State of Crypto 2024: Builder Energy, U.S. Election, Stablecoins, AI, More

0:01October 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.

0:40So 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.

0:58Welcome to Web 3 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 it's may have ahead of the US election. We also dig into infrastructure improvements to blockchains and key applications, including stablecoins, AI, and so -called deep -in.

1:37Be 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. C -A -16 -Z dot 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.

2:20Why do we do it? I think we like to use this report as an opportunity each year to really take a step back, kind of 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. 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. And 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 sort of appreciate what's happened in the stream.

3:04You know, 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 of progress, let alone to remember what was getting streamed to you at full speed a year or two years ago. So I think that State of Crypto Report is a chance for us to take a step out of the fire hose and take a look at what's actually transpired. And to that point, like 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.

3:43Another 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. And I think of our report as a way to try to mainstream some of those big things. We try to avoid ingroup language and make things very accessible through charts, through very simple explanations. And it's an opportunity to do that too. Also, it's a way to shift the way people talk about crypto. Because crypto is just filled with like really difficult concepts and terms and to be able to kind of peel back the layers and talk about what is actually happening in a way that people can understand is a unique challenge.

4:35Let's talk about how the report opened. 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? 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.

5:16These blockchains are becoming more and more accessible, they're cheaper to use. And as a result, we're starting to see applications come online. And now that we have these applications, I think it's really starting to come to life. And I think in the years to come, this will be an increasingly important question. And yeah, I think that's right because beforehand, the technology is still coming together. And in many cases, it is still coming together. But we're actually beginning to see some applications. And that's something that if you haven't been paying attention to crypto, you might not realize.

5:47Totally. And I think the results speak for themselves, right? Active addresses across all of the blockchains that we tracked hit an all time high this last month of 220 million mobile wallet users. So data that we get from mobile app stores, that also recently hit an all -time high of 27 million. And so, you know, the numbers do kind of speak to this idea that we are now seeing some of these breakout applications that are bringing real, on -chain transactions and usage. Let's go through each of those. You mentioned that active addresses are at an all -time high. Now, this is a kind of controversial metric.

6:25Not 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, I think we need to look at some of the historical context. I think in traditional software, most people tend to understand the basic concept of a user. Of course, there's 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.

7:05It'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. And 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 symbol and up until recently, a lot of the most popular blockchains had very limited capacity, which resulted in high transaction fees, which created this natural barrier or spinning up and using thousands or hundreds of different addresses, because it would come with significant monetary costs.

7:48But recently, we've seen that crypto infrastructure has become more scalable, the BEL2s and new high throughput layer ones, which has reduced the cost of transactions on many of these blockchains to nearly zero. And maybe you might ask, isn't it also near zero costs to create multiple identities on traditional internet applications? And 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. Yeah, Google doesn't give you money for opening a new Gmail account, unfortunately.

8:29Exactly. A lot of new tokens today actually bootstrap their circulating supply by doing something called an airdrop where you're rewarding retroactively, users of the protocol based on a predefined set of addresses. And so 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. Yeah, 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.

9:14And what we've seen over the last four or five years that we've had air drops 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. And I want to make it really clear to anybody who thinks that it is a gigabrain take to say monthly active addresses is simple. Yes, we know that. And if you have a better way to measure using public data, you know, 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. Tell me. Let's work together and let's figure it out because the space deserves really high quality transparent metrics.

10:03And that's what we're trying to do. Yeah. And so given what we know about these behaviors? How many users are there, right? Is it 10 million, is it 50 million, is it 100 million? This is the question that we put a lot of work in and we're going to publish some of our thoughts around estimating them. And 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 the screen.

10:38I think one approach sounds kind of obvious, which is, you know, we've got these 220 million monthly active addresses. What if we could filter out what we suspect are bots and civils? And the way that we can do this is some techniques using on -chain analytics and forensics. One method is to filter out addresses that received funds from something called the dispersion contract. This is a smart contract whose sole purpose is to take in funds and automatically distribute them across many different addresses. Of course, 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.

11:23So there's certain types of filtering you can do around dispersion contracts specifically that 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 1 and September 30th. This criteria implies that the addresses were transient in nature. I think bots and Sybles 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.

12:12So this is like an address popped up and then within like some period of time people dumped into another thing and the address never was revived after that. 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. So it's a very transient type of activity. That's often associated with bots and civils. The other thing that we've looked into is just like the frequency of transactions. And so 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.

12:51You know, at best, they're a low -quality user, at worst, they're a bot or a symbol, and especially over longer periods of time, this type of analysis can help you in some of that filtering. You could also specifically look at addresses that transacted very, very frequently over very short periods of time. Humans can only reasonably through a wallet or app interface process a certain number of transactions, whereas bots can do things much faster and so you can do some filtering there. And then on the flip side, you can optimistically include addresses that are tied to some sort of identity protocol that requires some sort of setup cost.

13:29For instance, addresses that are tied to an EMS name or a Farcaster ID or some other linked social identity off chain, those are likely to be real human users. So obviously it's very complicated, 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. 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 cooling the wheat from the chaff, cooling out the addresses that seem transient, bot -like, or low quality.

14:06Yeah, 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. Okay, so let's walk through method number two then. So 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. And I think an obvious place to start here is wallet users. For example, in February, MetaMask, which is a popular Ethereum wallet, reported that that they had 30 million monthly active users.

14:42And specifically, they define an active user as someone who either loads a page within the Metamass extension or opens the mobile app at least once during any 30 -day period. And assuming that we're looking to estimate transacting users, we need to make some sort of assumption on what percentage of Metamass users actually end up transacting. And 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. And so let's say 30 to 50 million you can use some sort of assumption there.

15:22And based on that you have 10 to 15 million users that we believe are transacting through the MetaMask wallet products. And then all we need to do is try to understand what MetaMask's market share in the wallet space is. Of course, 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. And so 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.

16:06And then compare the results to approach number one, the filtering from active addresses to sort of triangulate on at least a range that we feel is in the right ballpark. And by the way, it doesn't just have to be metabasque. 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 kind of triangulate on a range based on all of the information that we have. So we have done this. We have done this internal analysis. It is definitely not perfect. I'm not claiming at all that we are super, super scientific about this.

16:44But we feel comfortable saying that we think there are 30 to 60 million real monthly transacting crypto users today. Of course, this is still a small percentage of the monthly active addresses. It's 14 to 27%. And in even smaller percentage actually of the total number of people who own crypto, but do not necessarily transact with crypto. It's actually only five to 10 % of the 617 million reported by crypto. which means there's a huge opportunity here, right, to convert existing crypto owners into active crypto users by bringing them on chain. So the point is to say is not that, well, the civil analysis is perfect, and we can end up at a, you know, flawless classification of which addresses our real humans and not.

17:34The point here is to get sort of 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 before that, and see approximately how things are developing. I also have this kind of like funny way of thinking about this too, where I'm like, well, maybe we're entering this new internet world where actually AI and bots and these things that are farming right now for awards and trying to snatch up incentives that certain projects are offering. Maybe we're entering an internet where like bots and AI are just infused everywhere.

18:15Like why why are humans the major metric? Yeah, look, I don't want to get to sci -fi, but everything is many to many now. Everything in a networked world is many to many. By that, I mean like does one person have a credit card? No, you have many. Is a credit card only used by one person? No, like there are many internet accounts, cars, just everything is totally intertwined and entangled. And as we add AI agents and other such things, it's going to get even crazier. In a way what we really want is we want to measure the attentional capacity that things command, right, the total amount of like cognitive bandwidth that they are are commanding from the environment, but that's the really like sci -fi way out there, getting kind of cookie conversation out of it.

19:05Next year's state of crypto report can be a measure. Yeah, we'll see. Aognitive bandwidth. All right, so for 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? Like, can you not get any more precise about it? I think if anybody has a problem after they hear the methodology, they might complain that it's not wide enough.

19:44Or maybe it should be a 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, right? Like we had to make some estimates. There's some things you have to kind of guess. Like the ratio of monthly active users is reported by Metamass to the proportion of them that actually do transact per month thereby becoming an active address, right? Like those are just things that we have to estimate. And I think it helps even just to think in orders of magnitude, like what we're looking at here, The fact that active monthly users of crypto is about tens of millions and global owners of crypto is hundreds of millions.

20:29There is a gap, there's a gulf there, but we're beginning to see the sort of outline of the market that we're trying to size up here. 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 Salana. Salana's far and away got the most active addresses of any blockchain network that we looked at. It's got 100 million or so. What's going on there? Well, I think the obvious answer here is that the blockchains that have the most active users are the ones that it's cheapest to transact on, right?

21:15and so, you know, blockchains like Solana are very, very cheap, which means it's very low cost to set up bots and cybles. 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 cybles on these low cost chains. And so I would take all of the face value monthly active addresses by chain data with a big grain of salt because there of course is lots of nuance associated with this. But with all that being said, base and slona were some of the top destinations for crypto users in 2024.

21:58I don't want to take away from the great growth and development that those ecosystems have seen this year. Yeah, base has the most active addresses of any Ethereum chain that we looked at at 22 million exceeding even Ethereum, which has six million. So clearly they've struck a chord. Totally. I was also interested to see Bitcoin up there. Like Bitcoin's got 11 million by our count. Totally. And you know, to keep going on this point, like the cost to transact on Bitcoin is not near zero, right? Which means there is likely to be less bots and cybles on the Bitcoin blockchain. And so, you know, you can kind of take that number more at face value.

22:42Certainly Bitcoin has been an ecosystem that we've seen more builders actually try to build new products and applications on the Bitcoin blockchain. And I think it's gotten very mainstream attention with a lot of top politicians talking about it. So I think definitely a good year for Bitcoin. Definitely. I mean, like the strategic Bitcoin reserve once a niche idea is becoming more mainstream. Yeah. And to add to Darren's point, all in all, I think it's a lot more difficult to look at Bitcoin activity and say that it's largely driven by symbols. I think that's just a lot more difficult to believe.

23:22So if activity is positive on Bitcoin, the implication is that there's probably an increase in real activity across the rest of the space. I mean, take with a grant and a salt, but I think that that's likely to be true. So we're talking about some of these blockchain networks that have had a lot of activity and interest over the past year. We mentioned Solano, Bayes, Stephen Bitcoin. One of the most exciting things I think 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.

24:05I think that that is going to be a mainstay feature of future reports. The big context is that I think the heartbeat of the crypto industry is, of course, all of the builders who are building the products and infrastructure to make this all work. And 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. And for the first time, we now have a lot of tools internally that allow us to So, 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.

24:54And we've done that. We've made actually a dashboard that we call the Builder Energy Dashboard. It has some very cool interactive data visualizations around all this data. and you can check it out at builderenergy .asixinzcrypto .com. One thing I'll point out is we were talking about blockchains that have the most active addresses, and 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.

25:36Base as well, super high up there. And even Bitcoin in slot number three had a really big bump in people who want to build on it. Yep, and 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? So 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 just means kind of where, generally speaking, are these builders interested in building on?

26:10And 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 mind share. So I think those were the key takeaways from that data, but you can check it out yourself by looking at the dashboard. 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 sort of changed from last year when we did the report to this year when it comes to a policy perspective?

26:55Yeah, so crypto has become political in this sense that the crypto industry believes that political engagements can help resolve some of its major challenges. And a big question is whether that has made it to the mainstream or not. Have the crypto industry's issues become something that some voters or enough voters care about? Probably for me the most interesting slide in the policy section of this report where is this analysis of the crypto interest that we're seeing within various states of the union? Block us through this analysis that you did here and what you found. I think everybody knows that this presidential election is shaping up to be a very tight race.