Author: Grayscale
Compiled by: TechFlow
In the third quarter of 2024, the crypto market moved sideways, as assessed by the FTSE/Grayscale Crypto Industry Index Series.
This year’s changes to the FTSE/Grayscale index series highlight emerging trends in the digital asset industry, including the rise of decentralized artificial intelligence (AI) platforms, tokenization efforts for traditional assets, and the popularity of memecoins.
Although Ethereum has underperformed Bitcoin this year, it still outperforms the smart contract platform crypto industry index. Grayscale research believes that despite the fierce competition in the smart contract field, Ethereum still has many reasons to remain competitive.
We have updated the Grayscale Research Top 20. The Top 20 represents a diverse group of assets covering the crypto industry that have high potential for the coming quarter. New assets added this quarter are SUI, TAO, OP, HNT, CELO, and UMA.
All assets in our top 20 list have high volatility and are considered high risk; the US election may also be a significant risk factor for the crypto market.
The Grayscale Crypto Category provides a comprehensive framework for understanding the universe of investable digital assets and their relationship to the underlying technology. Based on this framework, and in partnership with FTSE Russell, we developed the FTSE Grayscale Crypto Sector Index Series to measure and track the crypto asset class (Figure 1). Grayscale Research incorporates the Crypto Sector Index into its ongoing research into the digital asset market.
Figure 1: Crypto Industry Index measures the performance of the asset class
The Crypto Industry Framework is designed to be updated dynamically with the evolving digital asset markets and is rebalanced at the end of each quarter. The most recent quarterly rebalancing process was completed on September 20. Since the beginning of the year, index rebalancing has brought significant changes to the index composition, reflecting new exchange listings, asset liquidity changes, and market performance. This year's updates to the Crypto Industry Index showcase emerging themes in the digital asset industry, including the rise of decentralized AI platforms (e.g., TAO), tokenization efforts for traditional assets (e.g., ONDO, OM, and GFI), and the popularity of memecoins (e.g., PEPE, WIF, FLOKI, and BONK).
From a revenue perspective, Bitcoin and the crypto-currency category outperform other market sectors in 2024 (Figure 2), which may reflect the successful listing of spot Bitcoin exchange-traded products (ETPs) in the U.S. market and a favorable macro environment (for more details, refer to our previous quarterly report (Grayscale Research Insights: The Crypto Industry in Q3 2024)).
Figure 2: Bitcoin has outperformed other assets this year, but Ethereum is not far behind
Ethereum has underperformed Bitcoin this year, rising 13%, but still outperformed compared to most other crypto assets. For example, our Crypto Sector Market Index (CSMI) - which measures gains across the asset class - is down about 1% this year. In fact, excluding Ethereum, the Smart Contract Platform Crypto Industry Index is down about 11%, so it significantly outperforms other assets in its market segment. Among all assets within our crypto industry framework, Ethereum’s year-to-date returns rank around the 70-75th percentile. So while Ethereum is up less than Bitcoin, it’s still doing well for the year compared to its crypto industry and the broader CSMI.
Focus on Smart Contract Platform
Unlike Bitcoin, which dominates the cryptocurrency crypto industry, Ethereum faces fierce competition in smart contract platforms. This year, a number of alternative smart contract platforms have gained widespread attention, including Solana, Toncoin, Tron, and Near, as well as the emerging Sui. These assets are all competing for fee income, and the excellent user experience provided by some alternative smart contract platforms may lead to a decline in the market share of Ethereum Layer 1.
Meanwhile, Ethereum has several competitive advantages in the smart contract platform crypto industry that solidify its position (Figure 3). Most importantly, it remains the leader in the category, with the most applications, the most developers, the highest 30-day fee revenue, and the highest value locked in smart contracts. When including the largest Ethereum Layer 2 network, it ranks second in daily active users, only behind Solana.
Figure 3: Ethereum is the category leader in fee revenue for smart contract platforms
As public blockchain technology continues to evolve, Grayscale Research expects the entire smart contract platform crypto industry to experience growth in terms of users, transactions, and fees, which will likely benefit all assets in the category to some extent. Since Ethereum is the category leader, it is difficult to imagine a period of sustained growth in the smart contract platform segment that would not benefit Ethereum, in part due to its pre-existing network effects. Because of this, despite the significant competition it faces, we believe Ethereum remains a compelling asset in the smart contract platform crypto industry.
Additionally, Ethereum benefits from certain specific characteristics that may hold off competitors for some time. These include high network reliability (limited downtime), high economic security, high decentralization, and clearer regulatory status in the United States. There has also been some encouraging adoption within the Ethereum ecosystem, including tokenization, prediction markets, and development by companies like Sony. For these reasons, Grayscale Research continues to believe that Ethereum has a very compelling investment thesis.
Grayscale Research Top 20 Assets
Every quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process of the FTSE/Grayscale Crypto Sector Series Index. As part of this process, Grayscale Research publishes a list of the top 20 assets under the Crypto Sector. The top 20 represents a diverse group of assets that, in our opinion, have high potential (Figure 4). Our methodology considers a variety of factors, including network growth/adoption, upcoming catalysts, fundamental sustainability, token valuations, token supply inflation, and potential tail risks.
This quarter we added six new assets to the top 20:
Sui: A high-performance layer-1 smart contract blockchain that enables innovative applications (see Building Block: Sui for more details).
Bittensor: A platform that facilitates the development of open, global AI systems (see Building Block: Bittensor for more details).
Optimism: An Ethereum scaling solution based on optimistic rollups (a scaling solution).
Helium: A decentralized wireless network running on Solana and a leader in decentralized physical infrastructure (DePin).
Celo: A mobile-first blockchain project that is transitioning to the Ethereum second layer network, focusing on stablecoins and payments.
UMA Protocol: An optimistic oracle that powers Polymarket, a leading blockchain prediction market (among other protocols).
Figure 4: High-potential crypto assets in Q4 2024
The newly included assets reflect several crypto market themes that Grayscale Research is following. Sui and Optimism are both seen as examples of high-performance infrastructure. Sui is a third-generation blockchain developed by a group of former Meta engineers. Two months ago, Sui made a network upgrade that made its transactions 80% faster, surpassing Solana, which has led to the recent increase in adoption on the network. Optimism is an Ethereum second layer that is helping to scale the Ethereum network and has developed a framework for building scaling solutions called "Superchains", which is used by Coinbase's second layer BASE and the second layer built by Sam Altman's Worldcoin.
Both Celo and UMA benefit from unique adoption trends: stablecoin usage and prediction markets. Celo is a blockchain focused on stablecoins and payments in the developing world, and has gained traction in Africa through the Opera browser’s MiniPay app. Celo recently surpassed Tron as the blockchain with the highest stablecoin usage by daily addresses, and is currently migrating from a standalone blockchain to Ethereum’s second layer, using Optimism’s Hyperchain framework. UMA is an oracle network for Polymarket, a breakthrough application for the cryptocurrency election year. UMA records every Polymarket event contract outcome on-chain, and facilitates voting on disputes over Polymarket outcomes, ensuring they are resolved without centralized, arbitrary, or biased interference.
The addition of Helium reflects our preference for industry leaders and projects with sustainable revenue. Helium is a leader in the DePIN (Decentralized Physical Infrastructure Network) category, leveraging a decentralized model to efficiently distribute wireless network coverage and connectivity resources and reward participants for maintaining the infrastructure. Helium has expanded to over 1 million hotspots and 100,000 mobile users, generating over $2 million in network revenue to date.
Finally, while we have been focusing on the topic of decentralized AI for some time, Bittensor is only now being included in our crypto industry framework, thanks to improved market structure, including more available pricing sources and higher liquidity. Bittensor has become a major player at the intersection of crypto and AI, gaining traction by attempting to use economic incentives to create a global decentralized AI innovation platform.
We have removed the following projects from the top 20 this quarter: Render, Mantle, ThorChain, Pendle, Illuvium, and Raydium. Grayscale Research continues to value the value of these projects, and they remain an important part of the crypto ecosystem. However, we believe the revised top 20 list could provide a more attractive risk-adjusted return for the next quarter.
Investing in the crypto asset class involves risks, some of which are unique, including smart contract vulnerabilities and regulatory uncertainty. In addition, all of the assets in our top 20 are highly volatile and may be considered high risk and not suitable for all investors. Finally, broader macroeconomic and financial market developments may impact the valuation of crypto assets, and the U.S. election in November is viewed as a significant risk event for the crypto markets. Former President Trump has explicitly supported the digital asset industry, while Vice President Harris recently stated that her administration "will encourage innovative technologies such as AI and digital assets while protecting our consumers and investors." Given the risks facing this asset class, any investment in digital assets should be evaluated in the context of a portfolio and taking into account an investor's financial objectives.
