Data & Insights Recap - January 29, 2023

The DEX drawdown

Source: The Block, CoinGecko

• For a brief second, it seemed like the hype on Solana was beginning to die down. However, recently, there seems to have been a bit of a reignition of Solana excitement, especially with the new memecoin WEN being airdropped to over one million wallets.
  • The 7-day moving average of active addresses dropped from over 981k at the end of December down to 580k this month, but it has now begun to rebound, climbing back to 767k already. A similar trend of relative highs, followed by declines into mid to late January, and then a recent turnaround has emerged in both new addresses on Solana and the amount of value being moved on the network. New addresses have actually hit a new high of 458k, surpassing the previous high set back in May 2022.
  • Solana itself fell down to around $80 after reaching over $120 in the last month of 2023 but has since pared some losses and risen back to $99. 
  • And many sectors on Solana are thriving, even if only in the hope of free tokens. For instance, staking the recently launched PYTH token has become quite popular as people speculate on airdrops that will be granted to users who help support the oracle. And the perpetual trading protocol Drift recently announced a points program that will conclude in March, ahead of its own token launch, which has brought a lot of attention to the platform. 
• One metric is still lagging behind, though: the ratio of DEX volume on Solana relative to DEX volume on Ethereum. 
  • In the peak of the Solana renaissance, weekly DEX volumes on Solana were roughly 40% of those on Ethereum, an impressive gain compared to the roughly 2% of volumes it tended to put up earlier in 2023. But since that high the week of December 18th, the ratio has now sunk down to 17.6%. 
  • The ratio is still relatively high, but unlike other metrics the ratio has been facing stronger downward pressure as it drops several percentage points each week. 
  • Part of what helped Solana's DEX ecosystem grow was the explosive popularity of a few memecoins, like dogwifhat (WIF) and bonk (BONK), which, similar to Solana, have also faced declines in valuation, which is likely contributing to depressed volumes. But the recent launch of WEN is likely to help the Solana DEX network begin to take off again. And even over the weekend we saw Solana-based Jupiter begin to show significant volumes, likely meaning the ratio might begin to turn itself around again in the coming weeks. 

What a fee-ling

Source: The Block

• Since December 6th, the 7-day moving average of the average transaction on Bitcoin has exceeded that on Ethereum.  
  • The disparity got quite large, with Bitcoin's fee surpassing $30 in late December, compared to Ethereum's $12. 
  • The initial inversion marked a large shift in the fees for these two popular networks. From July 2021 through to the end of 2023, Ethereum had been the blockchain with the higher fees. While Ethereum's fees climbed as high as $50 in late 2021 during the peak of DeFi popularity, Bitcoin's fees settled below $5 for over a year. 
  • And this did make sense. The complexity of certain Ethereum transactions made their fees higher, and demand to use the DeFi-focused blockchain was quite high when many of the protocols were first becoming popularized. On the other hand, Bitcoin continued to primarily just serve the purpose of sending bitcoin, which kept fees quite low. 
  • But as we've talked about before, Bitcoin's fees have begun to pick up in the wake of the popularity of Ordinals, bringing NFTs and token issuance to the chain and allowing the network to see interest pile into memecoins and collectibles. 
• In December, Ordinals and BRC-20 tokens were on a hot streak. While there was an initial wave of excitement for them in May, their resurgence in the winter was much stronger, both in magnitude and length. 
  • However, it seems like that hype is finally beginning to die down. The average transaction fee has dropped down to $6.09, the lowest it's been since the start of December. The decline in fees does seem to be tied to the waning of Ordinals' prevalence: Ordinals marketplace volumes are continuing to slide and Ethereum has surpassed Bitcoin in weekly NFT volume by chain again. 
  • And perhaps more significantly, Bitcoin's fee is only $1.83 higher than Ethereum's, bringing fees on both networks down to the same level. 
  • While Bitcoin fees have been steadily dropping since the end of December, Ethereum's have held pretty steady until a drop off more recently. Both are currently sliding, but it seems likely that Ethereum will soon reclaim the title of the chain with the higher fees as demand on Bitcoin subsides. However, as we saw the last time, each Ordinals era seems to come back better than ever, and time will tell before that happens again. 

Retail retreats

Source: SensorTower

• Last week, we talked about how the price of Coinbase's stock has been lagging despite the many victories the company has taken so far this year.
  • The two primary positive notes for the exchange have been the approvals of eight spot bitcoin ETFs for which they are the custodian and the seemingly aggressive stance that the judges took towards the SEC in the hearing over whether the agency's lawsuit against Coinbase should be dismissed. 
  • While legal experts are still undecided on whether the case will be thrown out, many are still thinking that Coinbase has the potential to win against the SEC if the case moves forward. 
• But another metric is also not showing much signs of improvement for Coinbase, much like its stock price. 
  • That metric is the ranking of Coinbase on the App Store. Coinbase is hardly charting within the top 500 free apps, so we can get a better look at how it's trending by looking at the rankings for Finance apps. 
  • We have talked about how many like to track Coinbase's App Store ranking as a means to signal when the top has arrived. There were times in 2021 when Coinbase was the number one app on the App Store overall, signaling a lot of retail interest. As Coinbase's popularity rises, it signals more traders looking to get on the exchange. 
  • Coinbase's ranking within the Finance category was showing some positive signs as we moved into the ETF approval, rising up to rank 16 on December 25th after being ranked 45th at the start of the month. Then Coinbase fluctuated a bit, coming up to the actual approval, sitting at rank 25 on January 11th, the day the ETFs began trading. 
  • Since the 11th, the Coinbase app's ranking has essentially been on the straight decline, reaching position 43 last Friday and erasing basically all the gains of the past two months. 
  • Part of the drop is likely tied to the decline in many crypto asset prices in the wake of the ETF approval, as a combination of the sell-the-news phenomenon tied with heavy GBTC outflows put pressure on bitcoin's valuation. That pressure seems to finally be abating more recently, so we could start to see a turnaround for Coinbase here.
  • But another reason for the decline could be that traders looking to get exposure to bitcoin can now do so in their primary brokerage accounts by buying shares in the freshly launched ETFs (unless they use Vanguard). For the most part, the ETFs also offer much lower fees than trading on Coinbase directly, as well. 
  • So, while Coinbase being the custodian for these ETFs, has been considered a win for the exchange, it is interesting to think about what the ETFs mean for the future of its trading business, given the new avenues available to investors.

What's at stake?

Source: The Block

• On a more positive note for Coinbase, their liquid staking product had its largest day of net inflows ever on January 19th, with the supply of cbETH, the derivative token the exchange provides in exchange for ETH deposits, growing by 14,800.
  • Coinbase launched their Ethereum liquid staking program back in August 2022, right ahead of The Merge, which was slated to take the network from Proof-of-Work to Proof-of-Stake in September of that year. 
  • Coinbase set out to help diversify the liquid staking market, which at the time was heavily dominated by Lido (which for the most part, it still is). 
  • Liquid staking for Ethereum has been wildly popular. It allows users to forgo the 32 ETH minimum staking requirement to run a validator and also puts the technical burden of maintaining the validators of the liquid staking protocol. The derivative token also allowed users to deposit their ETH to earn the staking rewards while still holding onto liquidity. 
  • So, while Coinbase taking on the endeavor into liquid staking did seem like a smart decision, it has also been the subject of much scrutiny from regulators. To be fair, it is not just their liquid staking that has come under fire. Coinbase offers staking for other assets on their platform, in which users just deposit assets and don't get a derivative token in return. In any case, though, the fact that users earn rewards for their staking has caused the SEC to be notably anti-staking, going after Kraken for a similar offering, claiming that these programs constitute and investment contract. 
• When the SEC sued Coinbase, while it went after the exchange for being an unregistered securities exchange in and of itself, it also highlighted their staking service. 
  • The lawsuit caused the most significant day of net outflows from their Ethereum liquid staking platform since the Shapella upgrade went live, which enabled users to unstake their ETH in the first place. 
  • Since then, cbETH flows have been pretty mild in both directions, especially more recently. 
  • This one-day spike likely isn't anything to be too excited about since it only lasted one day and didn't cause much of a shake-up in the overall deposits to Ethereum. But it does signal that some users are still willing to pour in funds to Coinbase's staking program despite the legal battle ahead. 
  • While Coinbase is still not really a major contender in the liquid staking sector, tracking inflows and outflows to its staking product can show how people are thinking about the future of the platform.

The option for an ETF

Source: The Block

• While the whole crypto market has been in a bit of a slump the past week, we discussed a few weeks ago the strong performance of ether in the wake of the spot bitcoin ETF approvals.
  • While bitcoin began to sink, ether surged for a couple of days on the hopes that it was next in line for spot ETF infamy. 
  • Even though the SEC has continued to delay decisions on the spot ether ETFs that are pending, the fact that BlackRock is one of the firms looking to issue one looks fairly bullish, given it was BlackRock that really kicked off the serious sentiment around a spot bitcoin ETF, given their record of ETF approval success in the past. Similarly, the SEC has approved Ethereum futures ETFs, and the existence of bitcoin futures ETFs was one of the main reasons the agency had to greenlight their spot counterparts in the first place. But of course, the path forward is not as clear cut, as ether itself is not clearly defined to be a commodity or a security, whereas bitcoin has had more clarification on its commodity status in the past. 
• And as we have talked about quite extensively in this newsletter, the anticipation for a spot bitcoin ETF caused quite an eruption in the bitcoin options market. 
  • The anticipation for volatility both in the run-up to the approval and in the wake of the launch caused options to soar, as both open interest and volume reached new heights in December. 
  • It seems as though the energy for options is now shifting to Ethereum, with monthly volumes for January already clocking in at an all-time high of $18.9 billion. 
  • On Deribit, the largest crypto options exchange, there is a lot more open interest on call options than on puts, a bullish signal indicating that traders are buying contracts that grant them the ability to purchase the asset at the strike price as opposed to selling it. A lot of the call open interest is on contracts with a strike price higher than the current price of ether, with traders thinking the asset can climb higher before their contract's expiration. 
  • And if we see a similar run up for ether in the hype for a spot ETF, then it would be the right call to bet bullish on the asset, but it is still anyone's guess as to whether we see a spot ETF for the second largest cryptocurrency come into fruition this year. However, speculation that an approval is coming might be worth more to these investors than an approval itself.