Author: Grayscale Research
Compiled by: Golem, Odaily
Summary:
- The crypto market saw a significant surge in Q4 2024, with the FTSE/Grayscale Crypto Sectors index showing strong market performance. The gains largely reflect the market's positive reaction to the US election results.
- Competition in the smart contract platform space remains fierce. The leading platform Ethereum has underperformed its closest competitor by market cap, Solana, and investors are also increasingly focused on other Layer 1 networks like Sui and The Open Network (TON).
- Grayscale Research has updated its Top 20 token list. The list represents the diversified assets in the crypto industry that may have high potential in the coming quarter. New assets added in Q1 2025 include HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. All assets in the Top 20 list have high price volatility and should be viewed as high-risk.
Grayscale Crypto Sectors Index
The Grayscale Crypto Sectors provides a comprehensive framework for understanding the investable universe of digital assets and their relationship to underlying technologies. Based on this framework, and in collaboration with FTSE Russell, Grayscale has developed the FTSE Grayscale Crypto Sectors index series to measure and monitor crypto assets (Figure 1). Grayscale Research incorporates this index into its analysis of the digital asset market.
Figure 1: Positive returns for the Grayscale Crypto Sectors index in Q4 2024
Crypto valuations soared in Q4 2024, largely due to the market's positive reaction to the US election results. According to the Crypto Sector Market Index (CSMI), the industry's total market cap increased from $1 trillion to $3 trillion this quarter. Figure 2 compares the crypto market cap to various traditional public and private market asset classes. For example, the current digital asset industry's market cap is roughly equivalent to the global inflation-linked bond market - more than double the US high-yield bond market, but still well below the global hedge fund industry or the Japanese stock market.
Figure 2: Crypto market cap increased by $1 trillion in Q4 2024
Due to the increase in valuations, many new tokens met the inclusion criteria for the Grayscale Crypto Sectors framework (which requires a minimum market cap of $100 million for most tokens). This quarter's rebalancing saw Grayscale add 63 new assets to the index series, now totaling 283 tokens. The consumer and culture sectors saw the most new token additions, reflecting the continued strong returns of meme coins and the appreciation of various assets related to gaming and social media.
The largest new addition by market cap in the Crypto Sectors is Mantle, an Ethereum Layer 2 protocol that has now met the minimum liquidity requirements (for more details on the Grayscale index inclusion criteria, see here).
Smart Contract Platform Competition
The smart contract platform space is likely the most fiercely competitive segment of the digital asset industry. While 2024 was a milestone year for the leading platform Ethereum - with the approval of a US spot ETF and a major upgrade - ETH's performance has lagged some competitors like Solana, the second-largest asset in the space. Investors have also turned their attention to other L1 networks, including high-performance blockchains like Sui and the blockchain integrated with the Telegram platform, TON.
In creating infrastructure for application developers, the architects of smart contract blockchains face various design choices. These design choices impact the three factors that make up the "blockchain trilemma": network scalability, network security, and network decentralization. For example, prioritizing scalability often manifests as high transaction throughput and low fees (e.g., Solana), while prioritizing decentralization and network security may result in lower throughput and higher fees (e.g., Ethereum). These design choices lead to different block times, transaction throughput, and average transaction fees (Figure 3).
Figure 3: Smart contract platforms have different technical characteristics
Regardless of the design choices and the strengths and weaknesses of the networks, smart contract platforms derive their value through the network fee revenue they generate. While other metrics (such as total TVL) are also important, fee revenue can be seen as the primary driver of token value accretion in this market segment (related reading: The Battle for Value in Smart Contract Platforms).
As shown in Figure 4, there is a statistical relationship between smart contract platform fee revenue and market capitalization. The stronger a network's ability to generate fee revenue, the greater its ability to pass value to the network through token burning or staking rewards. This quarter, Grayscale Research's Top 20 token list includes some smart contract platform tokens: ETH, SOL, SUI, and OP.
Figure 4: All smart contract platforms are competing for fee revenue
Grayscale Research Top 20 Token List
Each quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process for the FTSE/Grayscale Crypto Sectors index series. Following this process, Grayscale Research generates a list of the top 20 assets within the Crypto Sectors domain. The top 20 represent the diversified assets across the Crypto Sectors that may have high potential in the coming quarter (Figure 4). The list is curated based on a combination of factors, including network growth/adoption, upcoming catalysts, the sustainability of fundamentals, token valuations, token supply inflation, and potential tail risks.
In Q1 2025, Grayscale will focus on tokens that involve at least one of the following three core market themes:
- The US election and its potential impact on industry regulation, particularly in areas like decentralized finance (DeFi) and staking;
- Continued breakthroughs in decentralized AI technology and the use of AI agents on blockchains;
- Growth in the Solana ecosystem.
Based on these themes, the following six assets have been added to the Top 20 list for Q1 2025:
- Hyperliquid (HYPE): Hyperliquid is an L1 blockchain aimed at supporting on-chain financial applications. Its main application is a decentralized exchange (DEX) for perpetual futures, with fully on-chain but order book-based.
- Ethena (ENA): The Ethena protocol has evolved into a new stablecoin USDe, primarily collateralized by hedged positions in Bitcoin and Ethereum. Specifically, the protocol holds long positions in Bitcoin and Ethereum as well as short positions in perpetual futures contracts of the same assets. The staked version of this token provides yields through the basis between spot and futures prices.
- Virtual Protocol (VIRTUAL): Virtual Protocol is a platform for creating AI agents on the Ethereum L2 network Base. These AI agents are designed to mimic human decision-making and autonomously execute tasks. The platform allows for the creation and co-ownership of tokenized AI agents that can interact with their environment and other users.
- Jupiter (JUP): Jupiter is the leading DEX aggregator on Solana, with the highest TVL on the network. As more retail traders enter the crypto market through Solana, and speculation around Solana-based memecoins and AI agent tokens intensifies, we believe Jupiter is well-positioned to capitalize on this growing market.
- Jito (JTO): Jito is a liquidity protocol on Solana. Jito has seen a significant increase in adoption over the past year and has one of the best financial positions in the crypto space, with projected fee revenue exceeding $550 million in 2024.
- Grass (GRASS): Grass is a decentralized data network that rewards users for sharing their unused internet bandwidth through a Chrome extension. This bandwidth is used to crawl online data, which is then sold to AI companies and developers to train machine learning models, effectively performing web data crawling while compensating users.
Figure 5: Top 20 additions include DeFi applications, AI agents, and the Solana ecosystem
Note: Shaded areas represent new tokens to be added in the upcoming quarter (Q1 2025). "*" denotes assets in related domains not included in the Crypto Sectors index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024, for reference only. Assets may change. Grayscale and its affiliates and clients may hold positions in the digital assets discussed. All Top 20 assets have high price volatility and should be considered high-risk.
In addition to the new themes mentioned above, Grayscale remains bullish on themes from previous quarters, such as Ethereum scaling solutions, tokenization, and decentralized physical infrastructure (DePIN). These themes are still reflected through the return of some protocols to the Top 20, such as Optimism, Chainlink, and Helium.
This quarter, we have removed Celo from the Top 20. Grayscale Research continues to be positive on this project and believes it remains an important part of the crypto ecosystem. However, the revised Top 20 list may offer more attractive risk-adjusted returns in the coming quarter.
Investing in crypto asset classes involves risks, some of which are unique to the crypto asset class, including smart contract vulnerabilities and regulatory uncertainty. Additionally, all assets in the Top 20 have high volatility and should be considered high-risk, and therefore may not be suitable for all investors. Given the risks of the asset class, any investment in digital assets should be considered in the context of an investor's portfolio and their financial objectives.
