Market View
Economists are still equivocating about whether the latest US CPI print (October: 3.2% YoY headline, 4.1% core) is an aberration or part of a larger disinflationary trend, but markets have already moved on. (For the record, we've been firmly in the latter camp and remain so.) We believe the macro backdrop is lining up for a rally in risk assets into year-end, consistent with the constructive 4Q23 view that we posited back in July and reiterated in September.
Our view is that US dollar strength has peaked, and the path of least resistance is softer into next year. Fiscal support for the US economy is starting to wane in earnest, curbing activity enough to keep the Federal Reserve from additional rate hikes – even if the board maintains its “higher for longer” stance. Notably, November and December have been seasonally weaker months for crypto over the last five years (albeit not prior to 2018). However, we think the macro environment combined with the narrative surrounding spot bitcoin ETFs and the bitcoin halving are sufficient to accommodate some market resilience here.
Average BTC and ETH spot volumes across global exchanges have climbed to $8.9B per day this month, more than double the daily average in October and the highest since March 2023, based on data from CoinMetrics. Similarly, futures volumes (including both perpetual and term) on these blue chip names have risen to $53.7B per day.
Interestingly, bitcoin demand appears to be driven heavily by institutions as total open interest on traditional CME futures has increased by 44% over the last four weeks, outpacing the net change in open interest on non-CME term futures and perps over the same period, after adjusting for spot appreciation. Notably open interest on bitcoin perps, which tend to be used more by crypto native players, are at their lowest in over a year in notional terms as funding rates remain in positive territory. Separately, open interest on traditional futures for ETH has increased by a smaller 10% on the CME, though net open interest increased by a sharper 60% on non-CME exchanges.
Onchain measures of developer activity
In the crypto space, we often see developer activity measured by the number of commits, active developers, or lines of code added on Github. Not only can collecting this data be time consuming and labor intensive, but there are several limitations of such heuristics –
- commits are akin to hitting “save” on a Word document and do not necessarily reflect meaningful progress,
- developer counts do not reveal whether projects involve “10x engineers” who do disproportionately more work than others, and
- more lines of code could be a sign of poor code structure rather than new features.
The determination of which project repositories to include in these measurements is also unclear due to projects building on private repositories or without clear labels.
Thus, ascertaining a clear picture of developer activity has continued to be a challenge in this space. Instead, we think that an alternate heuristic for developer activity could be evaluating the proportion of blockspace demand that is spent deploying new contracts. (We only include contracts that have at least 1 interaction post deployment to eschew contracts that might be deployed in error.) See chart 3.
In our view, this measure may offer a clearer perspective on developer activity trends in an ecosystem because every application needs to be deployed onchain amidst existing network activity. Ethereum (blue) provides a strong baseline measurement of developer activity at around 1.5% of blockspace demand. Comparatively, Base (light gray) activity has been well above average in the past month, peaking at 2% in early November. Meanwhile, most of the other Ethereum Virtual Machine (EVM)-based chains see developer-driven blockspace demand clustered between 0.2% to 0.6%.
There are, however, a number of shortcomings to this heuristic. First, not all contracts are created equal – some contracts may be key ecosystem applications like Uniswap, while others may remain largely unused. Second, this number does not reflect trends in overall activity. For example, Base’s drop in deployed contract demand throughout September can be partially explained by increased blockspace demand for Friend.tech.
Lastly, chains with cheaper transaction fees and higher throughput may see a lower proportion of their transaction fees spent on deploying contracts due to the nature of applications in their ecosystem. For example, Polygon PoS and Binance Smart Chain both typically see ~20% more contracts deployed than Ethereum on an absolute count, but take up a lower proportion of total blockspace demand per our heuristic.
Further analysis can be done to normalize this behavior across non-EVM chains with different fee market structures and also to potentially account for the shortcomings listed above. Nevertheless, we think our measure provides a unique perspective on developer activity that could be used in tandem with existing metrics.
