Research | a16z | State of Crypto 2024 - a16z crypto

Created

Nov 2, 2024 12:12 PM

7 key takeaways

Crypto activity and usage hit all-time highs
Crypto has become a key political issue ahead of the U.S. election
Stablecoins have found product-market fit
Infrastructure improvements have increased capacity and drastically reduced transaction costs
DeFi remains popular — and it’s growing
Crypto could solve some of AI’s most pressing challenges
More scalable infrastructure has unlocked new onchain applications

1. Crypto activity and usage hit all-time highs

There have never been more monthly active crypto addresses. In September, 220 million addresses interacted with a blockchain at least once, a figure that has more than tripled since the end of 2023. (As a metric, active addresses are easier to game than other measures. See more on that point here.)

The explosion of activity is primarily due to Solana, which accounted for about 100 million active addresses. Following were NEAR (with 31 million active addresses), Coinbase’s popular L2 network Base (22 million), Tron (14 million), and Bitcoin (11 million). Of Ethereum Virtual Machine (EVM) chains, the second-most active after Base was Binance’s BNB Chain (10 million), followed by Ethereum (6 million). (Note: EVM chains were de-deduplicated by public key to calculate the 220 million total.)

These trends are also reflected in our Builder Energy dashboard. The blockchain that saw the biggest change in total share of builder interest is Solana. Specifically, the total share of founders who told us they either are, or are interested in, building on Solana grew to 11.2% this year from 5.1% last year. Base saw the next biggest jump, its total share growing to 10.7% from 7.8% last year, followed by Bitcoin, which bumped to a total share of 4.2% from 2.6% last year.

On an absolute basis, Ethereum is still attracting the greatest share of total 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%), Bitcoin (4.2%), and so on.

Meanwhile, the number of monthly mobile crypto wallet users hit an all-time high of 29 million in June 2024. While the U.S. makes up the greatest share of monthly mobile wallet users at 12%, its share of the total mobile wallet user base has declined in recent years as crypto adoption grows globally and as more projects seek regulatory compliance by excluding the U.S. through geofencing.

Crypto’s footprint continues to expand abroad. After the U.S., the countries with the greatest share of mobile wallet users include Nigeria (which has sought to provide regulatory clarity including through regulatory incubation programs and has seen significant growth in consumer uses such as bill payments and retail purchases), India (with its booming population and mobile phone adoption), and Argentina (where many residents have flocked to crypto — especially stablecoins — amid currency devaluation).

While it’s easy to measure active addresses and monthly mobile wallet users, it’s much trickier to measure the number of actual active crypto users. However, using a combination of methodological approaches, we’ve estimated that there are 30-to-60 million monthly active crypto users worldwide, a proportion that represents only 5–10% of the total number of the 617 million global crypto owners estimated by Crypto.com in June 2024. (For more on the methodology behind our estimate, see here.)

The disparity underscores the large opportunity to engage — and re-engage — passive crypto holders. As major infrastructure improvements make brand new, compelling apps and consumer experiences possible, more dormant crypto holders could become active onchain users.

2. Crypto has become a key political issue ahead of the U.S. election

Crypto has broken into the national discourse this election cycle.

So we measured swing states’ relative levels of crypto interest. Two battlegrounds expected to be among the tightest races in November — Pennsylvania and Wisconsin — have seen the fourth- and fifth-biggest jumps in crypto search interest since the last election in 2020, measured as a proportion of total searches using Google Trends. Michigan saw the eighth-biggest jump in crypto search interest, while Georgia stayed put. Meanwhile, Arizona and Nevada experienced moderate drops in interest since 2020.

One factor that could have raised people’s crypto interest this year was the listing of Bitcoin and Ethereum exchange-traded products (ETPs). The number of Americans who hold crypto could grow as ETPs such as these broaden investor access. Together, the Bitcoin and Ethereum ETPs already contain $65 billion in onchain holdings. (Note: Though commonly called ETFs, these products are actually registered as ETPs using SEC Form S-1, indicating the underlying portfolios are not comprised of securities.)

The SEC’s ETP approvals represent major crypto policy milestones. Regardless of which party wins office in November, many politicians expect momentum to build with the passage of bipartisan crypto legislation. An increasing number of policymakers and politicians are speaking positively about crypto on both sides of the aisle.

The industry has inspired other significant movements on the policy front this year as well. At the federal level, the House of Representatives approved the Financial Innovation and Technology for the 21st Century (FIT21) Act with bipartisan support, including 208 Republicans and 71 Democrats voting in favor. Pending Senate proceedings and approval, the bill could provide much-needed regulatory clarity to crypto entrepreneurs.

No less meaningfully, at the state level, Wyoming passed the Decentralized Unincorporated Nonprofit Association (DUNA) Act, a law that gives decentralized autonomous organizations (DAOs) legal recognition and enables blockchain networks to operate lawfully without compromising on decentralization.

The EU and the United Kingdom have been the most proactive in engaging the public on questions of crypto policy and regulation. Various European agencies have put out many more calls for input than, for example, the U.S. Securities and Exchange Commission. Meanwhile, the European Union’s Markets in Crypto Act (MiCA) is the first comprehensive crypto-related policy regime to pass into law and it is set to come into full effect by the end of the year.

Stablecoins — which have become one of the most popular crypto products — are one of the biggest topics for policy discussion, with several bills already floating around Congress. One of the tailwinds, at least in the U.S., is the realization that stablecoins can fortify the U.S. dollar’s position abroad even as the dollar’s global reserve currency status slips. Today, more than 99% of stablecoins are denominated in USD, which dwarfs the next largest denomination: 0.20% in Euro.

In addition to projecting the power of the American dollar around the world, stablecoins are potentially strengthening the country’s financial footing at home. Despite being only a decade old, stablecoins have risen to become a top 20 holder of U.S. debt, putting them ahead of countries like Germany.

While some countries are exploring central bank digital currencies (CBDCs), the stablecoin opportunity sitting right in front of the U.S. is ripe for the taking. Between these discussions and the number of prominent political figures now weighing in about crypto generally, we expect more countries will start to flesh out their crypto policies and strategies in earnest.

3. Stablecoins have found product-market fit

By enabling fast, cheap, global payments, among other uses, stablecoins have become one of crypto’s most obvious “killer apps”. Indeed, as Rep. Ritchie Torres (D-N.Y.) wrote in September in a New York Daily News op-ed, “The proliferation of dollar stablecoins — rendered possible by the ubiquity of smartphones and the cryptography of blockchains — could become the greatest experiment in financial empowerment humanity has ever undertaken.”

Major scaling upgrades have drastically reduced the cost to execute crypto transactions, including those involving stablecoins, in some cases by over 99%. On Ethereum, transactions involving USDC, a popular U.S. dollar-pegged stablecoin, cost on average $1 in gas fees this month, down from $12 on average in 2021. Sending USDC on Base, Coinbase’s popular L2 network, costs less than a cent on average. (Note that these figures may exclude some onboarding and exit costs.)

Compare these fees to the $44 on average that it costs to send an international wire transfer.

Stablecoins make it easy to transfer value. They amounted to $8.5 trillion in transaction volume across 1.1 billion transactions in the second quarter of 2024 ended June 30. Stablecoin transaction volumes more than doubled Visa’s $3.9 trillion in transactions over the same period. That stablecoins have entered the same conversation as such well-known and entrenched payment services as Visa, PayPal, ACH, and Fedwire is a remarkable testament to their utility.

Stablecoins aren’t just a fad either. If you compare stablecoin activity against crypto’s volatile market cycles, the two appear to be uncorrelated. Indeed, the number of monthly stablecoin-sending addresses has continued to increase even as spot crypto trading volumes have declined. In other words, people appear to be using stablecoins for more than just trading.

All that activity is reflected in usage stats. Stablecoins represent nearly a third of daily crypto usage at 32%, second only to decentralized finance, or DeFi, at 34%, as measured by share of daily active addresses. The rest of crypto’s usage is spread across infrastructure (bridges, oracles, maximum extractable value, account abstraction, etc.), token transfers, and a smattering of other areas, including emerging applications such as gaming, NFTs, and social networking.

4. Infrastructure improvements have increased capacity and drastically reduced transactions costs

One reason why stablecoins have gotten so popular and easy to use is due to underlying infrastructure advances. For one thing, blockchain capacity is growing. Blockchains are processing more than 50 times as many transactions per second as they were just four years ago thanks to the rise of Ethereum L2 networks and other high-throughput blockchains.

More staggeringly, Ethereum’s biggest upgrade of the year — “Dencun,” also called “protodanksharding” or EIP-4844 — significantly reduced fees for L2 networks after its implementation in March 2024. Since then, the fees paid by L2s on Ethereum have plummeted even as ETH-denominated value on L2s has continued to rise. In other words, blockchain networks are getting more popular — and more efficient — all at once.

It’s a similar story for zero knowledge (ZK) proofs, another technology that has important implications for blockchain scaling, privacy, and interoperability. Even as the amount spent monthly to verify ZK proofs on Ethereum has declined, ETH-denominated value on ZK rollups has increased. In other words, ZK proofs are getting cheaper, too, even as they’re getting more popular. (We use zero knowledge here as a catchall for cryptography that can succinctly prove that computations offloaded to rollup networks were performed correctly.)

ZK technology is extremely promising as it opens new pathways to cheap, verifiable blockchain compute for developers. Still, ZK-based virtual machines (zkVMs) have a long way to go before they can catch up to the performance of traditional computers — a humbling observation to note.

With all of these infrastructure improvements, it’s easy to see why blockchain infrastructure remains one of the most popular categories for builders and why L2s have become one of the top 5 hottest builder subcategories that we’re tracking.

5. DeFi remains popular — and it’s growing

The only category attracting builders more than blockchain infrastructure is decentralized finance, or DeFi (which also accounts for the most crypto usage at 34% of daily active addresses). Since DeFi’s arrival in the summer of 2020, decentralized exchanges, or DEXs, have grown to account for 10% of spot crypto trading activity — all of which occurred on centralized exchanges just four years ago.

More than $169 billion is now locked inside thousands of DeFi protocols. Some of the top DeFi subcategories involve staking and lending.

It’s been just over two years since Ethereum completed its transition to proof-of-stake, drastically reducing the network’s energy consumption and environmental footprint. Since then, the share of Ether being staked has risen to 29%, up from 11% two years prior, greatly enhancing the security of the network.

While still in its early stages, DeFi presents a hopeful alternative to the trend of centralization and power consolidation afflicting the U.S. financial system, where the number of banks has dropped by two-thirds since 1990 and where an increasingly small share of big banks dominate assets.

6. Crypto could solve some of AI’s most pressing challenges

AI is one of the hottest trends this year, not only in tech broadly, but also in crypto specifically.

AI is one of the most talked about trends among crypto influencers on social media. Perhaps more surprisingly, there’s major overlap between visitors to chatgpt.com and visitors to top crypto websites, indicating strong ties between crypto and AI users.

Crypto builders also have strong ties to AI. About a third of crypto projects — 34% — say they’re using AI, regardless of the category in which they’re building, up from 27% a year ago, per our Builder Energy dashboard. The most popular category for applied AI tech is blockchain infrastructure projects.

Given that the cost of training frontier AI models has increased at four-times per year over the past 10 years, we believe AI could trend toward increasing centralization of power on the internet. Left unchecked, only the biggest tech companies may have the resources to train the latest AI models.

AI’s centralization-related challenges are almost exactly the inverse of the opportunities for decentralization presented by blockchain networks. Crypto projects are already attempting to tackle some of these challenges today, including Gensyn (by democratizing access to AI compute), Story (by tracking IP to help compensate creators), Near (by running AI on open source, user-owned protocols), and Starling Labs (by helping to verify the authenticity and provenance of digital media), to name a few.

The crossovers between crypto x AI may strengthen in the years ahead.

7. More scalable infrastructure has unlocked new onchain applications

As transaction costs come down and blockchain capacity goes up, many other potential crypto consumer apps become possible.

Take NFTs, for instance. When crypto transactions were much more expensive a few years ago, people were trading NFTs on secondary markets for large sums totaling billions of dollars. That activity has since subsided, and in its place has risen a new consumer behavior: minting low-cost NFT collections on social apps like Zora and Rodeo. This represents a significant shift for the NFT market, one that was largely inconceivable before a drastic reduction in transaction fees.

Social networks are another example. Even though they account for only a small portion of daily onchain activity today, they’re attracting strong builder activity: 10.3% of crypto projects are social-related in 2024, per our Builder Energy dashboard. In fact, social network-related projects, such as those related to Farcaster, are one of the top 5 hottest builder subcategories this year.

While builders and consumers explore more social experiences, onchain games are pushing blockchain scaling to its limits. Rollups such as those used by Proof Of Play’s high-seas adventure role playing game Pirate Nation are consistently using the most gas per second of any Ethereum rollups.

As the November election approaches, crypto-based prediction markets are having a moment — despite their illegality in the U.S. — and momentum is building for prediction markets in general. So much so that Kalshi, a non-crypto-based prediction market that’s registered with the U.S. Commodity Futures Trading Commission, gained a win in a lower court last month as it pursues a federal lawsuit around listing elections contracts. (As of now, registered exchanges are allowed to offer elections-based traditional futures contracts.)

Glimmers of novel consumer behaviors are beginning to be discernible. All these new and emerging experiences were intractable when blockchain infrastructure was clunkier and transaction costs were higher. As the blockchains improve along classic tech price-performance curves, expect more of these applications to thrive.

Where does that leave us? The state of crypto has made significant strides across policy, technology, consumer adoption, and more over the past year. There were policy milestones, including the sudden approval and listing of Bitcoin and Ethereum ETPs, as well as the passage of significant bipartisan crypto legislation. There were major infrastructure improvements, from scaling upgrades to the rise of Ethereum L2s and other high-throughput blockchains. And there were new apps being built and used, from the growth of mainstays like stablecoins to explorations of more nascent categories like AI, social networking, and games.

Whether we have entered the fifth wave of the price-innovation cycle, our framework for understanding the ups and downs of crypto’s many market cycles, remains to be seen. Either way, crypto, as an industry, has made inarguable progress over the past year. And as ChatGPT has proven, it can take just one breakout product to shift an entire industry.

Sign up for a16z crypto’s biweekly newsletter here. And for more regular data updates, keep an eye on our State of Crypto Index, an interactive tool, updated monthly, that tracks the health of the crypto industry from a technological, rather than financial, perspective through measures of industry rates of innovation and adoption. Also be sure to explore our new Builder Energy dashboard, which tracks where we’re seeing the most “builder energy” across crypto.

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