Crypto News: 🟪 One Last Research Dance

To wrap up Byron's vacation week, here's a collection of charts and respective breakdowns that the Blockworks Research analysts found interesting.

We suspect that you, the reader, will also find them somewhat interesting. Or at least, we hope!

Enjoy!

Today's first chart is somewhat perplexing, so please do bear with me. We're diving back into activity on Base, Coinbase's L2, which received a lot of attention around its official launch at the beginning of August 2023. Following a meme coin mania that initially drove users to the blockchain, Friend.Tech emerged and has been the main driver for activity on Base. Friend.Tech's share of contract activity is marked as the light green area in the middle of the above chart, accounting for ~38% of activity at the beginning of the week, but has since dropped to only ~5%. Is this the beginning of the end for Friend.Tech as the driver of Base activity?

Another project of interest here is Aerodrome, a DEX that is a fork of the Velodrome V2 code base, created in partnership with the Base and Velodrome development teams. Aerodrome was deployed with the goal of becoming the main DEX on Base, which, based on TVL, seems to have been successful as Aerodrome is the clear leader based on the metric, with a TVL of ~$107M. In comparison, the second largest protocol by TVL on Base is Friend.Tech at ~$48M, while the second largest DEX on Base is Curve at ~$22M. However, Aerodrome hasn't been able to maintain transaction volumes since its launch. During epoch one, ~$45M of volume was traded on the platform, while in epoch four, the volume traded was at ~$10M. Epoch five began on Sept. 28 and will last until Oct. 5. This is visible in the graph above, with Aerodrome having accounted for up to ~21% of contract activity at the end of August and currently making up ~3% of total activity (marked as the light yellow area in the middle of the above graph). Although Aerodrome is the main DEX on Base, its low swap volume indicates that the blockchain doesn't yet have "real" usage. This makes sense as thus far, Base doesn't have any novel dapps to offer, with the exception of Friend.Tech, which doesn't require users to swap tokens.

Speaking of Friend.Tech, it seems that everyone and their mother are talking about the SocialFi application. The platform first received a vast amount of attention around a month ago as crypto users got excited about the ability to buy Friend.Tech profile keys, which allow the holder to access the associated profile's chat room. After the initial hype died down, transactions on the platform also decreased, but activity quickly returned when Friend.Tech announced an airdrop point system, with users speculating that the points will be converted to tokens in the future. However, as mentioned above, it seems that this hype is somewhat coming to an end.

Be that as it may, airdrop farming seems to be the name of the game, and many think that Friend.Tech will stay around at least until a token distribution takes place. If you ask me, the usage still feels somewhat forced as the platform has many bugs and features that are limited. Some are comparing the points system to Blur's airdrop strategy, which helped the NFT exchange capture a majority of the market, but it's debatable how organic the exchange's usage currently is. Nevertheless, as is common in crypto when a new mechanism or idea starts performing well, Friend.Tech derivatives have started popping up. Most notably, Post.Tech, a SocialFi platform on Arbitrum, has managed to penetrate the market. On Sept. 21, the platform accounted for ~57% of transactions across the protocols shown above. However, interest in Post.Tech seems to have somewhat calmed down — it had a ~22% share of the Friend.Tech derivatives transaction market on Sept. 25. History doesn't necessarily predict the future, but derivatives of popular crypto projects seldom do well in the long run, and it's likely that the SocialFi copycats will fade into irrelevance within a few months. At the end of the day, it's still unclear whether or not even Friend.Tech can attract a sticky and robust user base.

Going from Base to Ethereum, censorship by block builders on the latter blockchain has been on the rise since the beginning of H2 2023. As a reminder, the supply chain on Ethereum is as follows when validators are running MEV-Boost: A user initiates a transaction through their wallet, whereafter searchers look for extractable value by scanning through transactions located in the mempool, striving to create maximally valuable bundles of transactions. Bundles are sent to builders, who, together with transactions they've aggregated on their own and from private order flow, create the most valuable combinations and turn them into blocks. These blocks are finally sent to proposers through relays. Currently, ~90% of blocks come from validators running MEV-Boost. In comparison, validators can also build blocks locally, meaning that they only use public mempool transactions to create a block.

Since the beginning of August, censorship by builders jumped from ~40% to ~70%. Five of the six largest builders currently comply with OFAC sanctions, i.e., they mainly censor transactions touching Tornado Cash. The censoring is done by simply omitting certain transactions. It's important to note that the other layers within the supply chain, those being validators and relays, can also censor transactions. The former group does this by selectively including or excluding transactions in blocks or by refusing to attest to other specific validators. Meanwhile, the latter group can filter blocks based on specific rules. Solutions for censorship on Ethereum are currently being worked on, with two of the main possible solutions including inclusion lists and encrypted mempools.

That's enough about censorship, let's move on to how Ethereum's token is doing. As market activity has stayed limited, ETH has become inflationary over the past ~30 days at an annual rate of ~0.16%. As of Sept. 25, the supply of ETH was ~120.2M, which grew by ~16.2K in the previous 30 days (~67K ETH issued against ~51K burned). Gas fees were also extremely low, having hovered below the 10 Gwei mark for the last few days. In comparison, the daily average gas fee is ~25 Gwei since the end of September 2022. Uniswap has been the key driver for activity on Ethereum. As of Sept. 25, the dapp had accounted for ~23% of all burned ETH over the previous 30 days, which exemplifies DeFi's importance for Ethereum.

Assuming that gas fees stabilize at 15 Gwei and the number of staked ETH instantaneously grows from the current ~26M to 30M, the total supply of ETH would grow by ~500K to ~120.7M at a daily rate of ~1K ETH (2.5K issued against 1.5K burned through fees) by the end of 2024. However, if the gas fee grows to ~25 Gwei, a supply equilibrium would be reached. In other words, if activity on Ethereum grows even slightly above the daily average since the end of September 2022, ETH becomes deflationary.

That's all I have for you today, folks — hopefully, I was able to meet Byron's standards. They are big boots to fill.

I go by the name of Brick, also known as the (Chief) Junior Research Analyst at Blockworks Research, and I hope you have a splendid weekend!

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