Data & Insights Recap - October 16, 2023

Way off Base

Source: Block Scanners

• September proved to be a strong month for Coinbase’s fresh optimistic rollup protocol, Base. 
  • With its strong brand name connection and being built on the familiar OP stack, it's not surprising it was able to garner a lot of attention.
  • It also hosts friend.tech, the catalyst of the recent social finance, or SoFi, breakout, which has garnered its developers around $20 million since its launch in August. The platform allows users to buy keys of other people (formerly known as shares), which grants them access to chat with the users they hold keys of.
• The 7-day moving average of transactions on Base ran up to almost 1.5 million in mid-September, putting the daily activity on the network way ahead of its two main competitors in the optimistic rollup space, Arbitrum and Optimism, which at the time were both putting up below 500,000 transactions.
  • But with explosive growth often comes a bit of a correction, which seems to be the case for Base.
  • The moving average sank down to just 478,8500 on October 15th, which is still very impressive, but it does mark an over 65% decline from its peak less than a month ago. 
  • The decline puts Base right in line with Arbitrum in terms of transactions (although slightly below) and at about double the amount of transactions of Optimism. 
  • Despite its continued activity dominance, the amount of funds locked in escrow to be used on Base pales behind other optimistic rollups at less than $500 million compared to the over $1 billion of Optimism and over $4 billion of Arbitrum.
• There is little doubt that Base will continue to be a major player in the optimistic rollup space, but its magnitude of preeminence is still yet to be determined. 

Burning down

Source: The Block

• Since a huge spike in May, around the time memecoin mania caused an uptick in activity on Ethereum, the amount of ETH being burned each day has been dropping.
  • On October 14th, only 587.28 ETH was burned, the lowest amount since October 2nd, 2022, just over a year ago. 
  • Back in May, at the height of the frenzy, over 14,000 ETH was being burned each day.
  • Net ETH emissions have also been on the rise as a result. ETH’s supply grew by 1,430 on October 14th, the highest amount since The Merge in September 2022. Emissions have been net positive since September 22nd, marking over 20 days of supply growth for ether. 
• As a reminder, just over a year ago, Ethereum switched from Proof-of-Work to Proof-of-Stake, which in turn slashed ether issuance since it was less costly to run a validator with the new consensus mechanism as opposed to a miner. Previously, Ethereum was like Bitcoin, offering a hefty block reward for the miner that successfully solved the puzzle to find the next block; now, validators just need to attest to the state of the chain.
  • Also, back in August 2021, Ethereum implemented EIP-1559, which changed the fee market on the network and introduced a burn mechanism in transactions. 
• Once The Merge happened, there was a strong narrative around ETH becoming an “ultrasound” asset, with the amount burned exceeding the daily issuance and causing the supply to drop, making it a deflationary asset. 
  • And that did sort of happen. Especially starting in 2023, we started to see burns more commonly exceed the validator rewards, moving ETH’s supply from around 120.526 million at the start of the year to 120.214 million in August. 
  • The most net deflationary day for ETH post-Merge was May 5th, with 13,700 ETH being taken out of supply while block demand was heightened during the memecoin hype.
  • But as of late, we have not been seeing that much ETH being burned as activity on the network slows down in the bear market (both NFT and DEX volumes are in a lull and network transaction fees are the lowest they’ve been in a year), and users move to layer 2s for cheaper and quicker transactions. 
  • It’s bringing into question the ultrasound narrative, as ETH’s supply has crawled back up to 120.259 million through autumn.

Calm before the storm?

Source: The Block

• We have had two calls for increased bitcoin volatility somewhat recently.
  • The first was from Deribit CCO, Luuk Strijers, who signaled that when a large amount of open interest comes to expire, like the almost $3 billion worth at the end of September, it can trigger more volatility and higher trading volumes. 
  • The second was more recent and centered around the recent uptick in geopolitical tensions forcing the market into an even more risk-off position than it was before, and also a fresh reading of the Consumer Price Index in the U.S. giving an indication of how well inflation has been tamed.
• But bitcoin’s 30-day annualized volatility is quite low and has not risen much since the end of last month.
  • As a recap of recent volatility movements, bitcoin’s volatility dropped to record lows over the summer, reaching 15.5%, as the asset held steady around $30,000 after gains following a slew of spot ETF filings.
  • Then, a massive selloff in many digital assets in the middle of August pushed the 30-day volatility back up to 44%. Since then, there have not been any really large price swings.
  • Bitcoin’s volatility was at just 23.4% at the end of September and was just above 24% as of yesterday. That is still historically pretty low, considering the volatility stayed above 40% from October 2020 to October 2022.
  • There is a chance, of course, more volatility is on the way. There are a lot of factors that are making investors scale back on risk assets right now that can continue to apply pressure in the coming months. But analysts are pointing to bitcoin’s steady position as a sign that its value as a hedge against global unrest is becoming more apparent. 
  • It is possible that volatility will pick up after today after some apparent fake news about the approval of BlackRock’s spot bitcoin ETF spread like wildfire on X, which shot bitcoin up from under $28,000 to almost $30,000 in a matter of minutes. However, our 30-day calculation looks at price changes from midnight to midnight, and the gains have mostly subsided as it has become apparent that the rumors were not true, so it might not play too much into day-to-day changes. 

Unappealing

Source: Grayscale

• Grayscale’s GBTC has been riding high on optimism that its trust will be converted into a spot bitcoin ETF.
  • We have talked about this many times before, but even ahead of the legal victory that Grayscale took in court, in which judges called the Securities and Exchange Commission's decision to block the conversion “arbitrary and capricious,” GBTC was already rallying on a handful of spot bitcoin ETF applications at the start of summer, from the likes of Blackrock, Fidelity, Valkyrie, VanEck, and more, that made it seem like there was hope one would get approved. 
  • This helped turn around a very large discount that had emerged between the price of a GBTC share and the net asset value of the bitcoin in the trust a share represented. The reason for such a steep discount (almost 50% at the start of the year) was because, in GBTC’s current form, there is no redemption mechanism for the shares. This prevents the arbitrage that would keep the shares trading in line with their NAV from occurring, and for a while, it looked like there might be no conversion on the way, leaving the shares perpetually unredeemable on some pile of bitcoin. 
• With not much news and a slew of delays on spot bitcoin ETF decisions pushed the gap a bit wider than the 17% it reached in September. The disparity reached 23% by the end of the month, which is still low compared to most of the past year. 
  • But the difference has begun closing in again, becoming even narrower and reaching under 16% last week, the closest it's been to the NAV since December 2021. 
  • Last week, we did hit the deadline for the SEC to appeal the Grayscale decision. While SEC Chair Gary Gensler was not one to comment on whether or not his agency was going to appeal, the fact that the clock was ticking down to the midnight October 13th deadline left many thinking he wasn’t going to (spoiler alert: he didn’t). With no appeal, the path forward is a bit more clearcut and possibly can lead to a quicker approval process.
  • The turnaround also seemed to begin when Grayscale filed to convert its Ethereum Trust into a spot ether ETF, which coincided with the launch of a handful of ether futures ETFs, which could have served to bolster crypto ETF sentiment. 

Trading ETH...or DONUT

Source: SubredditStats

• The r/EthTrader subreddit has seen an uptick in comments lately, putting it ahead of r/Bitcoin and r/Ethereum in terms of activity. 
  • The subreddit is described as being for the “Ethereum investment community” and invites discussion of “Ethereum news, memes, investing, trading, miscellaneous market-related subjects and other relevant technology.”
  • It gained over 5,410 new comments the week of October 8th, a stark turnaround from the 267 new comments the week of July 16th. It marked the most new weekly comments seen since June 2022. 
  • Every week since August 20 has garnered at least 3,750 new comments on the forum. 
• In current market conditions, it seems odd that more people have been piling in to engage on r/EthTrader, especially considering how comments were declining from spring into summer of this year.
  • But r/EthTrader is where you can earn DONUTs (Decentralized Ownership Network Utility Tokens). These ERC-20 tokens are the first implementation of Reddit Community Points, and users can earn them by contributing to the forum. 
  • These tokens are not worth much, sitting below 1 cent from May 2021 to August of this year. But there was a massive rally in the DONUT market recently. In late August, the token exceeded 3 cents, the most valuable it’s been in over two years. While DONUT is currently priced around $0.014, it still marks a significant upgrade from where it was earlier this year. 
  • It’s not surprising that with an uptick in the value of DONUT, we’d see a corresponding increase in activity on r/EthTrader. It is now more lucrative to post since earning DONUTs is now worth more. 
  • As for why the huge price swing happened, there was hope that DONUT would be listed on Kraken. Kraken notably lists both BRICK (of r/FortNiteBR) and MOON (of r/CryptoCurrency), so the thought of the exchange listing a Reddit token was not out of the question. In August, after a governance and signal poll, the r/EthTrader community sent an email to Kraken vying to get DONUT listed, coinciding with the massive price uptick. 
  • While DONUT is still yet to be listed, the fact that it has still held onto some of its gains after the initial spike and engagement on r/EthTrader remains high, indicating optimism for the listing is still there.