval, the bill is expected to provide much-needed regulatory clarity for crypto entrepreneurs.
Equally important, at the state level, Wyoming passed the Decentralized Autonomous Organization (DAO) Enabling Act, which legally recognizes DAOs and allows blockchain networks to operate legally without compromising decentralization principles.
The EU and the UK have been the most proactive in engaging the public on crypto policy and regulatory issues. Compared to the US Securities and Exchange Commission, various European agencies have issued more requests for public input. At the same time, the EU's Markets in Crypto-Assets (MiCA) regulation is the first comprehensive crypto-related policy framework, expected to be fully implemented by the end of the year.
Stablecoins - now one of the most popular crypto products - are a major topic of policy discussion, with several related bills already in the works in Congress. In the US, stablecoins are seen as a way to bolster the dollar's position overseas, even as the dollar's status as the global reserve currency has declined. Currently, over 99% of stablecoins are denominated in US dollars, far exceeding the second largest denomination: the Euro, which accounts for only 0.20%.
In addition to demonstrating the global influence of the US dollar, stablecoins may also strengthen the country's domestic financial infrastructure. Despite being only a decade old, stablecoins have already become one of the top 20 holders of US debt, surpassing countries like Germany.
While some countries are exploring Central Bank Digital Currencies (CBDCs), the stablecoin opportunity in front of the US is ripe for the taking. Against the backdrop of these discussions and the growing number of prominent political figures weighing in on cryptocurrencies, we expect more countries to start seriously formulating their crypto policies and strategies.
3. Stablecoins Have Found Product-Market Fit
By enabling a variety of use cases such as fast, low-cost global payments, stablecoins have emerged as one of the most obvious "killer apps" in crypto. As New York Assemblyman Ritchie Torres wrote in an op-ed for the New York Daily News: "The proliferation of dollar-pegged stablecoins - enabled by the ubiquity of smartphones and the cryptography of blockchain - may be the greatest financial empowerment experiment in human history."
Major scaling and upgrade efforts have significantly reduced the cost of executing crypto transactions, including stablecoin transactions, sometimes by over 99%. On Ethereum, the average gas fee for USDC (a popular US dollar-pegged stablecoin) transactions this month was $1, down from an average of $12 in 2021. On Coinbase's popular L2 network Base, the average cost to send USDC is less than a penny. (Note that these figures may not include certain onboarding and exit fees.)
In contrast, the average cost of international wire transfers is $44.
Stablecoins have made value transfer effortless. By the end of Q2 2024 (June 30), stablecoin transaction volume reached $85 trillion across 11 billion transactions. During the same period, stablecoin transaction volume was more than double Visa's $39 trillion in transactions. Stablecoins are able to engage on a par with well-established and entrenched payment services like Visa, PayPal, ACH, and Fedwire, demonstrating their utility.
Stablecoins are not just a passing fad. When comparing stablecoin activity to the volatility cycles of the crypto market, the two appear uncorrelated. In fact, while spot crypto trading volumes have declined, the number of monthly active addresses sending stablecoins has continued to increase. In other words, people seem to be using stablecoins for purposes beyond just trading.
All of this activity is reflected in the usage statistics. Stablecoins account for nearly a third of daily crypto usage at 32%, second only to Decentralized Finance (DeFi) at 34%, as measured by the share of daily active addresses. The remaining crypto usage is distributed across infrastructure (e.g., bridges, oracles, maximum extractable value, account abstraction, etc.), Token transfers, and emerging applications including gaming, Non-Fungible Tokens, and social networks.
4. Infrastructure Improvements Have Increased Capacity and Dramatically Reduced Transaction Costs
The popularity and ease of use of stablecoins is partly due to the advancements in the underlying infrastructure. First, blockchain processing capacity is growing. Thanks to the rise of Ethereum L2 networks and other high-throughput blockchains, the number of transactions processed per second has increased more than 50-fold compared to four years ago.
Even more notable is that Ethereum's biggest upgrade this year - "Dencun", also known as "protodanksharding" or EIP-4844 - will significantly reduce L2 network fees when implemented in March 2024. Since then, while the value locked on Ethereum L2s has continued to rise, the cost of L2 payments has dropped dramatically. In other words, blockchain networks are becoming more popular and more efficient.
A similar trend is observed with Zero-Knowledge (ZK) proofs, a technology that has important implications for blockchain scalability, privacy, and interoperability. While monthly spending to verify ZK proofs on Ethereum has declined, the value of Ethereum locked in ZK rollups has been increasing. In other words, ZK proofs are becoming cheaper while also gaining popularity. (Here, we use "Zero-Knowledge" as an umbrella term to describe the cryptography that can concisely prove that a computation has been correctly executed on a rollup network.)
ZKtechnology has great potential, as it opens up a new, inexpensive and verifiable path for blockchain computing for developers. However, the performance of ZK-based virtual machines (zkVMs) still needs to be on par with traditional computers, and there is still a long way to go - this is worth deep consideration.
Given all these infrastructure improvements, it is easy to understand why blockchain infrastructure remains one of the most popular categories for builders, and why L2 has become one of the five hottest subcategories we are tracking.
5. Decentralized Finance (DeFi) remains popular and growing
The only category that attracts more builders than blockchain infrastructure is Decentralized Finance (DeFi), which accounts for 34% of total crypto usage. Since the emergence of DeFi in the summer of 2020, decentralized exchange (DEX) platforms have accounted for 10% of spot crypto trading activity, whereas four years ago, all of this activity took place on centralized exchange platforms.
Currently, over $169 billion is locked in thousands of DeFi protocols. Some major DeFi subcategories include staking and lending.
It has been over two years since Ethereum began its transition to Proof-of-Stake, which has significantly reduced the network's energy consumption and environmental impact. Since then, the proportion of staked Ethereum has risen to 29%, up from just 11% two years ago, greatly enhancing the security of the network.
Although still in its early stages, DeFi offers a promising alternative to the trend of centralization and consolidation of power in the U.S. financial system. The number of banks has decreased by two-thirds since 1990, with fewer and fewer large banks dominating assets.
6. Crypto may solve some pressing challenges of Artificial Intelligence
Artificial Intelligence is the hottest trend this year, not only widely discussed in the tech sector, but also particularly prominent in the crypto space.
Artificial Intelligence has become one of the most discussed trends by crypto influencers on social media. Perhaps more surprisingly, there is a significant overlap between visitors to chatgpt.com and top crypto websites, indicating a close connection between crypto users and AI users.
The connection between crypto builders and Artificial Intelligence is also very close. According to our Builder Energy dashboard, about one-third of crypto projects (34%) say they are using Artificial Intelligence, regardless of the category they are building, up from 27% a year ago. The hottest category for applying Artificial Intelligence technology is blockchain infrastructure projects.
Given that the cost of training cutting-edge AI models has increased fourfold per year over the past 10 years, we believe AI may lead to increasing centralization of power on the internet. If left unchecked, only the largest tech companies may have the resources to train the latest AI models.
In stark contrast to the decentralization opportunities brought by blockchain networks, the centralization challenges associated with AI are raising concerns. Many crypto projects are already trying to address these challenges, such as Gensyn (democratizing access to AI computing), Story (helping compensate creators by tracking intellectual property), Near (running AI on open-source, user-owned protocols), and Starling Labs (helping verify the authenticity and provenance of digital media), among others.
In the coming years, the intersection between crypto and Artificial Intelligence is likely to further strengthen.
7. More scalable infrastructure unlocks new on-chain applications
With lower transaction costs and increased blockchain capacity, many other potential crypto consumer applications have become feasible.
Take Non-Fungible Tokens (NFTs) for example, a few years ago, when crypto transaction costs were high, people were trading NFTs in the secondary market for billions of dollars. However, this activity subsequently declined, replaced by a new consumer behavior: minting low-cost NFT collections on social apps like Zora and Rodeo. This marks a significant shift in the NFT market, which would have been almost unimaginable before transaction fees were drastically reduced.
Social networks are another example, although they currently account for only a small portion of daily on-chain activity, they have attracted strong builder activity: according to our Builder Energy dashboard, 10.3% of crypto projects in 2024 will be related to social. In fact, projects related to social networks, such as those related to Farcaster, are one of the five hottest builder subcategories this year.
As builders and consumers explore more social experiences, on-chain gaming is pushing the scalability of blockchains to the limit. The high-seas role-playing game "Pirate Nation" by Proof Of Play, which uses Rollups that have consistently been the most gas-hungry Rollups on Ethereum.
With the upcoming November elections, crypto-based prediction markets are experiencing a surge in activity - although they are illegal in the U.S. - and the overall momentum is also steadily increasing. To the extent that the non-crypto prediction market Kalshi won a lower court victory last month and is pursuing a federal lawsuit against election-based contracts. (Currently, registered trading platforms can offer traditional futures contracts based on elections.)
Signs of new consumer behaviors are beginning to emerge. All of these emerging experiences were difficult to realize when blockchain infrastructure was more cumbersome and transaction costs were higher. As blockchains continue to improve on the classic technology price-performance curve, more of these types of applications are expected to thrive.
Where does this take us? Over the past year, cryptocurrencies have made significant progress in terms of policy, technology, and consumer adoption. There have been landmark policy developments, including the sudden approval and listing of Bitcoin and Ethereum ETPs, as well as the passage of important bipartisan crypto legislation. There have also been major infrastructure improvements, from scaling upgrades to the rise of Ethereum L2 and other high-throughput blockchains. Additionally, new applications have emerged, from the growth of mainstream products like stablecoins to explorations in emerging areas like AI, social networks, and gaming.
Whether we have entered the fifth wave of the price-innovation cycle - the framework we use to understand the multiple cycles of the crypto market - remains to be seen. Nonetheless, as an industry, cryptocurrencies have undoubtedly made progress over the past year. As ChatGPT has demonstrated, a single breakthrough product can transform an entire industry.
Link to the article: https://www.hellobtc.com/kp/du/10/5483.html
Source: https://a16zcrypto.com/posts/article/state-of-crypto-report-2024/
