Crypto Commentary September 2024

Keep up with the latest in crypto market commentary as we share the insights from our institutional research partners.

In this edition, GSR recaps the crypto markets for the month of September.

Bitcoin and Ethereum

Bitcoin entered September around $59,000 and rose 7% during the month to $63,300. Prices fell to start the month as poor US economic data reignited worries of a US-led slowdown. However, Bitcoin spent the remainder of the month moving higher as central banks enacted accommodative policies, most notably in the US and China and covered more below. During the month, the total Bitcoin network hashrate hit a record, periodically surpassing 750 EH/s, though this helped to push hashprice, which measures the expected value of 1 PH/s of hashing power per day, towards all-time lows. In addition and perhaps in response to August’s WBTC controversy, wrapped bitcoin products remained in the spotlight, with Coinbase launching its cbBTC that is now the second largest wrapped Bitcoin product on Ethereum, and others launching wrapped Bitcoin products like 21Shares or expanding existing wrapped Bitcoin tokens to new dapps or chains like WBTC and tBTC. Lastly, there continued to be considerable development from Bitcoin L2s, including Fractal launching on mainnet after attracting 12m unique addresses, Stacks developers selecting the Nakamoto upgrade hard fork block that’s expected to occur on October 9, and Citrea deploying its BitVM-based Clementine bridge on public testnet.

Ethereum also rose during September, entering the month around $2,500 and increasing 4% to $2,600. While Ethereum was positively impacted by looser monetary policy, ETH’s performance may have trailed that of Bitcoin in part due to tepid spot ETH ETF inflows that totaled -$45m compared to +$1.2b for Bitcoin, as well as continued debate around Ethereum’s strategy. ETH’s supply increased by 63,700 during the month, equivalent to 0.6% annual inflation, as emissions continued to outpace the number of ETH burned. Notably, network revenue nearly doubled from the prior month as the average gas price increased 80% to ~12 gwei and the average transaction fee rose. Also during the month, core developers agreed to split the coming Pectra upgrade into two parts to reduce risks associated with what was becoming a particularly large upgrade, and continue to plan for PectraA in early 2025. Further, Vitalik voiced support to increase Ethereum’s maximum blobs per block in the PectraA upgrade, stated he will not invest in token projects for the foreseeable future, and vowed to no longer mention rollups who have not progressed to stage one decentralization starting next year. Lastly, there continued to be notable L2 developments during the month, such as Polygon migrating MATIC to its new POL ecosystem token, and Arbitrum launching its Stylus upgrade that enables developers to write smart contracts in Rust, C, and C++.

BTC and ETH

Source: Santiment, GSR.

Central Bank Action

The month was characterized by heavy central bank activity, including the Federal Reserve’s first interest rate cut since 2020 and a “policy bazooka” from the People’s Bank of China. In more detail: The Fed lowered interest rates by 50 bps on September 18, with the move much larger than what the markets had expected just days before. The Fed stated that risks to its dual mandate of price stability and full employment are roughly balanced, conveyed confidence that inflation is moving towards its 2% target, and proclaimed that the economy is “in good shape.” In addition, the Fed’s Summary of Economic Projections called for another 50 bps of cuts through year-end and maintained expectations for another 100 bps of cuts next year, essentially pulling rate cuts forward compared to its prior forecast. Despite this, however, Powell stressed that future monetary policy actions will be data-dependent and on a meeting-by-meeting basis.

The other large monetary policy surprise during the month came from the PBOC, which launched its largest stimulus package since the pandemic. Specifically, the PBOC cut interest rates, injected funds, and eased mortgage repayments in a bid to boost the economy amidst weak credit demand. In addition to monetary stimulus, China later vowed the necessary fiscal spending to hit its growth target that combined with the central bank actions, caused China’s CSI 300 Index to increase 21% during the month.

Lastly and as expected, the ECB cut interest rates by 25 bps for the second time this year, while the Bank of Japan held rates steady during the month in its quest to normalize policy while not spooking markets or stymying growth.

Global Liquidity vs. Bitcoin Price, Year-Over-Year Growth

Source: The People’s Bank of China, Federal Reserve, European Central Bank, Bank of Japan, Investing.com, Glassnode, GSR

Note: Converts local currency M2 to US dollars and aggregates before taking year-over-year growth. Note that different countries may define M2 slightly differently, but the general concept of M2 is that of a measure of the money supply that includes cash, checking deposits, and non-cash assets that can easily be converted into cash.

zkVM Developments

With its main use cases in privacy and scaling, and applications ranging from finance to identity, compliance, governance, healthcare, gaming and more, zero knowledge proofs (ZKPs) allow for one to prove that a statement is true without revealing any other information. And while zero knowledge proofs have quickly moved from the theoretical to the practical, improving on key areas like prover time, proof size, verification time, and the trusted setup, the use of the technology has been out of reach for many given the immense time and expertise required to write lengthy custom arithmetic circuits in domain specific languages. However, zero knowledge virtual machines (zkVMs) have now progressed to allow developers to simply program in Rust and for the zkVM to prove the execution of the code, enabling a new paradigm in verifiable computation (technically, Rust code is compiled to RISC-V ISA bytecode and the zkVM proves the execution of RISC-V given the program and program inputs). Moreover, zkVM solutions like Risc Zero and Succinct are building decentralized prover networks so developers can outsource proof generation for low pricing/latency and high liveness/censorship resistance guarantees. And while the usage of zkVMs was historically inhibited by speed and cost considerations, zkVMs have improved immensely here to where zkVMs are now becoming the preferred zero knowledge solution for many/most use cases. As one example, optimistic rollups can now convert to zero knowledge rollups using zkVM technology to benefit from faster withdrawals, lower trust assumptions, and greater interoperability, while zero knowledge rollups, currently in the form of zkEVMs that may be hundreds of thousands of lines of code that are difficult to audit or upgrade with Ethereum forks, can also utilize zkVMs to drastically enhance flexibility, auditability, and upgradability. Finally, we see some similarities to restaking in providing compute guarantees, though unlike restaking, zkVMs do so with cryptographic rather than economic guarantees and further benefit from requiring just one party rather than all operators to perform the computation.

With that as background, there were several notable zkVM developments during the month. Risc Zero announced Boundless, a zero knowledge proof-based verifiable computation stack enabling unlimited execution, global composability, and infinite scalability. Rather than require all nodes to compute all transactions like traditional blockchains, Boundless enables verifiable compute, where any arbitrary computation can be done off-chain by just a single machine and then simply proved onchain using a zero knowledge proof. Such a construct enables nodes to verify the computation without needing to run it themselves, massively expanding the size of what may be computed and materially reducing costs, preserving the core tenets of decentralization and censorship resistance, and drastically easing the development experience. In addition, there were notable developments out of Succinct. First, Succinct introduced OP Succinct, a seamless way to upgrade any chain built with the OP Stack rollup framework to utilize zero knowledge proofs. OP Succinct does so by using Succinct’s SP1 zkVM and results in significantly reduced finality times from the traditional 7-day fraud proof window while maintaining low proving costs. Lastly, Succinct announced SP1 integration with data availability solution Celestia to secure Celestia’s Blobstream bridge to Ethereum. Blobstream makes Celestia data available for rollups settling to Ethereum, Arbitrum One, and Base, and the use of SP1 greatly simplified the Blobstream bridge logic, reduced audit costs, and materially sped up production.

Risc Zero’s Boundless Zero Knowledge Stack

Source: Risc Zero, GSR.

Solana’s Firedancer Nears

Perhaps the largest critique leviable against Solana had been its lack of client diversity. As background, clients are the software that implements protocol specifications, with Ethereum having various consensus and execution clients to add to network resilience and ensure transactions processed by a faulty client cannot finalize. Prior to the Breakpoint conference, Solana was operating with only two available clients in Agave from Anza and Jito-Solana from Jito. However, the Solana client ecosystem is set to expand with the introduction of Firedancer, developed by Jump Crypto, and Sig, a read-optimized client by Syndica.

Firedancer is designed to significantly outperform existing validator clients and targets one million transactions per second. The key architectural decisions driving Firedancer’s performance include eliminating thread scheduling by assigning one thread per CPU core, avoiding memory allocation during runtime to prevent delays, and minimizing costly system calls. Firedancer treats the CPU as a network of microservices, where each core operates independently but communicates through shared memory. Custom, high-performance implementations of key components, such as its faster signature verification, also contribute to its efficiency.

A key highlight last month was the live deployment of “Frankendancer” on Solana’s mainnet at Breakpoint. Frankendancer integrates Firedancer’s networking capabilities, such as transaction relay and signature verification among validators, with Anza’s runtime and consensus code. Additionally, the full Firedancer client is is live on Solana’s testnet, and is running on Solana’s mainnet in a non-voting mode, allowing it to participate in network operations and replay blocks in real time while final optimizations are made before it gains voting rights. While it will take time for validators to adopt the Firedancer client once the full version is released, it marks a significant improvement in both the performance and security of the Solana network, paving the way for a more scalable and secure blockchain.

Frankendancer Illustration

Source: Helius, GSR.

Restaking Updates

There were a number of notable restaking developments during the month. For example, EigenLayer, a security-as-a-service protocol that allows users to stake or restake assets to provide security for arbitrary programs beyond Ethereum dapps such as bridges, oracles, and sidechains, introduced its EigenPod upgrade, which adds a novel balance checkpointing system for managing Ethereum validator and EigenPod balances. In addition, EigenLayer introduced the first version of its Programmatic Incentives feature, which enables rewards to be paid to stakers and operators. ARPA, a secure computation network, quickly took advantage, becoming the first Actively Validated Service (AVS) to introduce a rewards program outside of EigenDA using Programmatic Incentives. And after much anticipation, the EIGEN token became transferable on September 30, allowing holders to move and trade EIGEN freely. The token was then listed on various exchanges, debuting at a fully diluted valuation of $6.5b.

Beyond EigenLayer, the broader restaking ecosystem is evolving. For example, Symbiotic is offering a flexible, modular, and thin shared security coordination layer, Solayer and Jito are optimizing restaking for Solana, and Bablyon is pursuing shared security on Bitcoin. Meanwhile, AltLayer introduced Wizard, the world’s first AVS-as-a-Service platform that’s designed to simplify the deployment and management of EigenLayer AVSs. Wizard enables builders to deploy AVS solutions such as MACH (a fast finality network for rollups), bridges, and co-processors with minimal effort, reducing the setup time from months to minutes. Wizard provides a no-code interface, making AVS deployment significantly easier compared to manual processes, and allows developers to quickly experiment with AVS ideas using AltLayer-hosted operators, removing the complexity of onboarding external operators.

AltLayer’s AVS-as-a-Service Wizard

Source: AltLayer, GSR.

Author:

Brian Rudick, Senior Strategist | Twitter, Telegram, LinkedIn

Carlos Guzman, Research Analyst | Twitter, Telegram, LinkedIn

Toe Bautista, Research Analyst | Twitter, Telegram, LinkedIn

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