Bitcoin

Bitcoin (BTC) price action has been steadily ranging/consolidating between $46k and $50k for much of August. Traders and HODLers are looking for a convincing break of $50k to confirm bullish momentum and (possibly) a continuation of the bull market. On-chain data suggests a convincing increase in HODLer net positions (below), which indicates that long-term investors are net buyers during this consolidation range. According to Glassnode, long-term HODLer supply (coins unspent for at least 155 days) increased to an all-time high of 12.7M BTC (67% of coins in circulation).

BTC price range — Source: Delphi Digital

However, on the other hand, transaction volumes remain extremely low, with the Bitcoin network daily volume sitting at nearly half of what it was in May.

Aside from price, Bitcoin adoption is also making headlines. September 7th marked the day El Salvador became the first sovereign country to officially accept Bitcoin as a country-wide legal tender. In addition to the big day, El Salvador also purchased 200 BTC, bringing its total holdings to a total of 400 BTC. Additionally, Twitter is (allegedly) trialing the ability to tip users using bitcoin. According to MacRumors, the tipping function will use the Lightning Network (LN) and support custodial and non-custodial wallets.

Ethereum

EIP-1559 and “The Burn”

Arguably, the biggest news in a jam-packed month for Ethereum was the successful implementation of EIP-1559. For a more in-depth review of all things EIP-1559, see our Ethereum CORE report, but the headline feature has been the burning mechanism. Post-EIP-1559, every Ethereum transaction now burns (removes from circulation) a portion of ETH, creating deflationary pressure.

ETH new issuance post-1559 — Source: Dune Analytics

In the ~30 days since going live, approximately ~190,000 ETH (~0.15% of supply) or $590M has been burned. This is an astounding amount, especially considering that only ~50% of all transactions on the network are using EIP-1559 style transactions, while the other ~50% still use the “legacy” transaction type. Over time, adoption of EIP-1559 should increase closer to 90-100% as more wallet and service providers make the switch.

Prior to EIP-1559, Ethereum’s inflation rate was ~4% but due to high network traffic and therefore more ETH being burned, the current inflation rate is < 1%. Thanks to the burn feature, ETH’s supply has now undergone a Bitcoin halving-esque supply reduction. ETH inflation now sits below Bitcoin’s (~2.8%), giving ETH more appeal as a Store of Value (SoV) asset.

ETH inflation post 1559 — Source: CoinMetrics

Fees

One common misconception with EIP-1559 is that it would help reduce Ethereum gas fees. While it should help reduce fee volatility, it actually doesn’t help reduce fees when the chain is experiencing heavy usage. And experiencing heavy usage, it is!

Despite ETH transaction fees spiking to their highest levels in 3 months, averaging > $40, usage metrics continue to rise.

ETH TX fees sept 2021 — Source: CoinMetrics

In August, Ethereum surpassed Bitcoin in total value transferred on-chain according to Coin Metrics’ adjusted transaction volume estimates. Total ETH fees paid have remained higher than on Bitcoin since mid-2020. In 2021, total fees on Ethereum (USD) were 4x Bitcoin, suggesting that the demand for block space on Ethereum is outpacing Bitcoin despite the astronomical fees.

ETH vs BTC TXs aug 2021 — Source: CoinDesk

NFTs

Much of Ethereum’s recent traffic and high transaction fees can be attributed to the explosive resurgence of NFTs. NFT activity retreated significantly from its peak of March/April 2021 but has been surging again lately. Daily transfers of ERC-721 tokens (the standard for Ethereum-based NFTs) are near an all-time high.

ETH ERC 721 transfers aug 2021 — Source: CoinMetrics

Ultra-popular Ethereum project CryptoPunks saw its price floor increase from ~57.5 ETH to 63.7 ETH after Visa publicly bought their own CryptoPunk (for 50 ETH) and displayed it as their profile picture during the month of August. This display of acceptance from a major corporation further drove the floor price up, ultimately reaching a peak of 140 ETH before retracing over the last couple of days.

Another notable standout over the past month is Pudgy Penguins. While the project is newer and generally has smaller price tags, it has become one of the most used profile pictures on Twitter, was featured in The New York Times, and saw their price floor increase to ~3 ETH (+2365%) in August.

Volume on OpenSea, the leading marketplace for NFTs, hit new all-time highs with ~$302M in 24 hour volume on August 29th, surpassing ALL of OpenSea’s yearly volume in 2020. Google Trend search interest for the term ‘NFT’ is also hitting all-time highs.

OpenSea volume August 2021 — Source: Dune Analytics

Layer 2 Scaling

The much-anticipated release of Ethereum layer 2 scaling solution, Arbitrum One, launched on August 31st. The layer 2 (L2) project, utilizing Optimistic rollups, has launched with a ~75 project ecosystem of integrated projects including many Ethereum leading DeFi projects, like Uniswap, SushiSwap, Balancer, Curve, and more. Arbitrum users can now trade, lend, provide liquidity, yield farm, etc. with low fees (~$5) and nearly instantaneous transaction speeds. Arbitrum One is being released in a controlled, staged fashion in which the TPS threshold is purposely capped. Over time, the team will increase the L2’s capacity. This, combined with the fact that transaction costs on rollups can actually decrease as usage increases due to increased efficiency in bundling transactions, means fees on Arbitrum One should come down over time.

Arbitrum is just one scaling solution that has recently been released to help quell Ethereum’s network congestion and high fees. Other solutions (see below) include other rollups like Optimism and Starkware as well as side chains like Polygon.

Ethereum scaling solutions — Source: Coin98

Layer 2s, overall, continue to see increased funds deposited into them as they mature and users begin to trust them. A total of ~$970M currently resides in L2s.

Ethereum killers

Other projects, rather than try and scale Ethereum, have built their own layer 1 blockchains to compete with Ethereum and its smart contract use cases. Dubbed “Ethereum Killers,” Cardano, Solana, Avalanche, and Terra, are altcoins that look to improve upon Ethereum’s lack of scalability by tweaking the underlying technology. Since Ethereum has taken years to only begin to scale and transition to Eth2, other competing chains have gained traction due to cheaper fees.

Cardano is now the third-largest token in the world by market cap ($90+ billion). The smart contract platform achieved this milestone despite not actually being able to execute smart contracts. However, it was announced the project will launch its smart contract functionality on September 12, 2021, leading to its significant price run-up over the last month.

Solana has led all crypto markets lately (tripling in price over August), cracking the top 10 in market cap, despite only launching its mainnet in March 2020. Solana has seen tremendous growth in its own DeFi and NFT space thanks to many users being priced out of Ethereum due to the previously stated high fees. Terra reached its all-time high of $36.61 on August 29th, partially thanks to Solana’s Wormhole project opening a cross-chain pipeline between both SOL and LUNA. Finally, also capitalizing on the moment is Avalanche, which drew in new users thanks to a $180 million liquidity mining incentive. It remains to be seen if users will stick around once the free money dries up, but it is Avalanche’s hope that users become entrenched in the network.

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