--:-- Robert Hackett: October 31st, 2008. That was the date that the Bitcoin white paper was released. And in the 16 years since, well, so much has changed. So where are we really today in the arc of crypto adoption? Not only at the infrastructure level, but also the applications built on top.
--:-- In today's episode, you'll get to hear a16z's crypto team dive into their new State of Crypto report. So how many real crypto users are there? Have gas prices come down enough for real applications to be built on top? And what is crypto's relationship to the national conversation? Listen in to find out.
--:-- Oh, and this episode was originally published by our sister podcast, *Web3 with a16z*. So if you are excited about the next generation of the internet, find *Web3 with a16z* wherever you get your podcasts. And of course, you can find a link to the State of Crypto report in our show notes. Now over to host Robert Hackett for more.
--:-- Robert Hackett: Welcome to *Web3 with a16z*. I'm Robert Hackett, and today we've got a special episode. We're taking you behind the scenes of our newly released annual State of Crypto report, a16z Crypto's analysis of the latest data and trends that have defined the industry in 2024.
--:-- This year's report features some brand new insights, from estimating the number of real crypto users globally to understanding how much interest in crypto swing states may have ahead of the U.S. election. We also dig into infrastructure improvements to blockchains and key applications, including stablecoins, AI, and so-called DePIN. Be sure to visit a16zcrypto.com for all this and more, including a new Builder Energy dashboard, which we'll discuss on today's show.
--:-- Joining me to talk about the findings are our lead data scientist and report author, Darren Matsuoka, and CTO, Eddie Lazarin. The first voice you'll hear after mine is Darren's, then Eddie's. As always, none of the content should be taken as tax, business, legal, or investment advice. See a16z.com slash disclosures for more important information, including a link to a list of our investments.
--:-- This is our third year doing this. We've put together three of these State of Crypto reports. Why do we do it?
--:-- Darren Matsuoka: I think we like to use this report as an opportunity each year to really take a step back, look at the industry holistically, analyze all of the data that we have access to. We consult with various experts across the industry and ultimately bring it all together into a single perspective.
--:-- Eddie Lazarin: Yeah, I think that's right. And I don't want to get too lofty with this, but crypto as an industry was born in the social media age. That means that information is constantly being streamed in real time. So I like to see the State of Crypto report as a way to pause for a second and appreciate what's happened in the stream.
--:-- When you're in the mix of it and things are getting blasted at you multiple times a day, it can be hard to get a sense of the cumulative progress, let alone to remember what was getting streamed to you at full speed a year or two years ago. So I think the State of Crypto Report is a chance for us to take a step out of the firehose and to take a look at what's actually transpired.
--:-- Darren Matsuoka: To that point, our goal is not to just say that the crypto industry is great and get that message out regardless of what we're seeing. We really try to be intellectually honest based on data and what we're seeing out there.
--:-- Eddie Lazarin: Another thing I'll say is that crypto has a very overdeveloped in-group language, not just because of the memes and the jokes and the personalities, but also because of the technical complexity. All those things together create this really strong in-group language. I think of our report as a way to try to mainstream some of those big things. We try to avoid in-group language and make things very accessible through charts, through very simple explanations. It's an opportunity to do that too.
--:-- Darren Matsuoka: Also, it's a way to shift the way people talk about crypto, because crypto is filled with really difficult concepts and terms. To be able to peel back the layers and talk about what is actually happening in a way that people can understand is a unique challenge.
--:-- Robert Hackett: Let's talk about how the report opens. We're trying to summarize the state of crypto in the past year. First up is size in the market. If we're talking about crypto, the first question you might have is, what are we talking about here? How big is the industry? How big is the market? That's the first question that we tackle here. Darren, you want to hit us off?
--:-- Darren Matsuoka: Sure. For many years in the past, we've been mostly focused on building the infrastructure to make all of this work. There really wasn't that big of a market for users of these crypto-based applications. But I think in 2024, we really did hit a tipping point with infrastructure improvements. These blockchains are becoming more and more accessible. They're cheaper to use. As a result, we're starting to see applications come online. Now that we have these applications, I think it's really starting to come to life. In the years to come, this will be an increasingly important question.
--:-- Eddie Lazarin: Yeah, I think that's right. Beforehand, the technology was still coming together. In many cases, it is still coming together. But we're actually beginning to see some applications. That's something that if you haven't been paying attention to crypto, you might not realize.
--:-- Darren Matsuoka: Totally. And I think the results speak for themselves. Active addresses across all of the blockchains that we track hit an all time high this last month of 220 million. Mobile wallet users, data that we get from mobile app stores, also recently hit an all time high of 27 million. The numbers do speak to this idea that we are now seeing some of these breakout applications that are bringing real on-chain transactions and usage.
--:-- Robert Hackett: Let's go through each of those. You mentioned that active addresses are at an all-time high. This is a kind of controversial metric. Not everybody loves talking about active addresses. One of the things they have going for them is that they are easy to measure. It's something that you can very easily quantify. I think to really understand why active addresses has become such a hot topic recently, we need to look at some of the historical context.
--:-- In traditional software, most people tend to understand the basic concept of a user. Of course, there are ways to measure the quality of the user. There's a whole field of growth analytics around this topic. But in its most simple form, I think people can grok the idea of a daily active user or a monthly active user. It's just the number of people that are using your product and service on a daily or monthly basis. It's fairly straightforward.
--:-- But in crypto, things are a lot trickier. The reason is because on blockchains, user identities are pseudonymous. This means that it's very easy for one person to create and control a group of public addresses or identities. This is called a Sybil. Up until recently, a lot of the most popular blockchains had very limited capacity, which resulted in high transaction fees. This created a natural barrier for spinning up and using thousands or hundreds of different addresses because it would come with significant monetary costs.
--:-- But recently, we've seen that crypto infrastructure has become more scalable via L2s and new high throughput layer ones, which has reduced the cost of transactions on many of these blockchains to nearly zero. You might ask, isn't it also near zero cost to create multiple identities on traditional internet applications? I'd say, yes, that's true for the most part. I can create multiple email addresses pretty easily. But the key difference here is that in the crypto world, we have very strong incentives for this type of behavior.
--:-- Eddie Lazarin: Google doesn't give you money for opening a new Gmail account, unfortunately.
--:-- Darren Matsuoka: Exactly. A lot of new tokens today actually bootstrap their circulating supply by doing something called an airdrop, where you reward retroactively users of the protocol based on a predefined set of addresses. As long as people believe that these tokens could be valuable, there is a strong incentive for them to try to game the system by creating and transacting under many different identities. This is commonly known as airdrop farming.
--:-- Eddie Lazarin: There's no reason that one person couldn't spin up hundreds of millions of addresses and just go wild, engaging in totally useless and inauthentic activity in order to try to maximize their likelihood of extracting as many rewards as possible. What we've seen over the last four or five years that we've had airdrops and yield farms and so on, there's been a profound professionalization of the efforts to pull out those rewards. People have gotten really, really, really good.
--:-- I want to make it really clear to anybody who thinks that it is a gigabrain take to say monthly active addresses is Sybil-able. Yes, we know that. If you have a better way to measure using public data that's verifiable by everyone or that is easy to trust, I'd love to hear it. Tell me a better way. I'm thirsty for it. Let's work together and let's figure it out, because the space deserves really high quality, transparent metrics. That's what we're trying to do.
--:-- Robert Hackett: Given what we know about these behaviors, how many users are there? Is it 10 million? Is it 50 million? Is it 100 million? This is the question that we put a lot of work into, and we're going to publish some of our thoughts around estimating that. We'll include that blog post in the show notes. But maybe you could walk us through how you think about actually getting from this big number, this 220 million number. If that's the number of addresses, how do we get down to humans? How do we reduce that to the number of users, the actual flesh and bones on the other end of a screen?
--:-- Darren Matsuoka: One approach sounds kind of obvious: we've got these 220 million monthly active addresses. What if we could filter out what we suspect are bots and Sybils? The way that we can do this is using on-chain analytics and forensics.
--:-- One method is to filter out addresses that received funds from something called a dispersion contract. This is a smart contract whose sole purpose is to take in funds and automatically distribute them across many different addresses. There could be false positives here, but the activity implies that the destination addresses all received funds from a single source and therefore they're connected in some way. Certain types of filtering around dispersion contracts specifically can eliminate a lot of the bots that you might see.
--:-- The other approach involves looking at addresses that have a near zero balance at both the beginning and end of the period that you're aggregating over. For example, if you're trying to find the real number of monthly active users in September, you can look at addresses that had a zero balance on both September 1st and September 30th. This criteria implies that the addresses were transient in nature. Bots and Sybils typically want to clean up their balances after taking actions on chain, whereas real human users usually like to keep some balance in their wallets to cover future transaction fees.
--:-- Robert Hackett: So this is like an address popped up and then within some period of time, people dumped into another thing and the address never was revived after that.
--:-- Darren Matsuoka: Exactly. This is the type of behavior where it received a source of funds, it took some action, and then it pushed all of those funds outside. It's a very transient type of activity that's often associated with bots and Sybils.
--:-- The other thing that we've looked into is the frequency of transactions. You can analyze these distributions to look at: did the address transact one time, two times, three times, four times, five or more times during the period? Addresses that have just one or two transactions, at best they're a low quality user. At worst, they're a bot or a Sybil. Especially over longer periods of time, this type of analysis can help you in some of that filtering.
--:-- You can also specifically look at addresses that transacted very frequently over very short periods of time. Humans can only reasonably process a certain number of transactions through a wallet or app interface, whereas bots can do things much faster. So you can do some filtering there.
--:-- On the flip side, you can optimistically include addresses that are tied to some sort of identity protocol that requires some setup cost. For instance, addresses that are tied to an ENS name or a Farcaster ID or some other linked social identity are likely to be real human users.
--:-- Obviously, it's very complicated and requires a lot of on-chain data and analytics and forensics. But we've done an internal analysis taking this approach, and I think we've come up with some decent estimates.
--:-- Robert Hackett: Okay, so the first method is basically you're starting with the number of active addresses and you're trying to whittle it down based on culling the wheat from the chaff, culling out the addresses that seem transient, bot-like, or low quality.
--:-- Darren Matsuoka: Yeah, so this is reducing the ceiling. We know what the ceiling is. If there's 220 million monthly active addresses, then we're trying to lower the ceiling. And then we can use other methods to try to get at a reasonable estimate of the floor.
--:-- Robert Hackett: Okay, so let's walk through method number two then.
--:-- Darren Matsuoka: Method number two says, rather than looking at active addresses, let's look at some other sources of data that we might have access to, particularly off-chain data. An obvious place to start here is wallet users.
--:-- For example, in February, MetaMask, which is a popular Ethereum wallet, reported that they had 30 million monthly active users. Specifically, they define an active user as someone who either loads a page within the MetaMask extension or opens the mobile app at least once during any 30-day period. Assuming that we're looking to estimate transacting users, we need to make some assumption on what percentage of MetaMask users actually end up transacting. That requires some research. I don't think we're going to find the perfect number. We do have some sources that we can cite that say that 30% of users of MetaMask, at least on a daily basis, actually end up transacting. So let's say 30 to 50 million, you can use some sort of assumption there. Based on that, you have 10 to 15 million users that we believe are transacting through the MetaMask wallet products.
--:-- Then all we need to do is try to understand what MetaMask's market share in the wallet space is. The exact data here is not going to be readily available, but we can make some educated guesses based on what we know. For example, we do get pretty good estimates of MetaMask's market share on the mobile wallet side, based on some data that we get from Sensor Tower. Once we are able to estimate what MetaMask's market share is, we can simply extrapolate an estimate for the total number of crypto users from that 10 to 15 million that we discussed earlier, and then compare the results to approach number one, the filtering from active addresses, to triangulate on at least a range that we feel is in the right ballpark.
--:-- By the way, it doesn't just have to be MetaMask. We can also run this exact analysis for other wallet providers who have either reported their numbers publicly or are willing to share their proprietary data. And then, as I mentioned, just triangulate on a range based on all of the information that we have.
--:-- We have done this internal analysis. It is definitely not perfect. I'm not claiming that we are super scientific about this. But we feel comfortable saying that we think there are 30 to 60 million real monthly transacting crypto users today. This is still a small percentage of the monthly active addresses. It's 14 to 27%. And an even smaller percentage of the total number of people who own crypto but do not necessarily transact with crypto. It's actually only 5 to 10% of the 617 million reported by Crypto.com. That means there's a huge opportunity here to convert existing crypto owners into active crypto users by bringing them on chain.
--:-- Eddie Lazarin: The point is not that the Sybil analysis is perfect and we can end up at a flawless classification of which addresses are real humans and which are not. The point is to get an order of magnitude range so that we can look at growth. That's the goal. The goal is to be able to look back retrospectively and say, we're bigger than we were last year. We're bigger than we were the year before that, and see approximately how things are developing.
--:-- I also have this funny way of thinking about this, too. I'm like, well, maybe we're entering this new internet world where AI and bots and these things that are farming right now for rewards and trying to snatch up incentives that certain projects are offering. Maybe we're entering an internet where bots and AI are just infused everywhere. Why are humans the major metric?
--:-- Darren Matsuoka: Look, I don't want to get too sci-fi, but everything is many to many now. Everything in a networked world is many to many. Does one person have a credit card? No, you have many. Is a credit card only used by one person? No, there are many. Internet accounts, cars, just everything is totally intertwined and entangled. As we add AI agents and other such things, it's going to get even crazier.
--:-- Eddie Lazarin: In a way, what we really want is to measure the attentional capacity that things command. The total amount of cognitive bandwidth that they are commanding from the environment. But that's a really sci-fi, out there, kind of kooky conversation to have.
--:-- Robert Hackett: Next year's State of Crypto report: can we measure cognitive bandwidth?
--:-- Robert Hackett: All right. So if we're sizing up the market, when we're looking at actual users and trying to think about the people who are using, interacting with crypto on a monthly basis, actual humans, we're looking at around 30 to 60 million, which is, as you said, 5 to 10% of the people who own crypto globally and also a fraction of the active addresses, too. Why such a wide range? Why 30 to 60? Can you not get any more precise about it?
--:-- Eddie Lazarin: I think if anybody has a problem after they hear the methodology, they might complain that it's not wide enough. Maybe it should be wider. Maybe it's 20 to 70 or 20 to 80 or something. It's hard to say exactly. Very open to that. We're not pretending that this is a totally flawless analysis.
--:-- The reason for the range is just contained in Darren's reasoning. We had to make some estimates. There's some things you have to kind of guess, like the ratio of monthly active users reported by MetaMask to the proportion of them that actually do transact per month, thereby becoming an active address. Those are just things that we have to estimate.
--:-- I think it helps even just to think in orders of magnitude. The fact that active monthly users of crypto is about tens of millions and global owners of crypto is hundreds of millions. There's a gap, there's a gulf there, but we're beginning to see the outline of the market that we're trying to size up here.
--:-- Robert Hackett: That's right. One thing that will be apparent to anybody who looks at this report is that it's not just that active addresses are at an all-time high, it's that there are a few blockchains that are driving this. One of them is Solana. Solana has far and away the most active addresses of any blockchain network that we looked at. It's got 100 million or so. What's going on there?
--:-- Darren Matsuoka: I think the obvious answer is that the blockchains that have the most active users are the ones that it's cheapest to transact on. Blockchains like Solana are very, very cheap, which means it's very low cost to set up bots and Sybils. We also got some interesting data from the Artemis team, and we have found that on blockchains like Solana, a large portion of the activity is simply one-time use or two-time use, which indicates that there is a larger percentage of bots and Sybils on these low-cost chains. I would take all of the face value monthly active addresses by chain data with a big grain of salt because there is lots of nuance associated with this.
--:-- With all that being said, Base and Solana were some of the top destinations for crypto users in 2024. I don't want to take away from the great growth and development that those ecosystems have seen this year.
--:-- Eddie Lazarin: Base has the most active addresses of any Ethereum chain that we looked at, at 22 million, exceeding even Ethereum, which has 6 million. Clearly, they've struck a chord.
--:-- Robert Hackett: Totally. I was also interested to see Bitcoin up there. Bitcoin's got 11 million by our count.
--:-- Darren Matsuoka: Totally. To keep going on this point, the cost to transact on Bitcoin is not near zero, which means there is likely to be less bots and Sybils on the Bitcoin blockchain. You can kind of take that number more at face value. Certainly, Bitcoin has been an ecosystem where we've seen more builders actually try to build new products and applications on the Bitcoin blockchain. It's gotten very mainstream attention with a lot of top politicians talking about it. Definitely a good year for Bitcoin.
--:-- Robert Hackett: Definitely. The strategic Bitcoin reserve, once a niche idea, is becoming more mainstream.
--:-- Eddie Lazarin: To add to Darren's point, it's a lot more difficult to look at Bitcoin activity and say that it's largely driven by Sybil. I think that's just a lot more difficult to believe. So if activity is positive on Bitcoin, the implication is that there's probably an increase in real activity across the rest of the space. Take it with a grain of salt, but I think that that's likely to be true.
--:-- Robert Hackett: We're talking about some of these blockchain networks that have had a lot of activity and interest over the past year. We mentioned Solana, Base, even Bitcoin. One of the most exciting things about this year's State of Crypto Report is this segment that we've dedicated to builder energy. This idea of looking at everything that founders are telling us about where they're building, what they're interested in, and where their activities and energies are directed toward. I think that is going to be a mainstay feature of future reports.
--:-- Eddie Lazarin: The big context is that the heartbeat of the crypto industry is all of the builders who are building the products and infrastructure to make this all work. We meet with and engage with thousands of companies every year as part of our course of business through investment team research, our crypto startup accelerator. We do some external deal tracking. For the first time, we now have a lot of tools internally that allow us to normalize a lot of that data, aggregate it in a way that we can share some of that data externally so that people could see the bigger trends here across blockchains, geographies, technologies, and categories.
--:-- We've made a dashboard that we call the Builder Energy Dashboard. It has some very cool interactive data visualizations around all this data. You can check it out at builderenergy.a16zcrypto.com.
--:-- Darren Matsuoka: One thing I'll point out is we were talking about blockchains that have the most active addresses. It's interesting to me that it sort of lines up with where builders are interested in building on and what they are building on. We've seen more and more builders interested in Solana and actually building projects on Solana. That was the biggest jump in interest that any blockchain had seen between this year and last year. Base as well, super high up there. Even Bitcoin in slot number three had a really big bump in people who want to build on it.
--:-- Eddie Lazarin: Maybe just to add one clarifying point here. The way that we source this data comes from a question that we ask founders and builders. We ask them simply, what blockchain ecosystems would you be interested in building on? It does not mean that there are this many builders specifically deploying contracts or that there are a certain number of protocols on these blockchains. It simply means where, generally speaking, are these builders interested in building on.
--:-- I'd say still today, Ethereum and all of the layer twos, including Base and Arbitrum and Optimism and ZK Sync and the others, still capture a majority of the builder mindshare. Those were the key takeaways from that data, but you can check it out yourself by looking at the dashboard.
--:-- Robert Hackett: Excellent. So this is an election year and crypto has become a part of the national conversation. People are talking about it. Politicians are talking about it. Candidates for the office of the president are talking about it. What have we found about how crypto has changed from last year when we did the report to this year when it comes to a policy perspective?
--:-- Eddie Lazarin: Crypto has become political in the sense that the crypto industry believes that political engagements can help resolve some of its major challenges. A big question is whether that has made it to the mainstream or not. Have the crypto industry issues become something that some voters or enough voters care about?
--:-- Robert Hackett: Probably for me, the most interesting slide in the policy section of this report is this analysis of the crypto interest that we're seeing within various states of the union. Walk us through this analysis that you did here and what you found.
--:-- Darren Matsuoka: Everybody knows that this presidential election is shaping up to be a very tight race. It will likely be decided by a handful of counties in a handful of swing states. We wanted to at least understand: based on some of the data that we have, is the interest growing or shrinking across these different states?
--:-- Darren Matsuoka: And so we basically used Google Trends data. We looked at a basket of search terms that were relevant to crypto: Bitcoin, Ethereum, and crypto. We looked specifically at the relative change in search interest as defined by Google Trends from 2020 to 2024. We looked at which states increased in rank and which states decreased in rank. We plotted that on a map and showed which ones had the highest growth and which ones had the highest declines.
--:-- Darren Matsuoka: I think if we look at the swing states specifically, the most interesting takeaway is that Pennsylvania and Wisconsin actually had top five ranks by change in this relative crypto-related search interest since 2020. I believe they were fourth and fifth. These are some of the tightest races currently, as indicated by various prediction markets. There are many different factors at play, and you need to be careful in what you conclude from a simple analysis like this alone. But I think there is some evidence to suggest that crypto is relevant here and could have an impact.
--:-- Darren Matsuoka: It's not a sentiment analysis, so we don't know exactly what those people searching for these crypto terms actually think about crypto. But we do know they are searching for crypto terms, which indicates general interest. That is pretty interesting to note in and of itself.
--:-- Eddie Lazarin: You mentioned Pennsylvania and Wisconsin in the top five. Michigan is, I believe, number eight, so that's in the top ten. And then there were some declines. Some states saw a drop in interest. One of those is Nevada, a place that has the city of Las Vegas, which is often associated with gambling. If there's less crypto interest in Nevada, I don't know that that's necessarily a bad thing. But it is really interesting to see that this election could come down to a few counties in a few states, and these are places where there is increasing interest in crypto, especially since the last election in 2020.
--:-- Eddie Lazarin: Just to add clarifying detail, all of this data is by default from Google Trends population adjusted. They are representing this data as a percentage of the total searches in the region. We don't actually have visibility into the actual total numbers by state.
--:-- Darren Matsuoka: That's right. Total numbers anyway would be skewed toward the states with the biggest populations, which wouldn't be extremely informative.
--:-- Robert Hackett: Another really big thing that happened this year from a policy perspective was the Bitcoin and Ethereum exchange-traded products were approved. I'm deliberately calling them exchange-traded products, ETPs, and not ETFs, because ETFs, while they are a form of ETP, the underlying portfolios of them would have securities. In this case, these crypto ETPs were registered with the SEC in a way that indicates the underlying portfolios are not securities. Anyway, that's a really important point. It is the first time we've ever had these market products accessible on major stock markets. It's kind of a big deal.
--:-- Eddie Lazarin: I think it's a very big deal. I think it legitimizes crypto as an asset class. I think it puts us on a path to really having crypto be a part of every diversified portfolio and just makes it much more accessible, which I think is a good thing.
--:-- Eddie Lazarin: In the report, we do look at these net inflow numbers because crypto is all on chain. We can see when the ETFs are accumulating and distributing crypto out of these products. They haven't been all that high relative to expectations. Maybe it has underwhelmed a bit. But I have talked to some experts and they do say that getting the distributors activated is something that's going to take time. You need to go through a long process. You need to get it into the model portfolios. You need to discuss it with your clients. I think that could be a multi-year process. So I'd keep an eye on those inflow numbers over the next few years, because now that we have them, I think it's a tremendous tailwind for the industry.
--:-- Darren Matsuoka: Yeah, I think it absolutely does broaden access to a whole new segment of investors that otherwise would not have dabbled with crypto beforehand. I'm thinking about my dad, for one. He's like, "Where's the ETF? Where's the ETP?" as it were, because he's probably not going to set up a hardware wallet.
--:-- Robert Hackett: All right. Okay. Anyway, let's dig into some of the other things we found in this report. People always ask this question, where are the crypto applications? But there's one that's been staring people in the face for a long time, and that is stablecoins. Stablecoins are a product that people are using a lot. It's a crypto product. I think people discount that.
--:-- Eddie Lazarin: Well, stablecoins have been in crypto for a long time. In the earlier days, people used to think of them as something that would end up being for payments. Very interestingly, what we found in 2021, 2022, as the stablecoin supplies really started to pop off, was that they were primarily being used as a means of settlement between centralized exchanges and also as collateral for DeFi protocols. Something people could supply and end in a protocol and then enable other people to borrow and create debts denominated in dollars, which is a lot easier to reason about than a debt denominated in Ethereum or some other volatile asset.
--:-- Eddie Lazarin: Another reason why stablecoins make a lot of sense as collateral is that if you're borrowing a fair amount on chain, it may be totally reasonable to pay a 30, 50, or even $100 transaction fee to perform that borrow because it still may be meaningfully more affordable than other ways to engage in an over-collateralized loan. That is really the type of use case that we saw for people in the 2021 through 2023 period for stablecoins.
--:-- Eddie Lazarin: But as a result of the infrastructural improvements in 2024, where lots has come online — not just 4844, but the proliferation of L2s in Ethereum world generally — now sending stablecoins in a single transaction often costs a penny or less.
--:-- Robert Hackett: 4844 being the Denkun upgrade that Ethereum went through in March of this year, also called proto-dank sharding.
--:-- Eddie Lazarin: Yeah. So as a result of those infrastructural improvements, as well as increasing adoption in newer generation, newer architecture blockchains like Solana, Sui, many others, now sending stablecoins in a single transaction often costs a penny or less. Because of this, just this year, because of these improvements, I think a lot of people are talking about stablecoins as a medium for payment again.
--:-- Eddie Lazarin: It's really interesting to me because I can't emphasize enough how in 2022, this was just a non-starter. Everyone had given up on it. I don't think I heard the word "payment" in 2022, except to debunk the possibility that stablecoins were being used for payments. Whereas now it's something that I'm hearing about all the time.
--:-- Eddie Lazarin: It's not just in a conventional "pay for your coffee with crypto" setting, although that is actually a real possibility. Coinbase had a "pay for coffee with USDC" day in New York not long ago. It was a lot of fun. But more concretely, people can now play with blockchains as a piece of infrastructure to potentially bring down interchange fees and merchant network fees — all the types of fees that go into settling an actual consumer payment for something.
--:-- Darren Matsuoka: I just pre-ordered a book from Stripe Press with the new Stripe "Pay with Crypto" feature. USDC on Solana was fantastic. It was just a really straightforward experience for me. Of course, I already have crypto in my wallet, so that made it pretty convenient. But these are real things.
--:-- Robert Hackett: Right. This is because you've got to still onboard to a layer two network, say an L2, a rollup where the fees would be lower. But once you're there, it becomes quite seamless to transact and move around.
--:-- Eddie Lazarin: Yeah. And there are still very meaningful UX challenges. But the point is that now this is in the story. There are a lot of crypto projects that are interested in trying to improve payments or aspects of payments or take advantage of the ease of settling payments internationally, computationally. There are all kinds of ways that payments ought to be programmed and experimented with. Now just this year, that's a possibility.
--:-- Eddie Lazarin: To set people's expectations, the way I like to think about it is: now that there is a glut of supply for being able to transact stablecoin dollar-denominated payments, how long will it take for builders to consume that extra supply in terms of interesting applications? It's not instant. People don't realize this. People see new technology and it sort of appears. But from my perspective, it takes at a minimum six months to start to see people really talk about it. And then it takes about two years for people to soak up all of the excess.
--:-- Darren Matsuoka: This reminds me a lot of the Midwit meme, where it's like, maybe it is as simple as: when the fees come down, stablecoins work well. When the fees are really high, stablecoins kind of suck. I think to all of the points that Eddie made, in 2024 we made a ton of infrastructure improvements. It brought fees down. Just to share some data from our report on this: in 2021, to send USDC on Ethereum using the average gas price, it was about $12. That's a lot of money. That was like my lunch that I just had today.
--:-- Eddie Lazarin: Yeah.
--:-- Darren Matsuoka: And as people took for granted, that's obviously totally unacceptable for a payment setting. Unless you're moving tens of thousands of dollars, then it actually may be better. But there's a smaller number of people who are in that situation.
--:-- Darren Matsuoka: Today, if you use USDC on Ethereum post EIP 4844, it's like $1. But if you use USDC on Base, which is a layer two, it's less than a cent. That makes all the difference when it comes to stablecoin adoption. It's no coincidence that 2024 was the year that stablecoins found product market fit. It's as simple as the infrastructure got better, fees came down, and now it works.
--:-- Robert Hackett: It's really amazing to wrap your head around this, that just a few years ago, it cost $12 to transact.
--:-- Eddie Lazarin: Exactly. It totally changes the applications that are possible. I think there are a number of examples that we can point to that are only now possible in a low fee environment. We do our best to highlight those emerging applications in the report.
--:-- Eddie Lazarin: This doesn't just speak to stablecoins. It also speaks to other sorts of applications that weren't possible before. I would say the most striking thing to me in this report compared to past reports was: look, NFTs were going crazy a few years ago. The secondary markets, NFTs were trading on them for billions of dollars regularly. That activity has subsided. But now, because fees have come down, we're seeing totally different sorts of consumer behaviors arise around NFTs.
--:-- Robert Hackett: I think a lot of people might think that NFTs happened and then they went away and they're over and done. Your mainstream listener might not realize that they've actually stuck around and they're just gaining traction in a completely different context.
--:-- Eddie Lazarin: Being honest, the NFT market has faced some pretty tremendous challenges. There was a lot of speculative activity in prior years, very high trading volume, high priced premium collections. We definitely got over our skis a bit as an industry. As a result, we've seen a 90-plus percent decrease in trading volume over the last few years. There's been a ton of drama around how creators can enforce royalties. We have faced a lot of challenges. There are some data points that you can look at that say, "Wow, the NFT market really is not what it once was." I think that is very true in all senses.
--:-- Eddie Lazarin: But I think what also happened at the same time is, to the point we were just discussing about the infrastructure getting better, these infrastructure improvements enabled NFTs to be exchanged and traded and interacted with at much lower costs. That really shifted the behavior away from these high volume, high price, speculative secondary markets into these newer, low cost social collecting experiences.
--:-- Eddie Lazarin: For example, if you look at the number of NFT collections with 50-plus unique minters, the trend is actually very positive. It means that people are still interacting with and using and collecting these NFTs, but they're doing it much differently than they had in prior years. This is only possible in a low fee environment. You can look at products like Zora today. You can look at products like Rodeo today. There are some really fascinating, cool, new, emerging cultural behaviors around this social collecting that I think many people would find really interesting. The NFT market is very much alive, but behavior has shifted. It's all driven by the infrastructure developments in 2024.
--:-- Darren Matsuoka: Yeah, I don't know that there's a perfect way to communicate what this new behavior is other than: people like to collect stuff. On a social network, you're probably familiar with liking posts. I've heard people describe this new sort of social collecting experience as a kind of "super like" behavior, where you are just expressing that you're interested in something. Critically, it's on the order of magnitude of one to two cents per collecting. In prior years, we were paying tens of thousands or hundreds of thousands of dollars, which of course only very few people can afford. Now we're opening it up to a much broader audience, which I think is a net positive for the NFT market.
--:-- Eddie Lazarin: We got to recall that the way crypto has developed: the first thing that you can do, and actually the simplest thing to do computationally, is just to buy and own the thing. That is the novel component — being able to directly own the underlying asset on this big shared state computer. Doing more complicated things like transacting or mutating the state of a program require much more computational capacity, in addition to creativity from application designers, in addition to user experience improvements to make it easier to do those things. We're seeing advances on all of those fronts. You should expect the complexity of what people do with blockchains to increase over time, starting from the simplest — just owning — and moving to the more complex things — interacting with programs.
--:-- Darren Matsuoka: Even just the mental shift that it takes to understand what activity on a blockchain is affected by this evolution. It's not just a money payment system. It's actually a shared state computer, as you called it, Eddie. These interactions can be interactions with applications, just like people are interacting with websites or something. All these interactions can be much more expansive than this sort of limited view of crypto as just a money thing.
--:-- Eddie Lazarin: Yeah, and I want to sketch out the pattern to how these things unfold. Just buying an NFT when the costs are very high — that's the simplest thing you can do, that's the best supported thing you can do, and that's probably the only thing that's reasonable to afford. But NFTs are programmable. Experimenting with what that looks like requires low gas fees. The exact pattern I would expect would be: speculative boom with very simple uses, where most of the interesting things that happen in the very earliest stages are actually the themes and the ideas that come through as people imagine what's possible. You see glimmers of very exciting things. Of course, then they run into the pragmatic reality that it's too expensive, it's developing too slow. There are certain pragmatic limits. As those things scale, then experimentation returns. And then as experimentation develops, more complex and interesting applications start to take place. We just described that with stablecoins. The exact same thing is going to happen with NFTs and with all these different settings. It's not a crypto-specific thing. I think that's how AI is developing as well.
--:-- Robert Hackett: Because you mentioned AI, I think people listening will recognize that AI is one of the biggest trends of the past year. But what's interesting is that it's not just a trend within tech, it's also a trend within crypto. Maybe it's unsurprising that crypto influencers are talking about AI. But what is more surprising is that the people likeliest to visit the websites of various AI tools like ChatGPT are also the likeliest to visit some of the top crypto websites out there. That goes to this inference that could possibly be drawn that there is strong overlap between the user bases of these frontier technologies.
--:-- Eddie Lazarin: Yeah, definitely it's a hot area. AI was clearly the breakaway narrative in 2024, even among crypto social circles relative to other topics. Clearly people are thinking about this. A lot of the top crypto sites are highly, highly overlapping with chatgpt.com, which indicates that there may be an overlap in crypto and AI users. The fact that there is, I do think, reinforces this point that it's a hot area. I think we should expect to see more innovation in this pocket of crypto specifically.
--:-- Robert Hackett: So let's cover some more emerging applications. The cost of transacting on blockchain networks is coming down. Like we said, it can cost as little as cents on the dollar now, or even less than a cent. Just a tremendous plummeting of costs there. What other territory does this open up?
--:-- Eddie Lazarin: Yeah, some areas that have popped up include DePIN — decentralized physical infrastructure networks. There are new forming marketplaces for energy, for wireless bandwidth, for mapping, for weather, for food delivery. This is where the digital world meets the physical world, using a digital overlay to manage resources in the physical world.
--:-- Eddie Lazarin: The difference, of course, we have these things like Uber and Lyft and so on. You could call those Web2 DePIN networks. The key difference is that in a blockchain, there's a degree of credible neutrality about the underlying platform. That means that people who build on top of it — including not just the suppliers of the good and not just the people buying it, but also people who build applications to make the whole thing work better — can take for granted what they're building on and not risk being rent collected or Sherlocked by the underlying platform. If you can make payments affordably, if you can update reputation systems, incorporate all kinds of interesting identity systems — all these things that these marketplaces need — then they can finally exist. Those have been emerging.
--:-- Eddie Lazarin: Maybe a final category, which we give a little glimpse of in the report, is decentralized social networks. Farcaster, which is another portfolio company of ours, is an incredible place for builders to experiment with different types of tools, different types of toys to extend and improve the experience for all types of users. I know for a fact, having spent a bunch of time with the Farcaster team, that they are totally capacity limited. They're working really hard to allow the network to onboard more and more people while remaining totally decentralized.
--:-- Darren Matsuoka: You can see in the report a lot of projects where people have been experimenting with software on top of this network. Even in our Builder Energy dashboard, we're seeing that a lot of builders are interested in social networks. I think 10% of the founders that we've talked to and looked at are building social-related projects. I think people see this opportunity and they expect that it's going to be a thing, given how big it was in Web2.
--:-- Eddie Lazarin: Yeah, then there's prediction markets. Of course, those have been huge this year. No surprise, given the incredible dynamics and volatility related to the election.
--:-- Robert Hackett: Yeah, prediction markets is an idea that people have been talking about for decades, but have been hamstrung. People are actually coming around to their value — an ability to source knowledge from disparate parts of the world and get a better, more informed picture of the state of the world and how things might shake out. It's interesting to see that it's actually finally getting some traction when it's a very old idea that has been stalled for so long.
--:-- Robert Hackett: All right, Eddie. We've been putting out reports for three years. What's been most surprising looking at this year's report compared to earlier reports?
--:-- Eddie Lazarin: I don't know. Stepping back, I'd say when we're deep in the mix like we are, it often feels like nothing is coming fast enough. I feel that all the time. I want it right now. I'm just tick-a-waiting. There are some areas that have definitely lagged. But at the same time, it is a little bit unbelievable when you look back at the progress.
--:-- Eddie Lazarin: Let's be very conservative in our estimates. Let's say we have 30 million monthly active users of blockchains. That's pretty damn good. I'm pretty happy with where that is, given the historical infrastructural limits. About a year ago, we were all debating how long it would take things to start to heat up in terms of on-chain usage. Where I ended up was that six months after Denkun, six months after 4844, is when we'd start to see new types of stories, because that's about how long it takes. We're just six months after. I think that's exactly what's happening. The payments thing is one of those things. Some of these new networks, some of these DePIN networks, are examples of that. It feels very on track to me and I'm very pleased with that. That's kind of surprising, maybe in a certain way. It is surprising to me that it feels like we are thinking it's going to unfold.
--:-- Robert Hackett: If you had to cast your prediction a year ahead, what do you think is going to be the theme of State of Crypto 2025?
--:-- Eddie Lazarin: I hope that all the extra block space is filled with something productive. That's what I hope it's about. It's about what fills that block space. We just started creating all these L2s and new blockchains. Maybe something that we didn't put in the report because it can be challenging to present in a very straightforward way: bridges are great for people in crypto. Three years ago, there were very few bridges and they were terrible — slow, expensive, error prone. A lot wrong with them. Now bridges, there are myriad options, really high quality, fast, super affordable, great connectivity. Anyone in crypto would agree with that.
--:-- Eddie Lazarin: Now that we have good bridges and good L2s, we're getting tons more L2s and tons more bridges and tons more interoperability questions and fragmentation. As always happens with technology, you solve one problem, you create another. I'm beginning to see signs that there are really, really great strategies to solve interoperability. I hope the combination of good interoperability plus good block space means finally great user experience for a family of applications. If that was the case at the end of 2025, I'd be really pleased.
--:-- Darren Matsuoka: That's great for the wishlist. I really hope that in the coming years, our section on infrastructure gets smaller and our section on applications gets bigger. I think there's still a place to report on key infrastructure developments, which I think will continue to happen over the coming years. But I think it should be hopefully more about how do we just overall improve the user experience. There's account abstraction protocols, interoperability, various developments that we can report on. But I hope that is not the main story. I hope the main story of 2025 and the years following is that we now have a new set of applications that are proving to be real use cases for this technology that is attracting people. That is my hope for the years to come.
--:-- Robert Hackett: We've made a lot of progress on infrastructure, but hopefully from here going forward, the improvements are more on the margin. Maybe in the years ahead, there won't even be a need for a State of Crypto report. We will all just be using these applications and won't even know that there's crypto on the back end.
--:-- Eddie Lazarin: Could be. We'll have to wait to know for sure.
--:-- Robert Hackett: Thank you both for joining.
--:-- Darren Matsuoka: Thank you, Robert.
--:-- Eddie Lazarin: Thank you, Robert. Thank you.
