Despite Ethereum's performance this year being inferior to Bitcoin's, it still outperforms the smart contract platform crypto industry index.
Author: Grayscale
Translation: Deep Tide TechFlow
In the third quarter of 2024, the crypto market remained stagnant, assessed based on the FTSE/Grayscale crypto industry index series.
Changes to the FTSE/Grayscale index series this year highlight emerging trends in the digital asset industry, including the rise of decentralized artificial intelligence (AI) platforms, efforts to tokenize traditional assets, and the popularity of memecoins.
Although Ethereum's performance this year has not matched Bitcoin's, it still surpasses the smart contract platform crypto industry index. Grayscale research suggests that despite fierce competition in the smart contract space, there are multiple reasons for Ethereum to remain competitive.
We have updated the top 20 assets in Grayscale research. The top 20 represent a diverse set of assets covering the crypto industry, which have high potential in the upcoming quarter. New assets added this quarter include SUI, TAO, OP, HNT, CELO, and UMA.
All assets in our top 20 list exhibit high volatility and are considered high risk; the U.S. elections may also pose a significant risk factor for the crypto market.
Grayscale Crypto Categories provide a comprehensive framework for understanding the realm of investable digital assets and their relationship with underlying technologies. Based on this framework, and in collaboration with FTSE Russell, we developed the FTSE Grayscale Crypto Industry Index Series to measure and track the performance of crypto asset categories (Figure 1). Grayscale research incorporates the crypto industry index into its ongoing study of the digital asset market.
Figure 1: Crypto Industry Index measures the performance of asset categories
The crypto industry framework is designed to update dynamically with the evolving digital asset market and undergoes rebalancing at the end of each quarter. The latest quarterly rebalancing process was completed on September 20. Since the beginning of this year, the index rebalancing has brought significant changes to the index composition, reflecting new exchange listings, changes in asset liquidity, 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), efforts to tokenize traditional assets (e.g., ONDO, OM, and GFI), and the popularity of memecoins (e.g., PEPE, WIF, FLOKI, and BONK).
From a returns perspective, Bitcoin and Currency Crypto Categories performed better than 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: Crypto Industry in Q3 2024”).
Figure 2: Bitcoin outperformed other assets this year, but Ethereum also held its ground
Ethereum's performance this year has lagged behind Bitcoin, rising by 13%, but it still performs well compared to most other crypto assets. For instance, our Crypto Industry Market Index (CSMI)—which measures the returns of the entire asset class—has declined by about 1% this year. In fact, excluding Ethereum, the smart contract platform crypto industry index has dropped by about 11%, thus it has significantly outperformed other assets in its market segment. Among all assets within our crypto industry framework, Ethereum's year-to-date returns are approximately in the 70-75 percentile. Therefore, although Ethereum's gains are lower than Bitcoin's, it still performs well compared to its crypto industry and the broader CSMI this year.
Focus on Smart Contract Platforms
Unlike Bitcoin, which dominates the currency crypto industry, Ethereum faces fierce competition in the smart contract platform space. This year, several alternative smart contract platforms have gained significant attention, including Solana, Toncoin, Tron, and Near, as well as the emerging Sui. These assets are all competing for fee revenue, and the excellent user experience offered by some alternative smart contract platforms may lead to a decline in Ethereum Layer 1's market share.
At the same time, Ethereum possesses several competitive advantages within the smart contract platform crypto industry that solidify its position (Figure 3). Most importantly, it remains the leader in this category, with the most applications, the most developers, the highest 30-day fee revenue, and the highest value locked in smart contracts. Including the largest Ethereum Layer 2 networks, its daily active users rank second only to Solana.
Figure 3: Ethereum is the leader in fee revenue among smart contract platforms
As public blockchain technology continues to evolve, Grayscale Research expects the entire smart contract platform crypto industry to experience growth in users, transactions, and fees, which may benefit all assets within the category to some extent. Given that Ethereum is the category leader, it is hard to imagine a sustained period of growth in the smart contract platform segment without benefiting Ethereum, partly due to its existing network effects. For these reasons, despite facing significant competition, we believe Ethereum remains a compelling asset in the smart contract platform crypto industry.
Additionally, Ethereum benefits from certain specific characteristics that may shield it from competitors for a period of time. These characteristics include high network reliability (limited downtime), high economic security, high decentralization, and a clearer regulatory status in the U.S. Within the Ethereum ecosystem, there have also been some encouraging adoption cases, including tokenization, prediction markets, and developments by companies like Sony. For these reasons, Grayscale Research continues to view Ethereum as having a very compelling investment thesis.
Grayscale Research Top 20 Assets
Each quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process of the FTSE/Grayscale crypto industry series indices. In this process, Grayscale Research publishes a list of the top 20 assets under the crypto industry sectors. The top 20 represent a diverse set of assets that we believe have high potential (Figure 4). Our approach considers various factors, including network growth/adoption, upcoming catalysts, fundamental sustainability, token valuation, token supply inflation, and potential tail risks.
This quarter, we have added six new assets to the top 20:
Sui: A high-performance Layer 1 smart contract blockchain that offers innovative applications (for more details, see Building Block: Sui).
Bittensor: A platform that facilitates the development of an open global AI system (for more details, see Building Block: Bittensor).
Optimism: An Ethereum scaling solution based on optimistic rollups (a type of scaling solution).
Helium: A decentralized wireless network running on Solana, a leader in the decentralized physical infrastructure (DePin) space.
Celo: A mobile-first blockchain project transitioning to an Ethereum Layer 2 network, focusing on stablecoins and payments.
UMA Protocol: An optimistic oracle that serves Polymarket, a leading blockchain prediction market (and other protocols).
Figure 4: High-potential crypto industry assets for Q4 2024
The newly included assets reflect several crypto market themes that Grayscale Research is focusing on. Both Sui and Optimism are 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 underwent a network upgrade that increased its transaction speed by 80%, surpassing Solana, which has led to a recent increase in adoption on the network. Optimism is an Ethereum Layer 2 that is helping to scale the Ethereum network and has developed a framework for building scaling solutions called "Superchain," which is used by Coinbase's Layer 2 BASE and Sam Altman's Worldcoin.
Celo and UMA both benefit from unique adoption trends: stablecoin usage and prediction markets. Celo is a blockchain focused on stablecoins and payments in developing countries and has gained significant attention in Africa through the MiniPay application in the Opera browser. Celo recently surpassed Tron to become the blockchain with the highest stablecoin usage by daily addresses and is currently migrating from an independent blockchain to an Ethereum Layer 2 using Optimism's Superchain framework. UMA is an oracle network for Polymarket, which is a breakthrough application in the cryptocurrency election year. UMA records the results of each Polymarket event contract on-chain and facilitates voting on disputes regarding Polymarket outcomes, ensuring resolution without centralized, arbitrary, or biased interference.
The inclusion of Helium reflects our preference for industry leaders and projects with sustainable revenue. Helium is the leader in the DePIN (Decentralized Physical Infrastructure Network) category, effectively allocating wireless network coverage and connectivity resources using a decentralized model and rewarding 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, although we have been focused on the decentralized AI theme for some time, Bittensor has only now been included in our crypto industry framework, thanks to improvements in market structure—specifically, more available pricing sources and higher liquidity. Bittensor has become an important player at the intersection of crypto and AI, attempting to create a global decentralized AI innovation platform through economic incentives, thus gaining attention.
This quarter, we have removed the following projects from the top 20: Render, Mantle, ThorChain, Pendle, Illuvium, and Raydium. Grayscale Research continues to value these projects, as they remain important parts of the crypto ecosystem. However, we believe the revised top 20 list may offer more attractive risk-adjusted returns for the next quarter.
Investing in crypto asset categories involves risks, some of which are unique, including smart contract vulnerabilities and regulatory uncertainties. Additionally, all assets in our top 20 exhibit high volatility and may be considered high risk, making them unsuitable for all investors. Finally, broader macroeconomic and financial market developments may impact the valuation of crypto assets, with the U.S. elections in November seen as a significant risk event for the crypto market. Former President Trump has explicitly supported the digital asset industry, while Vice President Harris recently stated that her administration "will encourage innovative technologies like 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 the overall portfolio and consider the investor's financial goals.
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