Original title: State of the Network’s Q1 2024 Wrap-Up

Original article by: Tanay Ved, Matías Andrade

Original source: Substack

Compiled by: Lynn, Mars Finance

Introduction

In this special edition of “State of the Network,” we take a data-driven look back at the most important events impacting the digital asset industry in the first quarter of 2024.

Source Coin Metrics Reference Rate

In the first quarter of 2024, the digital asset market expanded significantly, catalyzed by the end of the decade-long exploration of Bitcoin spot trading products in the United States. In stark contrast to the uncertainty that has plagued the crypto asset market over the past few quarters, the first quarter marked a turning point for the industry. During this time, we have seen the total digital asset market capitalization recover to over $2 billion, with Bitcoin (BTC) reaching an all-time high of $73,000, up 66% year-to-date.

From first-tier cryptocurrencies like Solana (SOL +92%) and Near (NEAR +90%), to memecoins like Pepe (PEPE +527%), and the intersection of AI and computing applications like Render Network (RNDR +141%) Projects in the field, multiple crypto assets and fields have demonstrated this advantage. Additionally, we are seeing various forms of tools, infrastructure, and applications coming to fruition, which is bringing a new sense of innovation and optimism to the entire blockchain ecosystem. Below, we cover the key developments shaping the digital asset landscape in the first quarter of 2024.

Bitcoin hits all-time high

The launch of Bitcoin spot ETFs has been a key catalyst for the digital asset market this quarter, with the much-anticipated event broadening investors’ access to Bitcoin. The development is attractive to both retail and traditional investors, providing them with a familiar investment vehicle with a competitive cost and fee structure that allows them to gain exposure to the largest digital asset. Eleven issuers have joined the ranks, including giants such as BlackRock and Fidelity, signaling the continued expansion of acceptance of digital assets.

Source: Coin Metrics ATLAS Coin Metrics ATLAS

Unprecedented demand and inflows into Bitcoin exchange-traded products have caught many off guard and made it the fastest-growing ETF in history. About $12 billion has flowed into these instruments in the quarter since their launch, holding about 4% of Bitcoin’s current supply. Among the 11 issuers, BlackRock’s IBIT is the clear winner, having amassed nearly 250,000 BTC (approximately $17 billion) since its inception, with several other issuers also growing their market share. Conversely, Grayscale’s GBTC was an outlier, seeing significant outflows, primarily due to higher fees and the impact of the Genesis and FTX bankruptcies.

While there have been occasional swings in investment flows, with some days seeing particularly heavy activity, the launch of the spot Bitcoin ETF certainly sets the stage for a broad-based rally across the digital asset market. The first quarter gave us a glimpse of strong demand for these products, however, participants will be keen to see the enduring appeal and impact of derivatives-based ETFs on future portfolios.

Ethereum Dencun upgrade goes online

With the successful completion of the "Dencun hard fork" on March 13, Ethereum achieved another major milestone on its roadmap, undergoing a major infrastructure upgrade to enhance the blockchain's scalability. This event is anticipated not only by Ethereum users, who have struggled with high transaction fees during periods of congestion, but also by layer-two (L2) solutions that face problems with storing or settling off-chain data There are associated high costs, and this data has been processed to the Ethereum layer. However, the introduction of "Blobs" through EIP-4844 alleviates these bottlenecks, laying the foundation for making the network more economically viable for all stakeholders.

Blobs landed on the Ethereum mainnet

Source: Coin Metrics Network Data Pro, Dencun Metrics

EIP-4844 solves Ethereum’s scalability issues by creating space for “blobs” of data. As a more efficient form of data storage than calldata, Layer-2 can utilize blobs to settle transactions to Ethereum’s Layer-1, which serves as the data availability and settlement layer. Since the upgrade, the network has processed over 209K blobs as of March 31st. A “Blob Transaction” is a new transaction type that involves the use of a Blob, which is available for approximately 18 days — unlike calldata, which is stored permanently. The temporary nature of blobs allows them to be priced at a lower cost, significantly reducing the data availability cost (DA) of L2.

The impact of adopting Blobs

Several companies, including Arbitrum, Optimism, and ZkSync, started adopting Blobs soon after upgrading and saw significant reductions in data costs. The average cost or ETH payout of each L2 orderer (responsible for ordering and processing transactions on L2 and submitting them to L1 for settlement) has dropped significantly from 0.15 ETH to ~0.0005 ETH, which means that user transaction fees have been reduced by 60% to 90%. As the cost of applications such as decentralized exchanges (DEX) decreases and trading volumes increase, L2 may benefit from higher profit margins.

Source: Coin Metrics ATLAS

In this context, the impact of network demand on blob fee pricing dynamics will be key to monitor. EIP-4844 creates a new blob gas market that operates similarly to EIP-1559, with fees varying based on supply and demand. Currently, the network is targeting 3 blobs per block, with a maximum of 6 blobs. Therefore, when the number of blobs in a block exceeds this target, the blob base fee increases. We have seen this happen in a few instances, and it is an important stress test for the network when blobs space utilization is high. For example, Coinbase's L2 Base experienced a surge in transaction fees as memecoin mania spread to Solana Base as well.

Additionally, on March 27, a surge in inscriptions on blobs ("blobscriptions") caused the average hourly blob cost to skyrocket, from previously costing nothing to over $60. The increase in blob activity has also led to a decrease in the number of blocks on the Ethereum network. Therefore, as convolutions and their blob capacity increase, monitoring fee dynamics and network health will be critical. Despite these early hiccups, the Dencun upgrade clearly paves the way for greater accessibility for users, volumes, and applications.

The growth and landscape of stablecoins

Stablecoins resumed expansion in the first quarter as digital asset market valuations grew. The supply of U.S. dollar-pegged stablecoins exceeded $135 billion, a cumulative increase of 13.5% during the quarter. Stablecoin giant Tether (USDT) has surpassed $100 billion in supply, with its circulating supply on Ethereum growing by 16% and its supply on the Tron network growing by 11%. Circle’s USDC has had a strong start to the first quarter, with supply growing 22% to $27 billion, close to levels seen during the regional banking crisis last year. While USDT dominates trading volume on centralized exchanges, USDC trading pairs are gaining traction in spot markets as liquidity improves. The two major stablecoins’ growing market share is partly due to the shutdown of Paxos-issued BUSD, in addition to the overall growth in demand for digital assets.

Source: Coin Metrics network data

Meanwhile, MakerDAO’s token supply fell 13% in Q1 to 3.2 billion. With U.S. interest rates near their peak, demand for crypto-collateralized yields outstripped the appeal of U.S. Treasury rates, which make up a large portion of the collateral backing Dai. Increasing competition from high-yield newcomers like Ethena’s USDe (collateralized by ETH and perpetual futures positions in derivatives markets) also prompted changes in interest rates across the ecosystem. To prevent a demand shock for Dai and improve its reserve liquidity, Maker increased the Dai Savings Rate from 5% to 15%, incentivizing adoption. As a result of these dynamics, stablecoin rates across the decentralized finance market surged to nearly 15%, raising borrowing and leverage costs across the ecosystem.

Coin Metrics Formula Generator

As liquidity has increased, so have the types of stablecoins. For example, PayPal’s PYUSD has had a challenging start to the year, with supply down 28% since January; Societe Generale’s Euro-backed EURCV; and protocol-native stablecoins like Aave’s GHO. Recently, we’ve also seen the launch of the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), a tokenized money market fund built on Ethereum. Not only do these products vary in terms of collateral backing and risk, but the issuers are also diverse, ranging from financial institutions to DeFi protocols. In addition, in addition to Tron and Ethereum second-layer networks, stablecoin issuance and transfer volume has also expanded on first-layer networks such as Solana, demonstrating their use across the ecosystem.

in conclusion

As the first quarter of this year comes to an end, the digital asset space has experienced transformative growth and key developments, marking the market's maturation and diversification. While the market is full of speculation and excitement, progress has been made on multiple fronts, from the launch of spot Bitcoin ETFs to infrastructure upgrades and the adoption of first- and second-layer ecosystems, paving the way for greater accessibility and innovative use cases.

The first quarter also marked a key turning point in market sentiment as the shadow hanging over the Bitcoin industry gradually lifted following the sentencing of Sam-Bankman Fried. Looking ahead, there are various dynamics on the horizon that may impact the future development of the digital asset industry. The resumption of litigation between Coinbase and the U.S. Securities and Exchange Commission (SEC), the possible launch of an Ethereum ETF, and the upcoming fourth halving of Bitcoin will undoubtedly make participants wait and see.

Network Data Insights

Summary Highlights

Source: Coin Metrics Network Data Professional Edition

This week, Bitcoin and Ethereum’s market caps rose by 7% and 5% respectively, while active addresses fell by 7% and 8% respectively.

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