Variant Fund Investment Partner: Thoughts on the Current State of Cryptocurrency

Author: Alana Levin, Investment Partner at Variant Fund

Compiled by: 0xjs, Golden Finance

Every six months or so, I write an internal reflection on the state of cryptocurrency and its future direction. I believe it is worth sharing my most recent piece for public reading.

This article is divided into three parts: existing effective products (what's working), other things that have happened (or are happening), and new things I look forward to.

I try to base most of my analysis on data, but it is undeniable that my opinions come through inadvertently. I hope this is an interesting article. If the response is positive or the feedback is productive, I will consider sharing more of these internal reflections in the future.

Existing Effective Products

The good news is that many things are working and progressing well. The development of these things—many of which I refer to as "big ideas" because they can effectively change the status quo—should create new opportunities, which is a secondary effect of their success.

To be clear, I use the term "existing effective products (what's working)" to refer to projects or trends that show signs of sustainable product-market fit, are expanding the crypto market size, or both.

So, what factors seem to be working or growing at the moment? I have listed 10 factors that I believe are showing signs of "existing effective products" (non-exhaustive list):

1. Stablecoins

2. Bitcoin as an alternative asset

3. Farcaster, an early but growing social network

4. Asset creation

5. Community-created and trained AI models

6. Solana

7. Ethereum

8. Zora

9. Coinbase

10. On-chain exchanges

11. Bonus: Blackbird

1: Stablecoins

The on-chain supply of stablecoins has seen a net inflow of about $25 billion year-to-date. Overall, inflows have been positive since November 2023. Permissionless global access to dollars continues to enjoy strong product-market fit.

2: Bitcoin as an Alternative Asset

Fewer than 12 Bitcoin spot ETFs were approved in January. As of early June, the value of Bitcoin spot ETFs exceeded $80 billion. (I follow Blockworks and The Block's tracker for data).

Gold seems to be a strong analogy for understanding institutional allocation to Bitcoin: whether you believe the asset represents a hedge against inflation or not, it is an alternative to traditional equities, with its value partially supported by social consensus. Some might argue that Bitcoin is far superior to gold—because it is easier to transfer, has a known supply cap, and is adopted on the balance sheets of some companies and countries—thus, Bitcoin's market cap could one day surpass gold.

In the private market, the first quarter was characterized by a surge of projects aimed at expanding Bitcoin's utility. These projects include (many) Bitcoin smart contract layers, on-chain lending protocols, and explorations of how to leverage Bitcoin's economic security budget to help protect other chains. I suspect any outcomes from these developments could emerge in the second half of this year.

3: Farcaster

Farcaster is a social network built on an open protocol track that has begun to enjoy meaningful growth.

The turning point occurred at the end of January, coinciding with the launch of Frames. Frames are mini-app-like components that people can share and interact with directly in the social message stream of the Farcaster client.

4: Asset Creation

The number of newly created tokens continues to rise. One way to track this trend is to look at the number of new tokens appearing on DEXs (decentralized exchanges). Activity seems to be primarily driven by asset creation on Base and Solana.

Particularly on Solana, over 10,000 new tokens have been created daily in recent weeks.

Source: SolScan

Many of these new assets are appearing in the form of meme coins. I wouldn't describe myself as an active participant in the meme coin space, but I do recognize that there is a very real and engaged group of users showing enthusiasm for participation.

Notably, the emergence of these new assets has brought some unexpected but productive side effects to the broader ecosystem. For example, we have seen more experimentation with new tools, such as Solana's token expansion. A token called $BERN utilizes Solana's new token expansion to innovate token economics: if someone sells their token, 5% of that transaction will be burned (as a redistribution mechanism for remaining holders). The popularity of $BERN has become a compelling feature for wallet adoption of the token expansion standard—these standards are productive because they enable complex payment splits, confidential transfers, and more. Without $BERN, who knows how long it would take to adopt token expansion.

Overall, my main point is that asset creation seems to be a tailwind trend. Regardless of your views on these assets, having issuance rights and exchanges remains two excellent choices in the flow of value.

5: Community-Created and Trained AI Models

Clearly, we are moving towards a world with abundant LLM opportunities, low creation costs, and numerous choices. In that world, where does value accumulate?

I believe value comes from scarce resources. Therefore, in a world rich in computation, content, and tools, the question becomes: what is scarce? One answer is taste and attention. The difficulty lies in the fact that taste and attention are quite intangible resources. Even if we can measure them (for example, "screen time" can serve as a measure of attention), it is challenging to quantify these metrics in dollars.

We are beginning to see crypto play a role by tightly integrating finance with taste and attention activities. Specifically, community-created and trained AI models have some productive output—such as goods or services (e.g., artwork, films, intellectual property, etc.) that can be sold or licensed—that can reward participants. For models with subjective output, community participants act as taste makers by training the models according to their cultural preferences. The motivation to choose good taste is strong: the more tasteful the output, the higher it should sell.

We are starting to see some of these emerge in real and effective ways. Botto is one of my favorite examples. It is an autonomous artist, and $BOTTO token holders can help train the model every week.

The quality of Botto's artwork is high and improving, as evidenced by the rising prices of Botto's works at weekly auctions. Meanwhile, the network of owner participants is also growing:

I believe we will start to see more community-created and trained AI models, especially as known and effective instances (like Botto) become more prominent.

Some businesses are addressing attribution challenges top-down through litigation, data licensing agreements, or both. If we assume that the status quo represents less than 1% of model-based output five years from now, then clearly there is room for other attempts to address attribution issues and allocate contribution value. Crypto offers a unique and valuable solution. Cryptographic technology strengthens economic and creative attribution. Importantly, it also allows anyone, anywhere, to participate.

Chris Dixon mused in an old blog:

"There is a saying: 'The future is already here—it's just not evenly distributed.' An obvious follow-up question is: if the future is already here, where can I find it?"

Community-created and trained models are one area of some small-scale but continuously evolving projects we are undertaking that point towards a broader future.

6: Solana

The daily active addresses interacting with Solana are 2-3 times higher than the same period last year, roughly aligning with the peak activity period of the 2021 cycle. The number of monthly active addresses has increased 3-4 times during the same period and reached an all-time high in May 2024:

The network has also begun generating meaningful fee revenue, starting to prove the hypothesis that Solana's low fees will be compensated by greater user activity/volume.

Conclusion: Solana's development trajectory indicates that some things are working and are doing so in meaningful ways. Solana will continue to exist.

7: Ethereum

The Ethereum ecosystem has also made significant progress. There are two ways to describe this growth: focusing on Ethereum itself and looking at the Ethereum chain system as a whole (i.e., including the Ethereum roadmap).

The number of monthly active addresses on Ethereum itself has also seen significant growth. The average over the past 30 days has increased by about 30% year-to-date, only about 10% lower than the peak in 2021.

A more comprehensive view of the Ethereum ecosystem also shows significant signs of growth. I have summarized the daily active addresses of the five major Ethereum blockchains (Ethereum, Arbitrum, Base, Optimism, and Polygon) in the chart below. These five blockchains were chosen partly because they have rich application ecosystems and developers.

Key point: Ethereum has remained one of the most important ecosystems in the cryptocurrency space.

8: Zora

Zora Chain (also known as Zora Network) has been live for nearly a year. During this time, the network has been seeking a foothold. The number of weekly active users has grown by about 60% year-to-date, recently surpassing a new high of 250,000. The chain's profit margin has also reached about 34%, meaning Zora can retain about one-third of the ETH users spend on transaction fees.

Zora Chain helps validate the view that sufficiently distributed applications can begin to vertically integrate with other parts of the stack (such as block space) to unlock more attractive economic benefits.

9: Coinbase

Coinbase has also had a strong start this year. It is listed as the custodian for 8 of the 11 Bitcoin spot ETFs. The exchange business continues to make progress—trading volume reached $157 billion, a figure not seen since November 2021.

Trading fees still account for a large portion of Coinbase's revenue. In the first quarter, the platform's trading fee revenue exceeded $1 billion (about two-thirds of its quarterly revenue).

But it is also noteworthy that Coinbase continues to diversify its revenue sources, no longer relying solely on trading fees. Blockchain rewards revenue and custody fee income have both doubled compared to last year. Stablecoin revenue is close to $200 million, with the growth in USDC circulation offsetting (slightly) lower interest rates. The number of users for Coinbase's membership suite, Coinbase One, has surpassed 400,000. Coinbase's Layer 2 protocol, Base, generates millions in on-chain fees monthly.

Coinbase's success proves that the assumption many thought was true (until recently) is real: many meaningful new business models can be built around crypto primitives.

10: On-Chain Exchanges

On the major Ethereum chain, the number of unique users (traders) on Uniswap has increased by about double compared to six months ago.

One definition of a successful protocol is that successful businesses can be built on top of it. We have seen this with on-chain exchanges, such as the revenue growth brought by the interface of Uniswap Labs:

The 7-day moving average of trading volume on the Uniswap protocol has recently surpassed Coinbase:

Importantly, we see that the growth of on-chain exchanges is not limited to Ethereum. In Solana, the leading two DEXs—Orca and Raydium—have also seen significant growth:

On-chain protocols facilitate hundreds of billions (even trillions) in value exchange monthly, which is no joke. Protocols and interfaces are very real revenue-generating projects. In the presence of centralized entities (such as interface businesses), I hope we can see a portion of these profits reinvested to improve security, robustness, and user experience.

11 (Bonus): Blackbird

Blackbird is a loyalty and rewards program for the restaurant industry built on crypto. When users check in at restaurants associated with Blackbird, the app mints an NFT for them—this is a digital artifact of their visit and a data point for restaurants in the network to understand customer dining habits. Today, Blackbird primarily exists in New York City.

The daily check-in volume of Blackbird's user base continues to grow.

Personally, Blackbird has changed my own dining habits: I used to let my friends choose where we should eat, but now I am more proactive in recommending places for us (and primarily use the Blackbird app to guide where might be interesting dining spots).

Other Things That Have Happened

Other notable trends over the past two quarters include the rise of social finance and a surge of new chains (primarily L2 and L3 within the Ethereum ecosystem). While I think it is too early to say whether they are truly effective, it is worth noting that these trends are having a significant impact on user behavior on-chain and how developers are evolving their business models.

#1: Growth of Socialfi Applications

A plethora of financialized social ("Socialfi") applications have emerged. Several of them have generated millions in fees. Friendtech and FantasyTop are two of the most popular applications I know of. Clearly, some users find these applications engaging and are willing to participate. Providing users with new on-chain experiences is a good thing.

I am skeptical about the sustainability of some of these business models. Speculation alone seems insufficient to drive long-term success. But that’s okay. Some of these applications may only need slight adjustments to achieve a more sustainable business model. Capturing attention—even if sparked by speculation—provides an opportunity to monetize that interest in various other ways. However, the critical second step is, of course, the most challenging part.

#2: Surge of New Chains

We have also seen the launch of many new chains (especially L2 and L3). For these chains within the Ethereum ecosystem, the underlying technology does not seem to be a substantive differentiator. Instead, branding and community triumph over all. Coinbase's L2 Base may be a reflection of a strong brand. Even without direct token incentives from other chains to attract talent, the chain has a (rumored) growing developer ecosystem.

So far, we have seen chains attempt differentiation in three ways:

• Underlying technology. For example, integrated chains vs. modular chains, or optimistic rollups vs. zero-knowledge rollups.
• Chain economics. To my knowledge, Canto is the first chain in recent years to attempt to redistribute transaction fees to developers in the ecosystem. Blast and Berachain are currently experimenting with various other types of yield generation and economic distribution. It remains unclear whether these measures are sustainable—either from a macroeconomic perspective or in terms of providing a long-term competitive advantage.
• Branding and community. The culture and/or reputation of a chain can serve as an aura to attract developers: it may enhance the perception that developers will receive more help when building in the ecosystem (from the community or other developers), it can provide reputational protection in the eyes of certain consumers ("no one gets in trouble for choosing a MacBook" or something similar), and/or the values advocated by the chain community may align with the developers' own ideologies.

Mature blockchains embody all three elements. Taking the two "existing effective" blockchains I emphasized above as examples: Ethereum and Solana. Ethereum pioneered the EVM, implemented EIP-1559 (which redistributes part of transaction fees to ETH holders), and developed a strong developer community and ethos around its technology. Solana promoted integrated blockchains, was the first to make low fees commercially viable, and has a community that was truly forged in the fire during the economic downturn of 2022-2023.

My hypothesis is that the next wave of blockchain differentiation will stem from external integration. Examples might include seamless access to other funding sources (like Coinbase accounts), KYC screens for wallets, or verifying whether someone is human. This is a very broad design space, and I am excited to explore this area more deeply.

Looking Ahead

Reflecting on the past six months, my main takeaway is that we are still talking about the same things we discussed 6-12 months ago, but with more maturity in terms of "existing effective" aspects. As these mature, many platforms should and will transform into opportunity-creating platforms, which is a byproduct of their success. Growth will bring growing pains, and these pains create space for third-party solutions.

Predicting the growth of these major platforms can also provide a foundation for thinking about future directions. I am most focused on new forms of distribution and new building blocks.

New Distribution and Better Building Blocks

In terms of distribution, some growth vectors that excite me include: a larger Farcaster, a Telegram app with more powerful wallet features, and interfaces like World App continuing to attract more people (currently reaching 10 million).

There are also many exciting new building blocks. Coinbase has launched a smart wallet that allows users to pay directly from their Coinbase accounts. Reservoir's Relay protocol helps eliminate the user experience of bridging funds between chains, finally making a "one-click" checkout experience on-chain possible. World ID continues to evolve, promising a method for verifying identity between humans and agents. And more.

This may sound a bit vague. When I read some things that seem more like abstract hopes than realities, I sometimes feel frustrated, so I will try to illustrate what these building blocks and new distribution channels can achieve with a concrete example.

Take modern advertising as an example, a multi-billion dollar market that touches nearly every business. I suspect that despite decades of improvements in attribution and targeting, it remains inefficient. Now imagine what "advertising" on Farcaster might look like:

• Companies can send coupons directly to target customers' wallets (since each account has an associated wallet).
• Coupons could be based on mentions of similar products in consumer-created posts or posts that users like.
• Businesses can operate with confidence because the data will always remain open and accessible (i.e., no need to worry about APIs being shut down or prices being raised), allowing businesses to invest in improving the effectiveness of that distribution channel.
• Budgets would only be spent when consumers convert to sales (i.e., use the coupons).

Overall, this seems like a win-win for businesses and consumers, thanks to open social graphs, embedded payment channels, and verifiable digital identities.

Mature Blockchains Point to the Future

Another notable takeaway from the "existing effective" section is that there are now several reliable and continuously evolving ecosystems (Ethereum, Solana, Bitcoin). These three ecosystems compete on unique differentiators, and each ecosystem's respective strengths exert continuous improvement pressure on the others. For example, Solana's success in low fees and high throughput has driven Ethereum to innovate continuously at the base layer and L2. Similarly, Ethereum's multiple clients may set a goal for Solana to achieve client diversity (e.g., the upcoming Firedancer client). Bitcoin was the first to achieve true institutional adoption but has begun experimenting with new programmable elements (using Ordinals, Runes, and potential OP_CAT upgrades). Broadly speaking, I summarize it as each ecosystem is continuously trying to achieve roughly the same functionalities as the others. Observing where each ecosystem currently stands—and the positive relative characteristics exhibited by its peers—can serve as a guide for what each ecosystem might try to implement in terms of improvements.

This feels very positive. I am a tennis fan, so I will use a tennis analogy. If Federer, Nadal, and Djokovic did not compete with each other, they might not reach the same level of athleticism. Each pushes the others to elevate their game, resulting in tennis being truly great. I think we see a similar situation today across different chains in the crypto space. Everyone is making faster and greater progress because there is pressure to improve. The result is a net gain for the entire industry.

Some New Ideas

There are still many ideal infrastructures and applications waiting to be built. I am interested in some areas that have not yet been developed but hold potential:

• Different forms of credentials. Credentials (certificates, proofs, etc.) are valuable resources placed on the chain: placing credentials on a public ledger benefits both marking the issuance time and verifying the issuer. One example of such credentials could be workplace verification—receipts issued by employers proving that someone worked at a company for a period. In the crypto industry, I have seen many attempts at proofs. I think the key here is to identify credentials with real economic value—like employment verification—and focus on those markets.
• Price-differentiated assets (PDA). These goods have real economic value, but there is significant variance in market participants' willingness to pay. Restaurant reservations are a great example. A recent article about the underground reservation market in New York went viral online: popular reservations are attacked by bots and resold on exclusive secondary markets for thousands of dollars. In my view, if people believe this financialization is inevitable, then making these "assets" as transparent and accessible as possible seems beneficial for both diners and restaurants. Restaurants can more easily view the transfer history of reservations, while more potential consumers can participate. Tokenizing reservations could even enable some form of programmatic price ceilings or share revenue with restaurants. This is just one example. There are more markets where actual assets with fundamental economic value are mispriced or inefficiently priced due to opaque or limited market entry channels.
• New forms of token distribution. There are many opportunities to drive people's existing behaviors through token rewards as a byproduct of activities they would already be doing. Blackbird is the first and most significant example: dining out is already a common activity, but the existence of Blackbird rewards may have changed the places and frequency some users choose to dine. This could be more broadly applied to areas where people already spend time and money but lack consistency or loyalty in their consumption activities. In particular, I would look for categories where merchants could benefit from some sort of alliance or cooperative effect (in terms of more data/insights on consumer behavior between merchants) and where there is a significant opportunity to enhance customer loyalty (through nudge-style incentives).

Admittedly, whether these ideas have unique "existing effectiveness" is an open question. They mostly leave a strong impression on me, as these ideas have existed for some time but have yet to be fully explored (thus worth further attempts).

Conclusion

This reflection represents many of the things I believe have happened recently in the cryptocurrency space, but importantly, it is not exhaustive. It does not cover, but could (or should) cover, some areas including the growth of permanent storage solutions (like Arweave), the maturation of DeFi protocols into true financial platforms (like Morpho), and Telegram's impressive push for TON.