HOMINERS
Digital assets rebounded sharply in 2023 as market conditions improved across the board; institutional interest accelerated with the impending introduction of a Bitcoin spot ETF. As we look ahead to 2024, we will see a number of important developmental advances. This installment of the State of the Net report will show you how we see some of the most noteworthy trends in the digital asset industry in 2024.
1. The arrival of spot ETFs
After a decade-long effort, spot bitcoin ETFs have taken the final step into the U.S. financial market, with well-known issuers such as BlackRock and Fidelity Investments expected to launch their products in 2024. The long-awaited approval of spot ETFs could have a big impact on the digital asset market in the coming years.ASIC miner
As the industry expects the U.S. Securities and Exchange Commission (SEC) to approve the ARK & 21Shares Bitcoin ETF, with an earliest deadline of Jan. 10, the issuer’s latest revised SEC filing seems to indicate that the SEC will be on the verge of giving the green light as we write this article. However, details about the first round of approvals and the exact release date remain unclear. It is widely believed that the SEC will approve multiple issuers at the same time in order to avoid accusations of favoritism toward anyone, as it did when it launched the Ether Futures ETF last fall. Currently, 11 major spot ETF applicants are expected to be approved in the coming week. And there are many different aspects to the launch of a spot ETF, such as the estimated size of ETF inflows, the dynamics of competition among ETF issuers, and Bitcoin’s mature market structure. Some issuers have already embarked on marketing offensives, while others are looking to gain a competitive edge in terms of minimum fees. Exactly how this heated contest will play out remains uncertain.
We believe it is also important to consider the dynamics of supply on the bitcoin chain, which could evolve in the medium term, and Coin Metrics’ data can be most helpful in this regard. Bitcoin supply is easy to audit and track on the chain, helping to make it a unique financial asset. Anyone running a bitcoin node can track the whereabouts of all bitcoins and follow transfer dynamics. This allows us to infer holder behavior, supply distribution, active addresses, and many other on-chain metrics that would be impossible to calculate for assets that are much more opaque. An important trend that parallels ETFs is the rising percentage of long-term Bitcoin holders. As the chart below shows, over 6 million BTC (30% of today’s total supply) have not moved in five years. We believe that these dormant BTC are not counted as part of Bitcoin’s “free-floating” supply.Antminer
Furthermore, in 2023, only 30% of BTC will be active on-chain, with the majority of BTC remaining untouched. However, it is important not to oversimplify the determinants of the BTC price, as it is a dynamic variable subject to many unknowns, but this growing illiquidity coupled with a large inflow into ETFs could squeeze the market, thus encouraging more supply into the liquidity market.
There are many other factors to watch. Countervailing forces will shake up the landscape of onshore cryptocurrency exchanges, and a given ETF may be able to lure buyers away from spot exchanges through lower fees and less friction. But in the meantime, exchanges such as Coinbase will benefit as ETF custodians. More broadly, the ETF is expected to enhance and confirm the legitimacy of digital assets, potentially benefiting U.S. exchanges as the industry continues to grow and mature. Coinbase’s average daily spot trading volume has jumped to more than $2 billion on the back of improved market sentiment around the ETF. Meanwhile, the significant increase in open interest in CME bitcoin futures reflects the changing structure of the market, which is centered on the U.S. financial markets.
This transformative development is coming, and this year could mark a shift in digital assets from a niche to an emerging asset class. With BlackRock and others also applying for ethereum spot ETFs, the expected approval of ETH products will also be a key focus for industry participants in 2024. But Bitcoin ETFs will be the first to hit the market within a year, while in the meantime, another major supply event will become the dominant narrative for Bitcoin in 2024: the next Bitcoin halving event.
2. The Fourth Bitcoin Halving
One of Bitcoin’s core value propositions lies in the procedural nature of its monetary policy. Every 210,000 Bitcoin blocks, or roughly every four years, the number of newly issued Bitcoins is halved, a situation known as “halving”. The 840,000 bitcoin blocks expected to be mined this April will reduce the reward for newly mined blocks from 6.25 bitcoins to 3.125 bitcoins, which would mark the fourth halving event in bitcoin’s history and a key milestone for the protocol as its mintage undergoes an exponential decay on its way to a final supply of 21 million bitcoins.
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While the halving event is a predictable factor for Bitcoin, it still has important implications. First and foremost is the impact on Bitcoin miners, who are incentivized to invest money and effort in securing the network in exchange for Bitcoin. Miners’ income comes from new BTC issuance, and a halving event reduces BTC issuance and the fees paid by traders (a function of demand for Bitcoin block space). In dollar terms, the absentee miners’ total revenue would almost certainly be reduced and their economics would suffer, while the margins of operators with high energy costs and/or inefficient hardware would be squeezed.
Simply put, if the halving occurred in April 2023, miners would have earned $6.8 billion in total revenue, up from $10.3 billion last year. However, the rise in BTC prices towards the end of the year and the recovery of the fee-based market helped miners in 2023, suggesting that the halving doesn’t necessarily mean a halving of annual USD revenues. Nonetheless, with hash rates reaching record highs above 500 EH/s, miners are racing to achieve economies of scale and modernize their ASIC gear to continue to be successful after the halving event.
As with past halving events, there is likely to be a renewed series of debates around the impact of halving on Bitcoin’s supply/demand dynamics and whether or not this reduction in mintage has been “reflected in the price”. Some argue that the halving of Bitcoin is a procedure inherent in the rules of the protocol and an event that was well understood in advance – especially by the growing body of Bitcoin research professionals. On the other hand, some explain the halving of bitcoin from a traffic perspective, pointing out that the halving of bitcoin will result in a decline in sales for miners (the natural sellers of bitcoin). They also argue that halving strengthens Bitcoin’s monetary properties and elevates Bitcoin as a reliable store of value, attracting new interest through the attention that comes with each halving event.
The market will likely feel the effects of sentiment related to halving throughout 2024. Much of the attention will fall on the profitability of absenteeism and spark a new round of discussion about the need for Bitcoin to eventually move to a fee-based absenteeism revenue model. But the halving also corresponds with a pivotal moment in Bitcoin’s history, when the spot ETF went public in the United States. While future results do not necessarily reflect the past, Bitcoin’s history highly echoes its four-year halving epoch. This new epoch is equally significant.
3. EIP-4844 and the Battle to Scale Smart Contract Platforms
Layer-2 (L2) solutions are indispensable in solving ethereum’s scalability problems, such as high gas fees and limited transaction throughput, which affect the user experience, especially during times of high block space demand.L2 solutions, such as Optimistic and ZK-rollup, bundle and package multiple transactions into a L2 solutions, such as Optimistic and ZK-rollup, bundle multiple transactions into a “rollup” and process them off-chain, while utilizing the Layer-1 (L1) network as the “data availability layer” for settlement and security. This approach has helped reduce the average transaction fee on the main network from about $8 to about $0.01 on an L2 platform like Arbitrum. However, with the rapid popularity of rollups, the costs associated with storing data on-chain have become the center of discussion and a key step in the development of Ether (see section EIP-4844 below).
Bridges have played an important role in this shift, facilitating the flow of assets between the main EtherNet and the various L2s. As shown in the figure below, the canonical Optimistic and ZK Rollup Bridges already have a significant number of ETH and ERC-20 tokens (such as USDC and USDT) locked into Bridge contracts, reflecting the growing demand for transactions on the L2 network. While optimistic rollups like Arbitrum and Optimism have the largest share of bridge assets at 1.3 million ETH and 33,000 ETH, respectively, with the introduction of Coinbase’s Base, ZK-rollup (Zero-Knowledge), and application-specific rollups optimized for specific use cases, the L2 space will continue to grow.
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A key step in this transformation is the “Dencun” hard fork, which could be activated in the second quarter of 2024. Through the Ethernet Improvement Proposal (EIP) 4844 (“proto-danksharding”), this upgrade aims to introduce the concept of “blob-carrying transactions”. This upgrade aims to introduce the concept of “blob-carrying transactions”, a new type of transaction that enables rollup to store large amounts of data in a shorter period of time at a lower cost on Ether L1 (Data Availability). This is expected to reduce the operational overhead of rollup while further reducing the transaction costs of L2, ultimately improving the economic viability of Ethernet usage and unlocking new use cases.
Despite the progress made on Ether’s rollup-centric roadmap and the anticipated Dencun hard fork, questions about long-term efficiency and user experience within the Ether ecosystem remain unresolved. The complexity of asset bridging and the need for standardization, coupled with the rapid growth of rollups with decentralized users and liquidity, highlights the importance of interoperability between ecosystems. There is also the potential challenge of redistributing certain activities from the first tier, as Ethernet uses a modular approach to mitigate its limitations, a shift that could impact both Ethernet mainnet trajectories and ETH utility. While some critical voices have a point, the Ether ecosystem will remain a leader in many important ways in 2024, including stablecoin liquidity, DeFi activity, total user payments, and other metrics.
However, parallel to Ether’s L2 roadmap, there has been a resurgence of Alt L1 blockchains such as Solana and Avalanche – realizing returns of 975% and 300%, respectively, for the year, once again focusing attention on their architectural tradeoffs. The discussion focused on comparing monolithic approaches, such as Solana, which unify execution, data availability, and consensus in a single layer, to Ethernet’s modular approach, which splits some of these functions. This comparison is at the heart of discussions related to smart contract platforms and will continue to influence discussions about the relative dominance of each, ultimately permeating discussions about the trade-offs between the pros and cons of scalability, user experience, security, and application ecosystems.
It is clear that there is much competing work underway to scale smart contract platforms; however, it is not yet clear whether there will be a single dominant player or multiple solutions coexisting. 2024 is also unlikely to provide a definitive answer. However, there is clearly a huge demand for block space, and as we will see in the next section, there will be a large number of emerging applications looking for reliable and lower-cost block space in 2024.
4. stablecoins, RWAs (real-world assets) and emerging applications
(1) Stablecoin and CBDC
Stablecoins have been a central topic of conversation over the past year, and we believe 2024 will be no different. 2023 saw the $120+ billion stablecoin market undergo a major reshuffle due to events such as the Silicon Valley bank failures, and the ensuing impact on the trajectory of the two largest fiat-backed stablecoins, Tether and onshore-issued USDC, whose supply is trending in the opposite direction. However, despite losing some market share in 2023, USDC issuer Circle is considering a U.S. IPO in 2024, and its business has been greatly boosted by rising interest rates in 2023, while it is planning overseas expansion in places like Japan and Brazil. Meanwhile, the stablecoin industry in general will continue to expand in 2024, solidifying its value proposition and strong product market fit within the digital asset ecosystem.
One good proof about this expansion is the adoption of new stablecoins such as PayPal’s PYUSD, the euro-backed EURCV issued by Société Générale, and protocol-native stablecoins like Aave GHO. This trend is reflected not only in the growing variety of stablecoins – from fiat-backed to cryptocurrency-backed – but also in the diversity of issuers, including payments and financial institutions. In addition, interest-bearing stablecoins backed by off-chain assets such as tokenized U.S. Treasuries and on-chain collateral such as ETH and liquidity pledge tokens (LSTs) are gaining traction. While still in their infancy and with their own varying degrees of risk, interest-bearing stablecoins are expected to add to the growing stablecoin ecosystem.
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Parallel to the rapid rise of stablecoins on public blockchains is the continued research and development of central bank digital currencies (CBDC). With some countries such as Brazil looking to launch CBDCs in the new year, 2024 may offer a new perspective on the contrast between permissionless and centralized digital financial infrastructure.
(2) RWA Real World Assets
As we predicted in 2023, the real-world assets (RWA) ecosystem has seen significant growth over the past year. This has been driven by the two main asset classes in the space, tokenization of public securities and private credit, both themes dedicated to bridging the gap between traditional finance and the digital asset economy. While the tokenization of public securities brings a huge market for traditional financial assets such as U.S. Treasuries to the public blockchain, enabling full-domain access, private credit projects satisfy the new
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