a16z State of Crypto report 2024: top takeaways

Transcript

GM good morning welcome to the milk Road show The Daily crypto show that summarizes the crypto world as neatly as a four dummies guide I'm your host Jay Hamilton and today we are joined by Darren matsuoka data scientist for A6 Zed or a16z as you say in the US in today's episode we're going through their recent state of crypto report that's the state of crypto in 2024 if there's one report that you should read this year other than our Pro reports of course it is this one we've been covering this report for years and it truly is one of the best reports in crypto that takes data from so many sources and compiles it all to tell you

guys how big is crypto today what is the trajectory we on where are we going long term what are the key applications of crypto that are taking off and that might be next to take off what sectors are set to grow exponentially and where are we headed in the coming years before we jump into today's episode we just need to take a moment to hear from our sponsors who make this show possible do you own your data nope every post click and search you make is controlled and monetized by unseen Giants I've had enough it's time for navigate where their mission is to give back data ownership to you and share profits with you that's right money in your pocket how you ask first the navigate browser

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transparent model create your account fund it with a few Taps and you're ready to go click the link in the description and join uphold today Darren welcome to the milk Road Show it's great to be here thank you awesome so excited to have you I want to start with before we jump into this report obviously being a active participant in writing and creating this report and pulling data from so many sources you looked at a lot of stuff as you pulled together this 60-page report give us your takeaway when you wrote this what was one of your main things that you said oh wow I really I didn't expect that yeah I mean I guess to to step back I I think uh you know in the crypto

industry there's often a lot of noise there's often a lot of jargon there's often you know a lot of of uh a lot of data to to sift through and I think every year we like to take a step back and just kind of look at the industry holistically see all of the data that we have you know talk to various experts and really try to understand at the highest level kind of how are are things uh how are things in the crypto industry and so we looked at a lot of data we talked to a lot of experts and I think the report really does paint an optimistic view of the crypto industry uh I think we we are at all time highs when it comes to activity and usage by a number of of different measures we're starting to see some of the key

applications like stable coins emerge and I I think the infrastructure story which we've been talking about now for for many years is finally coming together in a way that is uh really nice and in a way that I think will unlock the next wave of applications in the months and and years to to come and so I I walked away from this report very optimistic about uh the future of of crypto and kind of how How Far We've Come uh over over the last few years nice love to hear the optimism bullish Vibes for sure you mentioned stable coins and you mentioned infrastructure there's two key takeaways that we're going to discuss today before we do that you guys been reading this report for three years how would you say this report compares to a year ago if we

reflect back to 2023 yeah I mean I think if you look back to 2023 and and we actually first started doing this report in in 2022 and the world of crypto looked very different I think we were still kind of talking about the infrastructure improvements that we wanted to see ethereum in 2022 was still consuming huge amounts of energy with proof of work uh We've since transitioned to to proof of stake uh solved that problem uh you know we've made a lot of improvements on just bringing fees down for the end users which I think is really important in the cryp in the crypto space and I think we can finally say that the infrastructure pieces are coming together and as a result we're in the the early days of seeing some real

kind of web three applications start to to emerge and and I think we we could not have said that a year ago or or two years ago and so I I I do kind of believe that we're at this inflection point when it comes to the infrastructure being able to unlock the applications and I think that the data kind of speaks for itself when you look at the activity and the usage and some of these emerging applications let's go that's uh that's exciting talk all around okay let's start with a look you guys did a great job putting together a look of how big truly is crypto today you said it yourself like there is so much noise in this space there is experts Galore on crypto Twitter telling you things that are true and

unfortunately things that aren't true and you guys have really put together a solid look of truly how big is crypto today so when we look I'm just going to pull up this first visual today when we look at the size of crypto today what are we looking at yeah so I think there's actually a few or a lot of different numbers that we can unpack here uh but I think at the at the highest level uh what you can look at is the number of active addresses across various blockchains and you know how many of those addresses are transacting on a monthly basis and and that number is at an all-time high in September it was 220 million active addresses uh for the month uh and we also overlay this uh chart of internet user starting in 1992

and you can see that we're on a somewhat similar trajectory here um and so you can sort of extrapolate out to the point uh in which the internet reached a billion users to kind of draw some conclusions about maybe where the the crypto industry uh is is headed now I will be first the first person to tell you that active addresses isn't necessarily the best measure of crypto adoption and in fact we do uh further analysis to try to arrive at what we think the real number of users is but still I think this is a very positive highle trend to to look at here and exciting to see the trajectory that we're we're on when it comes to just the overall size of the market and the activity uh that we're seeing in it yeah

for sure it's it it is so exciting to see and and and if you guys haven't seen if you guys are listening and you can pull up the video do pull up the video because looking at the internet adoption rate and comparing it to blockchain is something we've all been doing for several years I think since you guys first wrote this report and it is amazing to see if if you look at the internet it hit a billion users in 2005 so by internet terms we are in 1998 in blockchain adoption so we got about seven years by this scale the log scale that we could hit a billion users now I'm glad you brought up that point though because uh here at milk Road and particularly on our research team we

always have this debate as well as to what is month what are wallets compared to humans and how do we how do we differentiate those two when we know that so many people have multiple wallets and Bots and things like that how how did you guys think about that when you were collecting data for this report yeah so we thought a lot about it and probably this is the area that I personally spent the most time trying to to reason about because uh we really do want to have an honest view of what is the size of the market how many people are using crypto today and are a number of different approaches that we took to estimate the number of real human crypto users uh you know one kind of approach looks at starts with the active

addresses and applies some filtering and D duplication based on uh onchain analytics and in forensics and so we wrote a whole blog post about how we uh use different methods to try to filter the 220 million active addresses down to a set of what we think are real human users uh we can also o look at uh reported wallet data from companies like metamask and uh and Mobile Wallet market share to uh estimate and and kind of triangulate on a a number uh and compare that to kind of the the analysis that we did filtering active addresses and we arrived at a a range of 30 to 60 million real monthly active users based on this

analysis of course it is a wide range and I think this stuff is is really tricky to get right but we wanted to kind of do our best to show how many kind of people are using crypto on a monthly basis and we believe that number is 30 to 60 million now an interesting number to compare that to is the 617 million people around the world who own crypto right and you know what does that mean when you look at those two numbers together only 5% of crypto owners are actually using crypto meaning uh interacting on chain uh which in my opinion presents really the the biggest opportunity for the industry today which is to re-engage some of these passive holders and uh bring them on chain and

convert them into crypto users and uh I think just looking at the kind of relative sizes of the two groups uh I think really shows the opportunity for the industry uh and for Builders to to bring people on chain and as we know For Better or For Worse uh speculation has been our best use case until stable coins came along and so it's not a surprise that the largest number is passive holders and passive investors honestly shout out to a lot of our listeners who are probably not very active on chain but are here to invest and are here to capitalize on this new tech and be here early and that's okay but I think you're so right

we have all these people who own crypto and now we just don't really have the apps yet that are exciting them but I I feel like I say this every year and I is going to be in my 2025 pred but it feels like we're at that Tipping Point would you agree I I would totally agree and I think it's all driven by the infrastructure developments that we've seen right which have taken some time and you know rightfully so there's some complex challenges to to solve when it comes to scaling blockchains uh but I think the industry has done a great job solving a lot of those challenges and I think we're really at the Tipping Point like you said where uh these infrastructure unlocks are are going to lead to some new applications uh in the coming year the other thing I other slide I want to pull up quickly before

we move on from uh the size of crypto today is you guys broke down of these 220 million active monthly active users in September you broke down which chains they are active on and this tells also a very interesting story particularly for our listeners who are investors and are very curious which chains have the most adoption and the most activity what stood out to you here yeah I mean I think uh just for for for similar reasons that I described earlier you got to be a little bit careful uh in how you reason about some of these numbers because of course there can be Bots and uh you know in in particularly on chains where it is very cheap to transact uh often times people will spin up many addresses and so uh it is uh take

everything with a grain of salt but but I still don't think it's unfair to say that base near uh and salana were some of the top destinations for for crypto users and uh really the breakout growth of of salana in particular has uh you know certainly been been something to to watch and you can see it in in the data here yeah amazing to see based on this data 100 million monthly active users on salana the next closest chain 31 million for near and then 22 million for base in incredible to see those to those chains really achieving breakout velocity compared to the rest okay let's go to stable coins we talk a ton about stable coins on this show and one of the key

takeaways from this report really was that stable coins have found product Market fit which is so exciting and the way you guys broke this down is amazing and I just want to bring up a slide here to show really the demonstrate how much the product Market fit exists for stable coins can you break down this slide which really shows why they have such great product Market fit yeah I I I sometimes think people overthink stable coins I think uh really what happened in the last couple of years is that stable coins got uh very cheap to use and stable coins are a product where when they're cheap to send uh it's a very good product when they're expensive to send it's it's not a very good product uh and I think you know by implementing

a lot of these infrastructure developments that that I've talked about uh it has allowed fees to come down which has made stable coins a good product and I think it's not a coincidence that this is the year that they've seemed to find product Market fit uh and and this slide I think kind of just shows the the DraStic reduction in cost for users that we've seen you know compared to the traditional Finance system you know you could pay $44 to send an international wire transfer in 2021 if you were using ethereum and usdc you would have paid about $12 for that transfer you know in September of this year uh on ethereum you would pay $1 for for a stable coin transfer um and now if you use base layer two you could pay less than one cent for a stable coin

transfer and that is a more than 99% cost reduction and I think this is what infrastructure improvements are all about it's incredible to this and just so exciting $44 compared to cents fractions of a cense uh especially for a lot of this connects to remittances and people sending money home to friends and family around the world and they're not sending big dollars a lot of these people right like sure we have institutions that are moving large billions of dollars around the world but we also have you know somebody is sending money home to their grandma in the Philippines and the difference that 40 $4 to send $100 versus cents to send $100 like this is real use cases that

the world really needs totally that's an Incredible use case you know also in countries with rampant in inflation like Argentina people are using stable coins to protect their assets and you know now they're able to do so in a way that's efficient and easy and and uh you know low cost so a lot to to be excited about when it comes to stable coins this is the other slide that just while we're still on stable coins really stood out to me was looking at stable coin transaction volume in comparison to the Alternatives can you break down what you guys found in here here yeah I mean I I think the fact that we can even put stable coins into a comparison against PayPal Visa a and the fedwire is pretty mind-blowing to me uh I think you know

you you look at just the the data here it really is competing against the world's biggest companies and and and systems uh to to move money and uh you know that's not a trend that I I think will stop anytime soon I I think we're uh really unlocking something special here and and if we look at this stable coins are moving 8 8.5 trillion in volume in the last year is that in the last year or sorry is that in the quarter this is in the quarter in the quarter compared to PayPal only did did about half a trillion Visa did about four trillion now a and fedwire both did more a did 21 trillion and fedwire

2854 trillion uh which is in just insane but you can see yeah we're we're we're already higher than PayPal and higher than Visa like that is I I don't I don't think a lot of people it's like hey if you if you're at Thanksgiving this year and you need to story to tell people like just tell them this slide right here this is so like get away from like the Dogecoin and the meme coins don't talk about that around the Thanksgiving tap table talk about this like this is real and it's happening yeah I agree this was one of the more surprising things that I think I I came across when we were building this report and definitely a talking point this is the other thing that really stood out to me as well is um you guys have a great chart showing stablecoin adoption in

comparison to crypto trading volume right and what this shows is that even though we entered a bare market and crypto trading volume went down and the speculators kind of left in the past few years during that rough bear the stable coin usage kept climbing consistently yeah I mean one of the criticisms that we see with Sable coins is that oh it's only used for crypto trading right it's only used to settle crypto trades uh but I think this this chart in particular shows shows otherwise right if if that were the case we would expect to see a high correlation uh between stable coin activity and and trading volume and we see that we actually broke that correlation which indicates that there are use cases Beyond just crypto trading

for stable coins you know some of which we we just talked about the other thing that I want to look at is okay so stable coins doing great when we look at the rest of the categories that are performing what are we seeing here yeah so as you can see most of the activity on blockchains today happens across Defi and stable coins uh I think that speaks to the fact that we are still pretty early you know we're we've got our eye on some of these emerging categories like gaming and decentralized social of course the the nft the nft market but I think uh you know still the reality of the world is that Defi and stable coins dominate activity and uh some of these emerging categories are

going to be the ones to to watch I think in the the coming years uh as the infrastructure gets better and you know that's that's where that's where where I'm looking at uh hopefully over the next couple years yeah this slide was really bullish for me so we got stable coins at 32% of active usage of blockchains then we got defi at 34% as you said I think both still have room to grow a ton of room to grow but then if you look at we have gaming at 2% that feels so small to me that just says hey there's a massive opportunity nft is at 1% I almost feel like my audience might throw mud at me if I use nft right now because uh they're they're in the gutter down bad

but that's because they're all the speculative nfts and we're going to look at a slide later it talks about how nfts are so much more than I think people realize right now especially those who have been in the space for a while we still think about nfts like they were in the last cycle when they basically made zero sense there is a lot of use cases for nfts and then social at at under 1% usage like we just have so many categories that have so much potential that I think we could really see emerge Darren when you look at defi what do you defi space yeah I mean I think the space has matured quite a bit since that Crazy Summer of 2020 if you recall uh you know it was just a few years ago that this whole Space was was getting started and

there was kind of wild crazy you know Wild Wild West out there and I think now we're starting to see the space mature kind of the category leaders are emerging and we're seeing now real solid activity across a number of I'd say real defi categories and I think that's exciting to to see and I think we'll continue to see growth there and uh I am excited as ever about the the defi space yeah the other thing that stood out to me on the defi space is just the the amount of volume of dollars like on this slide that we've got up here we have multiple protocols with over1 billion dollar in total value locked we did not have that in the past Cycles like the I

think it's very easy to not notice the growth because there's so much noise as you said but this is real products that are growing at rapid rates totally thousands of defi protocols controlling billions of of dollars i' consider that a success in in in a very short period of time this is another slide that stood out to me that sort of is connected to defi is we have this you know and this kind of comes back to the crypto ethos of why we are all here is a lot of us have this belief in decentralization and a fear that centralization and too many large companies and large banks are controlling our data controlling our money what did you guys see when you

looked at this growing need for decentralization yeah I mean I think there is consolidation happening across the US economy this is happening uh in the kind of banking sector with five banks now controlling nearly half of all assets in the US on the you know Tech side of things that the NASDAQ 100 there are six tech companies that make up uh more than half of the NASDAQ 100's value this consolidation is very worrisome in my opinion and I think crypto can present a solution to help make things more decentralized across the the economy uh but we we did show some data uh just to to Really drive this point uh home because it it is one I think that

is very important for people to be aware of yeah yeah completely if we take a look at infrastructure so you mentioned at the beginning that you're excited about infrastructure and you're excited that we're at at a place now where maybe we're ready for the these apps to be built because I think a lot of it comes down to the cost to build has decreased so much and we need we need that low cost so that people can experiment and they can try things and they can try apps and they can do so without this massive lift that it was maybe last cycle past cycles of you need to hire all these devs and you need to often you need to build your own chain first

before you can even launch an app and a lot of that has has changed what stands out to you when we look at infrastructure and where we're at now compared to uh past years yeah you know we could spend a lot of time talking about you know EIP 4844 which was an upgrade to ethereum that that that drastically reduced costs for layer twos we could talk about the uh continued progress and development of high throughput layer one chains like salana blockchains kind of as a as a whole are processing more than 50 times the amount of transactions per second that they did just four years ago I think that speaks to the infrastructure improvements that we've seen you know we could talk about

the ZK developments zero knowledge proofs are a really key unlock and could potentially be the end game for blockchain scaling privacy and interoperability we could talk about you know better user experiences that we're we're seeing through things like account abstraction but I think at the end of the day all of these infrastructure improvements boil down to how do do we kind of create a better experience for the users how do we unlock cheaper fees which we talked about for applications to be able to experiment and I think we are seeing the results of all of this hard work and is why you know I I do believe we're at this inflection point where the infrastructure is finally good enough to be able to start to see some

of those applications and and and you know it will take some time right it's not instantaneous it's not like you know the infrastructure comes and then immediately all of the applications are there the developers still need to to build and so we may still be you know some months out but uh you know I'm I'm definitely watching this coming year for the applications uh because I I think they're they're around the corner yeah me too I feel the exact same AI was a new section in the report I don't think there was a section A whole section about AI in last year's report and if you uh have not been thinking or hearing crypto times AI at some point in the past year you're probably living

under a rock when you looked at crypto and AI you guys did a great job of breaking down in the slide that I'm G to pull up here about how how these industries can work together totally and I think if you if you just take a step back and look at how the AI industry is is unfolding here uh I think it's very clear that AI is a centralizing technology it rewards people who can accumulate the most data the most compute resources is the most talent and uh you know I think uh it is on a path kind of like we saw with the the rest of the the US economy economy of kind of extreme consolidation into you know the the hands of a few very powerful big tech companies and blockchains may be

one of the only incredible counterbalancing kind of decentralizing forces that can really work well with AI and I think there's a number of different kind of categories and use cases that we're starting to to see in terms of how can come together it is still very early uh but I think the the high level Point here is that AI is a centralizing technology and blockchains are that counterbalancing decentralizing technology that uh I think could help solve some of the pressing challenges that are faced uh by the AI industry including you know things like proving that something is authentic you know we're going to see a world of endless deep fakes in the coming years and you know blockchains and crypto Technologies can can help kind of mitigate some of

that risk just democratizing access to compute resources you know another kind of area that is being explored just making things more transparent you know building not building AI in a black box and hopefully uh compensating people for the data uh and the IP that they contribute uh to these AI systems and uh you know I think uh it's still a bit early and I think it'll be fun to see how this all unfolds but uh certainly a trend to watch uh in the coming year it's uh will probably be one of the biggest uh developments I think in in 2025 okay as you mentioned 2025 when you look ahead first you guys talked about how we're entering a new

innovation cycle can you break down what you mean by that yeah so so we like to think of these crypto markets uh under a framework that we call the price Innovation cycle and the idea is that when crypto prices go up people get interested uh and then when people get interested developers build and then the products that get built are what Kickstart the the next wave and so we we think that the markets appear very chaotic from the outside but they actually follow this underlying order and we've seen this play out now four times since since bitcoin's Inception and I think there is a question of Are We entering the fifth wave here and you know it is admittedly a bit hard to tell if it's uh you know the prices have have

gone up but it's it's hard to tell if it's driven by net new interest in Innovation or more of the external factors that we've seen like the ETFs and the political Tailwinds uh for for the industry but even if we're not in the fifth wave I think history has has shown us and you can look at examples like chat GPT it really only takes one product to Kickstart an entire industry and you know like I said we're excited about uh the pipeline of uh of applications that we we think are coming in the in the the next year um and if we can get you know one or two breakout killer applications then uh you know we we may be seeing ourselves in in the next wave you know in in the Cycles so

uh I'm optimistic I'm excited and we'll we'll see what happens yeah I think it's such a good example to bring up chap GPT because it went from nobody using AI I shouldn't say nobody using AI I'm generalizing here but like Mass Market consumer based was not really on the radar to all of a sudden every single person you talk to knows chat GP chat GPT and understands it and possibly uses it and I'm not just talking about like the tech nerds like I'm talking about you know your mom and your uncle and like everybody and that's all we need that's all we need that we just haven't seen that yet and it's hard because like it feels almost a bit like

is it too much hopium to say we're going to get it like don't worry it's coming I don't think so I think that there is enough Builders and enough activity happening that that will happen and when it happens it'll happen fast just like chat GPT and you won't see it coming and all of a sudden you'll be like oh wow everybody is using crypto or everybody is using blockchain maybe they don't know it maybe they're not using it the way you're using it right now but that will come I think that's right I'm excited if we go to some thoughts for the future before we wrap up here uh I've got a slide up of a bunch of I believe quotes from your team maybe some of these quotes are from you so feel free to share whether it be your thoughts or whether it be thoughts from

your team what most excites you about the future where do you think we're headed in the next year I'm very excited for a lot of reasons we've already talked about right I think the infrastructure story is is coming together which will hopefully unlock that next killer application that will kind of Drive the the next cycle I I'm definitely watching closely for for that uh I think there is a lot of uh you know optimism around kind of what could happen on you know us in the US regulatory environment with new legislation uh that is uh you know looking to to be passed that could kind of uh just create more clarity for Builders which is what I think the the industry really needs to get the

smartest and and best people into the space they need to understand what the rules of the road are and I think we're on a path to to getting there you know I'm watching stable coins very closely uh just because they have the potential as we discussed to you know really be a breakout application that kind of hits a Tipping Point next year and then yeah all the early experiments that we're seeing with gaming and social and nfts I I I do kind of believe that uh you know this web 3 Vision will begin to materialize soon and you know I think uh now is kind of the time to to be watching for it because uh you know we've got the pieces in place to to make it happen and so you know I will continue to trust the price Innovation

cycle which we you know have have followed closely for years now and I think we're at the point where uh you know we we can start to see some of this breakout activity and uh the vision really come to life completely agree Darren couldn't have said it better myself thank you so much for joining us today shout out to you and your entire team for writing this incredible report everybody listening in we'll put a link to the report in the show notes if you want to read it highly recommend you do it's just fantastic Pack full of so much information and I also want to know what do you guys think were the highlights of 2024 as we reflect back here with Darren what were you most excited about what stood out to you let us know in the comments as always thank you so much for

joining us have a wicked awesome day as always if you liked today's episode please hit subscribe and make sure you follow us so you don't miss out on the next one there's also a link in the description to our free 5 minute daily newsletter where we simplify crypto for you wel making you laugh and if you're willing to step up your crypto investing game we're going to also leave a link for milk Road Pro you get access to our portfolio where you can see exactly what we are buying this is your number one resource to help you invest successfully in crypto one final note this show is for educational purposes only and nothing we say is financial advice investing in crypto or any asset is

risky and you should never invest more than you can afford to lose thanks so much for listening in my friends have a wicked awesome day