VanEck Crypto Monthly Recap for April 2024

Please note that VanEck may have a position(s) in the digital asset(s) described below.

In April, March’s euphoria faded into a downward price grind for digital assets and produced Bitcoin’s first negative return in eight months (-14%) amid an over-supply of new alt-token supply, falling on-chain activity and a regulatory assault on self-custody by U.S. authorities. Smart contract platforms, excluding Bitcoin, fell 28% on the month while trading volumes and on-chain revenues also declined sharply. Altcoins bore the brunt of the mushy price action as the average return outside of ETH/BTC was -37% on the month. Many names like Starknet and Aptos fell by almost 50%. The story of the month can best be described as the cooling of speculative froth amid more troubling macro signals, a stagnation of user activity, and a worsening of the regulatory environment in the U.S.

• Smart Contract Platform Update
• Bitcoin and Bitcoin Layer-2s Update
• Eigenlayer Deep Dive
• Altcoins Update
• Notable Performer: Gnosis
• Notable Laggard: Aptos

On the last point, note the following in April:

• The U.S. Securities and Exchange Commission (SEC) issued a Wells Notice to the Uniswap foundation, signaling the agency’s intent to bring a lawsuit against the DeFi giant, which Uniswap founder Hayden Adams promised to fight.
• The IRS ignored all industry comments and released a draft crypto reporting form that included reporting requirements for un-hosted wallets, which is unfeasible in many circumstances.
• The SEC amended its complaint against Justin Sun with arguments that he “traveled extensively” in the US between 2017 and 2019 while marketing and promoting certain tokens, signaling a possible escalation in agency efforts to hold him accountable.
• Consensys flipped the script on the SEC, suing the regulator in the favorable 5th circuit instead of allowing the SEC to bring a lawsuit first. Similar to the Coinbase lawsuit, this suit features William Savitt from Wachtell as lead counsel and appears to be part of a larger play to create a potential circuit split if the rulings differ from the Coinbase case in S.D.N.Y. (2nd Cir.), Binance case in D.D.C. (Fed. Cir.), or Kraken case in N.D.Cal. (9th Cir.).
• Media reports revealed that Gary Gensler now considers Ethereum a security despite calling the 2nd largest crypto asset a commodity while he taught at MIT and declining to answer direct questions from lawmakers on the issue.
• Samourai Wallet and associated Bitcoin mixing protocol developers were arrested and charged with conspiracy to commit money laundering and conspiracy to operate an unlicensed money-transmitting business.
• The FBI issued a warning that users should avoid self-custody wallets that do not collect KYC information as they are likely operating illegal money-transmitting services.
• The DOJ updated its response in the Tornado Cash case, suggesting that even decentralized, non-custodial services need to implement KYC/AML and register with the Financial Crimes Enforcement Network (FinCEN). Again, this is not feasible for most open-source projects.

All of the above suggests that the Biden administration is hurrying to make DeFi and self-custody functionally illegal in the United States before voters can express political intentions at the ballot box in November. We have already noticed a heightened correlation between bitcoin’s price action and Trump’s victory odds over the last 6 months. We think such a relationship may rise further over the next six months before the Supreme Court or legislators can definitively address these issues.

Source: Bloomberg as of 4/30/2024. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Smart Contract Platform Fully Diluted Valuation (FDV) Sags Alongside On-Chain Revenues, ex BTC

Source: Artemis XYZ as of 4/29/2024.  Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The crypto market buckled under the weight of April airdrops, with the majority of them quickly selling off post-launch. Notable airdrop duds include KMNO (-33%), REZ (-33%), W (-56%), PRCL (-33.4%), and SAGA (-54%). We count $9B of new circulating token supply and more than $70B to be unlocked/vested over the next 2-5 years, a considerable headwind to many token prices. Also, as we detail below, the granddaddy of all anticipated airdrops disappointed many stakeholders. That project is Eigenlayer, whose EIGEN token was finally announced, and though the token is still not tradeable, pre-launch markets point to an FDV of roughly $10B, which is as low as 1/3rd of what the most optimistic analysts were predicting. The most promising developing narrative is the Bitcoin Renaissance, but it is very early days here.

The Bitcoin Renaissance and Runes

Though BTC’s performance was anemic (-14%), network usage reached new record highs as transactions and on-chain revenue hit all-time record highs of ~927k and $81.6M on April 20th, the day after the halving. This activity was spawned by the bitcoin halving, but its genesis can be traced to the creation of new speculative assets on Bitcoin using “hacks” of Bitcoin’s core software. The latest iteration of these assets was Bitcoin Runes which is a standard for creating fungible tokens that is designed to succeed the BRC-20 standard. Runes are more efficient than BRC-20s because they employ a UTXO model that eliminates the Bitcoin network overhead inherent in BRC-20 tokens. Runes are called such because they are created and transferred using a Bitcoin software component in Bitcoin UTXOs called “Runestones.” Runestones allow tokens to be minted on Bitcoin with a name as well as other rules such as minting ability and total supply of tokens.

BRC-20s and Runes represent attempts by Bitcoin core developers to solve the long-term network security issues facing Bitcoin. The Bitcoin network has a “security budget” that is derived from the economic value miners receive for securing the network. This economic value that miners earn is the combination of network transaction fees as well as inflationary rewards minted for producing Bitcoin blocks. Unless the price of Bitcoin continues its parabolic trajectory, the security budget of miners will decrease alongside the BTC emissions. The path to stemming a declining security budget is to increase transaction revenues to the BTC network. Though some BTC maximalists believe BTC should only be used to store and transact BTC, there is a significant minority amongst the core developers who want to change Bitcoin to spur transaction growth. A shift in the Bitcoin community is occurring, and it's uncertain if we will see another return to the community feuds of the past.

Bitcoin Layer-2 Blockchains

Beyond trying to create a larger security budget through transaction revenue, the other core reason for BTC Layer-2 Blockchains (L2s) to exist is to give BTC holders the ability to use their stagnant BTC to earn yield. After the disastrous BTC lending market collapse and the billions in BTC lost in 2022, many entities with large amounts of BTC have been looking to utilize their idle capital. Though BTC Eden tracks only 18 projects, we track over 50+ projects. The definition of Bitcoin L2s is a bit more nuanced and flexible than L2s for Ethereum. While there is great nuance even for Ethereum L2s, they typically rely upon Ethereum for settling their state differences (the changes in everyone’s token balances and smart contract additions/updates). Often Ethereum L2s also post the compressed transaction data to Ethereum to prove state differences.

Bitcoin L2s, however, typically begin with a bridge that connects each chain to Bitcoin. This bridge acts as a value transport layer that locks BTC and mints a representation of that BTC on the L2. Some projects are building their own bridges from scratch, while others are relying upon existing, proven bridges like tBTC and Interlay. There are many competing designs for Bitcoin L2s. In its current form, Bitcoin is designed as neither a settlement layer nor a data availability layer – both constructs are necessary for there to be a true L2 roll-up to Bitcoin. The result is a myriad of approaches, including “merged mining,” “sidechains,” the evolution towards a “roll-up,” and even more exotic approaches to security. In some cases, Bitcoin L2s adopt more than one of these approaches simultaneously in order to secure their blockchains.

Merged mining involves miner pools opting into “mining” a blockchain alongside Bitcoin. This typically involves submitting proof of work for two or more blockchains. A current example of this is Rootstock. Another type of Bitcoin L2 is the “side-chain,” which is most often secured by a separate group of non-Bitcoin miners, a Proof of Stake validator set, or a federation of Bitcoin/native token holders. The ultimate Bitcoin L2, however, is one that is a roll-up. A roll-up is a blockchain that settles its state transitions and/or proofs of that transition to a host blockchain alongside the data to prove that the state transition is valid.

Additionally, the current crop of bridges relies upon trusting other parties through a multi-signature approach. This means that a group of people hold key shards that, when combined with some majority of signers, allow for the unlock of “bridged” BTC. Though it is early, most of the Bitcoin L2s have additional/flimsier trust assumptions than most Ethereum L2s.

However, this reality will change once the BitVM, an open-source Bitcoin virtual machine, is launched. Though it is roughly 12-18 months from becoming implemented on Bitcoin, BitVM promises to enable Turing-complete logic to allow for Bitcoin smart contracts. Though the smart contracts themselves would not be on Bitcoin but instead on other blockchains, BitVM will allow Bitcoin to act as a settlement and verification layer for Bitcoin roll-ups and trust-minimized bridging. The follow on to BitVM, BitVM v2, will allow for data to be stored on Bitcoin that will enable BTC L2s to become complete roll-ups.

Look for more color on BTC L2s in our upcoming deep dive on the BTC L2 landscape.

Ethereum Re-Staking Game and Eigenlayer

Eigenlayer TVL (USD) Continues to Levitate

Source: Defillama as of 4/30/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

In our past monthly reviews, we discussed the re-staking game that was being created to facilitate Eigenlayer, which promised to be the next “new thing” for Ethereum. Eigenlayer was premised on the notion that lots of service businesses could exist off of the Ethereum blockchain and still rely upon the economic value of ETH to secure their services. Many people outside of crypto are somewhat baffled by the necessity to secure a business using ETH. This is because most off-chain businesses rely upon legal recourse to business agreement violations as well as reputational damage from poor business dealings.

In the permissionless blockchain world, it is very difficult to rely upon the rule of law or reputation because other parties are often anonymous or may reside in countries with flimsy legal systems. In blockchain, cryptography, and consensus, as well as computer code, act as guarantees to ensure businesses are transacted according to immutable rules. However, many businesses necessitate additional trust beyond what is available on Ethereum or rely upon processes that would be too expensive to conduct on the blockchain.

The result is that a number of interesting businesses that would be palatable to blockchain users do not exist. Eigenlayer was developed to allow ETH holders to lend out their ETH as economic bonds in exchange for yield, allowing these complex but useful businesses to gain users due to an economic bond. This economic bond would also act as a form of recompense if a business agreement was not executed properly.

Eigenlayer emerged as the darling of the Ethereum ecosystem because it promised not only a new way to gain yield on Ethereum, but also allow new businesses and services to exist for Ethereum users. Cynically, it also meant that investors would have new projects to invest in, dreams to sell, and tokens to dump. A large ecosystem cropped up around “re-staking” ETH, as a number of on-chain protocols, to give users tokens in exchange for enabling them to spin up Eigenlayer-centric businesses.

Since Eigenlayer is premised on allowing users to stake ETH to back businesses, it opened up its vaults as a marketing ploy to allow users to deposit funds before its functionality officially launched. To spur users to supply their ETH, they promised that users would earn points which would correspond to an allocation of $EIGEN tokens when Eigenlayer officially launches. Additionally, the “re-staking” businesses that would operate Eigenlayer validators to verify the transactions promised to give users each an allocation of their tokens as well. Thus, two tiers of entities cropped up that each promised value to Eigenlayer users. But the sum of that value to be given to users was never confirmed.

To great fanfare, users allocated over 5M ETH worth north of $15B into Eigenlayer, giving it the second highest TVL of any crypto application in just under 10 months. Many anticipated that the “yield” from “farming” Eigenlayer points as well as the re-staked tokens would result in astronomical yields—some estimating as high as 100%+ returns from simply locking up ETH.

However, cracks in this speculative furor appeared early as the liquid re-staking token for Renzo, ezETH, de-pegged from its approximate ETH value. ezETH, like other liquid staking tokens, should have a bedrock value that is close to ETH because its swappable for ETH once withdrawals are enabled. But, as holders of ezETH cannot withdraw ETH from Renzo’s staking contract yet, ezETH’s price is subject to the laws of supply and demand. More risk-tolerant users seemed to forget this reality and sought to leverage their ezETH points farming by borrowing heavily against their ezETH position on borrow/lend platforms. After Renzo protocol released the distribution schedule of their $REZ token, users were very disappointed, and they sold their ezETH for ETH. This resulted in the price dropping below the liquidation level and caused a cascade of liquidation that caused ezETH to drop in price from ~$3150 to as low as $~800.

Eigenlayer finally launched its token on April 29, and to many, it was a massive flop. Early users received 5% of total supply rather than the 10-20% many anticipated, and the tokens are unclaimable for an unspecified period of time. Eigenlayer also blocked anyone who resides in the US and many other countries from claiming their tokens. Though the token has not officially begun trading, early estimates project that the FDV of $EIGEN tokens will be around $10B which is much less than the $30B that many were anticipating. The ETH-BTC ratio made a three-year low on April 13th.

Altcoin News

Solana, which has been plagued by unreliable transaction processing due to arbitrage bot spam activity, seems to be nearing a fix to solve the congestion issues. Anza, a Solana software-focused developer team, has deployed a testnet upgrade that will provide a stop-gap measure to the network issues until a more permanent solution is developed.

Cosmos, who has been very quiet over the past few months, announced a strong update to its business functionality called interchain security. In the latest iteration, Cosmos announced that it intends to move to partial set security which allows some validators to opt in to security provision. This is an improvement that allows validators to pick and choose which consumer chains they secure to avoid allocating resources to unsafe or low-profit chains.

Meanwhile, Avalanche demonstrated a successful test of its Hyper SDK, a software development kit that allows anyone to create blockchains. The test demonstrated a blazing-fast 100k TPS in a globally distributed node set up with 50 nodes. Avalanche also announced an integration with Stripe for Fiat-to-Crypto onboarding as well as an Amazon Ink partnership for deploying blockchains, called Subnets, on its network.

In the Ethereum L2 landscape, Arbitrum released the BOLD upgrade on its testnet, which allows anyone to submit fraud proofs to Ethereum for Arbitrum activity. This is a substantial upgrade and the first permissionless implementation of fraud proofs which helps decentralize Arbitrum. Scroll, an emerging zero-knowledge (zk) Ethereum L2 blockchain, joined the legion of projects offering points for desired user activity. In Scroll’s case, it is offering points for users who deploy capital to Scroll’s chain. Another interesting development is the announcement by Hashkey, a Hong Kong based financial services group, to create its own zk L2 blockchain.

Though price action was relatively dire, stablecoin data has proven a bit more encouraging. While stablecoin transfer volume continues to reach highs not seen since 2021, the 30-day moving average of daily active addresses reached its all-time high in April 2024 with 1.66M addresses.

Stablecoin Daily Active Addresses Reach All-Time Highs

Source: Artemis XYZ as of 4/30/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

April’s Notable Leader

GNO (-14%)

Gnosis Ranks Lowest in Daily Active Addresses Amongst Comparable Blockchains

Source: Artemis XYZ as of 4/30/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Gnosis is an Ethereum sidechain that calls itself a “sister” chain to Ethereum. As such, it is an Ethereum-compatible blockchain with its own validator set that implements much of the same software architecture of Ethereum. Gnosis acts as an Ethereum infrastructure layer as it creates popular products such as CoW Swap, Gnosis Safe, the Open Ethereum Client. Additionally, Gnosis has focused on some cutting-edge use cases in payments, called Gnosis Pay, which created the first permissionless debit card that links directly to an on-chain wallet.

An interesting dynamic of the Gnosis chain is that gas for on-chain activities is paid for using xDAI, a stablecoin, while the GNO token is used for staking Gnosis’s beacon chain and for governance of Gnosis chain as well as the Gnosis DAO’s Treasury. Gnosis also runs a venture arm to incubate projects that will ultimately benefit the Gnosis chain. Most recently, Gnosis has spun out both CoW Swap (a DEX that is designed to save users gas on swaps) and Safe Protocol (a non-custodial treasury wallet used by many crypto projects that secures >$100B in assets). In a March 2024 blog post, Gnosis announced that it intends to use the DAO treasury to fund and foster projects to drive value to tokenholders.

Gnosis’s most audacious venture is Gnosis Wallet, which is assembling a full-state, mobile-first bank that integrates Gnosis Safe, Gnosis Pay, CoW Swap, and other applications native to the Gnosis chain. The main catalyst for Gnosis in April was the passage of GIP-98, which funds the investment of GnosisDAO into a project called HOPR to create a VPN service called GnosisVPN. News of the quorum being reached to pass GIP-98 catalyzed a ~20% increase in GNO price over the next few days.

The price exuberance in April is due not only to the potential of GnosisVPN, but also to future investments using DAO funds that mirror the success of CoW Swap ($220 FDV) and SAFE ($1.75B FDV).

April’s Notable Laggard

APT (-52%)

Aptos Generates 7.5% of the Revenue Per User of Sui

Source: Artemis XYZ as of 4/30/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The price action of April was unkind to Aptos as its APT token lost (-52%) after a very auspicious March when it increased (+44%). On-chain activity reflected a plummeting lack of interest in Aptos as it lost the most on-chain revenue (-54%), month to month, of any chain outside of Ethereum. While Ethereum and its ecosystem of L2s have a logical reason for why revenues declined, the cost of blockspace decreased massively due to Blob Space, Aptos does not.

Aptos has a lot to offer from the standpoint of developer experience and blockchain technology. Aptos is a successor to the Facebook Diem project and its blockchain-optimized, rust-based, Move language. The move is billed as being substantially more developer-friendly than existing blockchain smart contract languages such as Move and Rust. In practice, developers claim that using Move has decreased development time by as much as 80%. The move is also claimed to be a safer language than other general-purpose blockchain languages. Aptos implements Move and utilizes a derivative of an optimistic transaction processing system called the AptosBFT that is claimed to reach 100k TPS. It also has a large war chest of funds as it has raised more than $350M to fund its development and its ecosystem.

Despite its high potential, Aptos has not been able to achieve meaningful adoption. Currently, Aptos is second to last in terms of fee revenue, averaging around $3.5K per day. For context, this places it behind the Cosmos Hub, which does not have any smart contract functionality and whose only source of fee revenues is users transacting between wallets or unstaking tokens. While Aptos has a respectable amount of daily active users, ~115K in April, it hosts a Lilliputian amount of DEX volumes. Aptos DEX volumes are the fourth worst among projects we track, ~ $16M per day in April, which ranks it in the same tier as Starknet, Near, Fantom, and Scroll.

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