Market View
In a previous report (What to Expect in Q2?), we argued that the setup for crypto performance in 2Q24 would be supportive, but that positive factors would only materialize in the latter half of the quarter. We were partially correct, as a more amenable regulatory environment in recent weeks has further crystallized crypto as an asset class. However, bitcoin prices in 2Q24 have remained inside a rather narrow range, which we believe has been more a product of a rather messy macroeconomic background than any endogenous crypto factors. But looking ahead, there may be some supply-side headwinds that may impact prices in the near term including:
- in-kind Mt.Gox repayments worth around $9.8B
- in-kind Gemini distributions worth around $2.2B and
- the cash settlement of the FTX estate worth between $14.5B and $16.3B.
Among these, we think that the Mt. Gox repayments are garnering the most attention among market players – particularly as it’s still not clear when the large cash settlement from the FTX estate will be made available. Those FTX repayments depend on court approval of the reorganization plan, so it is unclear when they may happen. That said, a briefing in March noted that the “JOLs [Joint Official Liquidators] and the Ch. 11 Debtors have a shared goal to make the first interim distribution by the end of 2024”. Also, FTX has already been in the process of selling off its assets to meet obligations.
Meanwhile, the Mt. Gox Rehabilitation Trust appeared to move around 137,892 BTC from their cold storage wallet a few days ago. While some market participants believe this signals that reimbursements are imminent, their ultimate deadline is October 31. We’ve previously said that the precise impact on bitcoin performance is hard to anticipate, as it’s dependent on whether creditors choose to sell some, all or none of the crypto distributions they receive. That said, many creditors who were inclined to sell have already sold their claims to third parties, while the two largest creditors that now represent around 20% of all Mt. Gox claims are themselves hedged. We believe that the remaining creditors, who opted not to take an earlier payout and are instead awaiting resolution from the rehabilitation plan, are more likely to hold rather than sell their bitcoin – given their relatively early support and adoption of bitcoin. Indeed, we suspect that these creditors would have other methods of managing their investment exposure outside of immediately selling their rehabilitation payment.
Separately, near-term attention remains centered around Ethereum as spot ETH ETF issuers have begun to submit amended S-1 filings. That said, the net size and directionality of flows remains uncertain as we discussed in our last weekly. Regional comparisons in Canada and Hong Kong between spot BTC and ETH ETFs suggest that the ultimate flows for US spot ETH ETFs may only be 15-20% of the flows we’ve seen in spot BTC ETFs. Alternatively, if we compare the total assets under management (AUM) for the Grayscale Ethereum Trust (ETHE) from the beginning of the year at $7.3B to the Grayscale Bitcoin Trust (GBTC) at $28.9B (i.e. before US spot bitcoin ETFs were approved), that ratio is closer to 25%. That said, these are only crude rubrics for something that’s exceptionally difficult to estimate.
Additionally, if President Biden does not veto the SAB 121 repeal by the June 3 deadline (delayed from May 28 due to procedural issues), banks and other financial institutions will no longer have a large financial block in providing crypto custody services. If the SAB 121 repeal becomes law (and the President has promised a veto), we think that this change would likely benefit BTC and ETH foremost due to their commodity status as well as their longevity and network security. The foray by traditional financial institutions into crypto will be bolstered by clear regulatory approvals, which could have outsized benefits on ETH due to its role in underpinning many tokenization efforts. Indeed, ETH futures open interest reached all time highs this week at $15B. Meanwhile, BTC open interest remains at $30B, below its March 15 high of $33B.
Onchain: Solana Fee Changes
Solana validators recently passed a vote to remove the 50% burn on priority fees and reward the full fee to validators instead. The vote passed with a 78% approval rate (of the total “yes” and “no” votes), though 51% of validator voting power either abstained or did not cast votes. In our view, the elimination of priority fee burns will have a relatively small effect on net SOL issuance in the near term (compared to the 5.3% realized inflation rate over the past 12 months). Priority fee burns removed 28k SOL from circulating supply in the past week, an order of magnitude less than the 402k SOL issued via inflation mechanisms over the same period. That said, this would eliminate the majority of current SOL burn since priority fees constitute upwards of 85% of all transaction fees (see Chart 2). This would make it harder for fee burns to counteract SOL’s inflation without additional reworking of the fee mechanism.
More importantly, we think this fee change highlights an important difference between Solana and Ethereum’s governance mechanisms. Ethereum Improvement Proposals (EIPs) have a structured and formal process for inclusion into a network fork (the most recent of which was Dencun in March 2024). This process relies heavily on social consensus and discussions between different stakeholders. There is no onchain voting of staked ETH, and upgrades are bundled into a single forking event that is telegraphed many months in advance.
On the other hand, Solana Improvement Documents (SIMDs) can be included into network upgrades either via social consensus or validator votes. The proposal to reward 100% of the priority to validators, SIMD-96, was voted on by validators in the following process described in their discussion forum:
- Discussion period: Validators are encouraged to participate in discussions to address any concerns.
- Stake weight collection period: Stake weights are captured and published for voting. Validators have the opportunity to verify these weights.
- Vote token distribution: Validators utilize the Jito Merkle Distributor tool to claim the vote tokens corresponding to their stake weights.
- Creation of token destination accounts: Three token destination accounts are created for voting choices: Yes, No, and Abstain.
- Voting period: Validators have a designated period to vote by sending their tokens to the respective addresses.
- Vote tallying: After the voting period, if the sum of Yes votes is equal to or greater than 2/3 of the total sum of Yes + No votes, the proposal will pass.
There has been mixed reception to these changes. Some validator operators claim that removing priority fee burns prevents side deals and promotes the financial viability of running a validator. On the other hand, others have pushed back that this disproportionately benefits validators with large amounts of stake or that this makes it harder to combat SOL inflation via fee burns. That said, it’s important to note that validators are the ones ultimately making this vote – not individual SOL owners or other stakeholders (except indirectly by validator delegation).
This change will not take place immediately. It will be locked behind a feature gate, and also requires an update to fee calculation rounding, which is targeted for v2.0. Mainnet Beta is currently undergoing a transition from v1.17 to v1.18, and there is no v1.19 planned. Deploying v2.0 to Mainnet Beta and then enabling the feature gate change could take several more months based on the previous release cycle timelines.
Onchain: Ethereum’s Blob Utilization
On Ethereum, blob usage has been driven upwards as a result of increased rollup adoption. In particular, Scroll, Blast, and Taiko’s recent adoption of blobs now puts them as the top blob posters in line with Base, Arbitrum, and Optimism. That said, blob storage is still typically below target levels. Ethereum is processing more than 2 blobs per block on average, with most blocks containing less than or equal to the target of 3 blobs (see Chart 3). Unlike the previous blob utilization peaks in late March and mid April, recent blob activity has not been inscription-driven. As a result, we anticipate this utilization to be less transient in nature, and it could continue to grow as more rollups launch.
Once blob utilization surpasses the target 3 blobs per block, blob fees may spike to mitigate demand. This could eat into layer-2 (L2) sequencer profitability, which is captured as the difference between earnings from total L2 transaction fees minus the costs paid to the Ethereum mainnet. However, L2s have multiple means to reduce their cost footprint. They can optimize posting frequency to reduce the total number of blobs (e.g. Starknet posted 6,314 blobs on its first day of blob adoption, but currently posts about 250 per day). L2s could also stagger their blob posting timings via a (not-yet-built) coordination mechanism. In the past week, approximately 25% of blocks have had 0 blobs posted to them, while 20% reached the maximum 6 blobs. This variance leaves much room for optimization, though L2 fees could increase in the interim before said optimizations are implemented.
The Pectra upgrade tentatively slated for 1Q25 could also increase the target and maximum blob counts in the longer term. PeerDAS (peer data availability sampling), which is currently targeted for inclusion, extends blobs by sharding data across multiple nodes. That is, the storage and retrieval of blobs can be distributed across the network to enable a larger amount of data stored without meaningfully impacting validator requirements. Per some estimates, the maximum blob count could increase from 6 to 32 (with room to increase further to 64 or 128). In our view, this additional capacity should suffice for most L2s. That said, a large rise in the number of application specific chains (such as those planned by ENS, Maker, and Aave) could drive adoption of alternative data availability layers like EigenDA, Celestia, or Avail if Pectra gets significantly delayed or blob demand grows faster than anticipated.
