Crypto Newsletter June 2023: On-chain Analysis
26 June 2023
Network Utilization Measures
The price may be down, but how is the network utilization doing? Last month we looked at active addresses and total addresses in Ethereum and Bitcoin. The number of addresses only reveals the tip of the iceberg when it comes to network utilization measures. Firstly, we can differentiate between utility and utilization measures. While a utility measure shows how much utility a network has, utilization measures show how much a network is really used for a specific utility.
It is actually surprisingly difficult to find a utilization measure that can be used cross-chain, mostly due to the protocol-level differences between blockchains. The most simple and intuitive one is total on-chain volume normalized by market capitalization. We normalize by market capitalization to understand whether there is relatively more volume on one blockchain versus the other. We could take this one step further and use our concept of last week to look on the average normalized on-chain volume per active unique address to understand how many unique users are actually using the chain for value transfer. As we know, value transfer through native (such as ETH on Ethereum) or non-native tokens (such as DAI, an ERC20 decentralized stablecoin) is one of the key utilities of blockchain. The final metric can described as the total on-chain volume divided by the market capitalization divided by the number of unique active addresses.
Luckily for us, all these metrics are readily available from on-chain data providers or even by yourself in case you’re running your own node. For unique active addresses we are using active addresses with a balance higher than 1$ (i.e. excluding insignificant accounts, zero balances). Since this number may be meaningless without comparison we calculate the ratio between Bitcoin and Ethereum. One disadvantage of this metric (could be seen as advantage as well) is that it doesn’t show adoption. It is merely a metric of how much value is transferred per unit of market capitalization per active address.
What does the graph show? Apparently almost no trend, there seems to be some periodicity in the metric. That is not what we are interested in; let’s take a closer look at the ratio and try to understand what is going on. A ratio of 1 would suggest that the value transferred per unit of market capitalization per active user is the same on Ethereum as it is on Bitcoin. A value higher than 1 would suggest that Bitcoin fulfills the value transfer utilization better than Ethereum and vice versa for a value lower than 1. In other words, Bitcoin seems to be consistently undervalued (value above 1) when it comes to value transfer utilization. There is a slight negative slope trend (which is in favor of Ethereum). It remains to be seen whether Ethereum will at some point consistently beat Bitcoin it terms of this metric. One thing that could complete this picture is to also include on-chain volume from layer-2’s on Ethereum (and Bitcoin). I will leave this as an exercise to the reader
Source: Messari, data as of 19-6-2022 to 19-06-2023. Past performance is no indicator of future results.
Post Shanghai Analysis
It has now been a couple months since full implementation of the Shapella (Shanghai and Capella) upgrade. Through on-chain analysis everyone is capable to review Ethereum’s transformation in quantitative terms and see if it matched our expectations, if not, we try to understand why it did not develop the way we think it would. To quickly recap, the Shapella upgrade allowed Ethereum stakers (i.e. validators) of the proof-of-stake network to withdraw their full or partial stake, it also allowed them to withdraw previously earnt rewards. Pre-update, the market expected initially significant withdrawals followed by even more significant deposits hence Shapella having a net-positive effect on the staking ratio of Ethereum.
Unsurprisingly, the day after the Shanghai/Capella upgrade 14,249 validators exiting, which remains the largest daily count. After this peak, exit events quickly tapered off, having levelled off to between 300 and 700 per day. Overall, this update seemed to have a positive effect on the network so far.
Source: Glassnode, data as of 08-06-2023. Past performance is no indicator of future results.
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