On 4 October 2023, Jamie Coutts, a crypto market analyst at Bloomberg Intelligence, released part one of his Q3 2023 report card. According to Coutts, the market capitalization of smart contract platforms has increased by 6% year-over-year. He also noted that active addresses have grown by 25%, adding 1 million new addresses. Coutts reported that quarterly revenues have shot up by 82.9%, and the sector has notably reduced its losses from $2.28 billion to $420 million. However, he pointed out that both capital and activity volumes have seen a decline.
Coutts observed that when comparing Q3 to Q2 of 2023, the market capitalization of smart contract platforms has decreased by 12%. He also stated that core adoption metrics have suffered, largely due to the Q2 meme coin surge. Despite this, Coutts highlighted that active addresses have shown resilience by being less price-sensitive, decreasing only by a modest 2.9%.
According to Coutts, the overall market drawdown remains at around 70%. He pointed out that Ethereum’s Layer 1 (ETH L1) and Layer 2 (ETH L2) platforms have seen 12-month price increases of 25% and 20%, respectively. In contrast, he noted that alternative Layer 1 platforms (Alt-L1s) have declined by 29%. Coutts stated that this has contributed to Ethereum’s market cap dominance, which has risen to 72%.
Coutts observed that active addresses have slightly decreased by 3% but have shown resilience, indicating a level of user engagement despite a decline in transaction fees and volumes compared to Q2.
Coutts emphasized that the rise in Ethereum’s Layer 2 solutions has been a significant factor in helping the network regain market share from Alt-L1 platforms. He reported that over the past year, active address growth on Layer 2 has outpaced that of Alt-L1s by twice as much, albeit from a lower base.
According to Coutts, Alt-L1 platforms account for 80% of active addresses, but their growth rate is decelerating. He stated that most transactions still occur on Alt-L1 platforms, but the legitimacy of these transactions is unclear. Coutts also noted that despite high transaction throughput and volume, few Alt-L1s are profitable, attributing this to capacity oversupply and sub-optimal market fit.
Coutts reported that Ethereum’s Layer 1 has been highly effective in converting transactions and active addresses into fee revenue, boasting a ratio of 26x for fees to active addresses and 8.4x for fees to transactions. In stark contrast, he noted that Alt-L1s lag behind with a 2.3x and 0.3x ratio, respectively.
Coutts stated that despite a slowdown in adoption and challenges such as liquidity and U.S. regulatory headwinds, the network effects from the incremental increase in active addresses are viewed as positive. He also mentioned that technical scalability improvements and falling costs are contributing to network growth.
Coutts concluded that while the rate of adoption has slowed down, the positive network effects stemming from a modest increase in active addresses during the 2022/2023 bear market are noteworthy. These effects persist despite challenges like liquidity issues and U.S. regulatory constraints. Coutts also noted that technological advancements in scalability and decreasing operational costs are gradually aiding the growth of smart contract platforms. As for Ethereum, despite uncertainties in the treasury market that could challenge existing theses, Coutts remains largely optimistic. On the flip side, he maintains a less promising future for many Alt-L1 platforms due to lackluster demand and ineffective tokenomics.
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