Andreessen Horowitz (a16z, if you know him) manages approximately $50 billion in investor assets, making it one of the most expensive venture capital funds in the world. But more importantly, the company is passionate about cryptocurrencies and publishes a comprehensive and must-read annual State of Crypto Report. We read the latest edition and selected some timely opportunities.
1. Cryptocurrency activity is at an all-time high.
According to a16z report, there have never been so many monthly active crypto addresses. In September, over 220 million wallet addresses interacted with the blockchain at least once. This was more than three times the number from the previous year. Although one address doesn’t necessarily mean one user (many people create different addresses for various reasons), this increase is still impressive. In fact, the number of active wallet addresses (orange in the graph) in recent years has increased as rapidly as internet usage (green) in the 1990s.
The growth in active crypto addresses since 2018 closely resembles the growth in internet users in the 1990s. Source: Andreessen Horowitz, September 2024, State of Crypto Report.
Opportunity: Solana (SOL) accounts for the majority of these active addresses (100 million in September alone), making it the most used blockchain in this metric. On top of that, Solana’s developer community is also rapidly growing. A16z tracks data from thousands of crypto projects and says 11.2% of founders are building or want to build on top of Solana. For context, this is second only to Ethereum (20.8%) and more than double the builder interest that Solana received last year.
Solana, Near Protocol, and Base had the most monthly active addresses in September. Source: Andreessen Horowitz, September 2024, State of Crypto Report.
2. Stablecoins are the “killer app” for cryptocurrencies.
According to A16z, $8.5 trillion worth of stablecoin transactions were processed in the second quarter, more than double Visa’s transaction volume and 20 times PayPal’s transaction volume during the same period. do. As the name suggests, a stablecoin is a cryptocurrency whose value is “stable” because it tracks the price of a regular currency such as the US dollar.
There are good reasons why stablecoins have become so popular. You can send stablecoins across borders at a fraction of the cost and time of regular money transfers. An international wire transfer costs about $44, while a similar stablecoin strategy currently costs just $1 on Ethereum and less than a cent on Coinbase’s base blockchain, according to the report.
Recently, Tether’s USDT token has taken the largest share of the stablecoin market, followed by Circle’s USDC. These projects buy dollars and other securities (such as U.S. government bonds) to back their stablecoins 1:1 with dollars. And they are buying them in large quantities, with the report saying that the stablecoin is now the 20th largest holder of U.S. bonds. In other words, rather than being a “threat” to the dollar, it is contributing to strengthening its position as the world’s reserve currency.
Stablecoins hold more US government bonds than Germany. Source: Andreessen Horowitz, September 2024, State of Crypto Report.
Currently, Ethereum still dominates the stablecoin market through both its own blockchain and a “layer 2” blockchain that leaves Ethereum to do the heavy lifting. Think of these as extra lanes on the Ethereum highway that help speed up traffic. These Layer 2 networks process transactions on their own blockchains and settle transactions on Ethereum. They deliver Ethereum security with Layer 2 speed and cost efficiency.
Opportunity: Buying Ether (ETH) seems like the most obvious strategy for a stablecoin. That’s because most stablecoin projects run on Ethereum (for security) and consume Ethereum for transaction fees. In other words, more use of stablecoins means more demand for Ethereum.
And ether may also be becoming rarer. According to A16z, 29% of all Ether in existence is currently staked on the Ethereum blockchain. (That’s when you post Ether as collateral in an Ethereum “smart contract” and earn a yield paid in Ether). Two years ago, that percentage was just 11%. However, with more Ether being staked these days, a large portion of the total coin supply is effectively locked up, leaving fewer coins available for investors to purchase.
As for Layer 2 blockchains, Base had 22 million active crypto addresses in September, the most of any Layer 2 network. It also follows Solana in terms of interest from builders, with 10.7% of builders considering working with Solana. Currently, Base has no tokens available for purchase, but they are a Coinbase (COIN) product. Therefore, buying stocks can be an indirect way to gain Base exposure.
3. DeFi and AI are the next frontier of cryptocurrencies.
Decentralized finance (DeFi) remains the largest sandbox for cryptocurrencies, driving the most developer activity (24.8%) and daily cryptocurrency usage (34%). And currently, approximately $169 billion is locked up within thousands of DeFi protocols, compared to just a few billion dollars in 2020.
The current use of cryptocurrencies is dominated by decentralized finance (DeFi), followed by stablecoins. Source: Andreessen Horowitz, September 2024, State of Crypto Report.
But now a new development is occurring. Roughly one-third of all crypto projects integrate AI into their applications, a significant increase from last year. That’s natural. Both blockchain and AI attract developers with an affinity for cutting-edge technology. AI is now being used to automate key DeFi processes (such as liquidity management and risk assessment), making the entire ecosystem faster, smarter, and more efficient.
Opportunities: The report shows that some clear winners are emerging across various DeFi spaces. Here are some things to consider (we’ll cover them all in this article):
Lido (LDO) for Ethereum “liquid staking,” Aave (AAVE) for DeFi lending, and Uniswap (UNI) for decentralized exchanges.
On the non-DeFi side, Near Protocol (NEAR) is becoming popular among the AI crowd. That’s because it’s advantageous for developers who want to build scalable, data-intensive AI applications. According to the report, 4.2% of cryptocurrency developers are developing with (or interested in) Near.
And finally, there is an opportunity not mentioned in the report: Chainlink. Currently, we verify most of the data on blockchain smart contracts, which is essential for DeFi and AI. I wrote about it in detail here.
To read more of what Andreessen Horowitz had to say, check out the original State of Crypto report.
