a16z's 2024 Annual Encryption Report: Supplementary Analysis Behind Optimism

Recently, a16z released its annual "State of Cryptocurrency" report, sparking heated discussions across major media and social platforms. The impressive charts in the report convey a clear "optimistic" message. This article aims to provide additional context and data to help readers gain a more comprehensive understanding of the current market situation.

Adoption of encryption currency

The report begins by stating that "cryptocurrency activities and usage have reached an all-time high," and it demonstrates the correlation between the monthly active cryptocurrency addresses and the growth of internet users. However, it is important to note that one address does not always correspond to a real user and may sometimes not represent anyone at all.

To better understand the driving factors behind address activity, we need to delve into the calculation method of this metric. The number of monthly active addresses refers to the sum of the daily count of unique addresses that are active as either senders or receivers in the network, only counting addresses that are active in successful transactions. This means that a transaction between two wallets can activate two addresses.

It is worth noting that the growth of on-chain addresses such as Solana and Base is closely related to memecoin-related activities. Active memecoin traders typically have multiple wallets, and users rarely use just one wallet to handle all transactions. In addition, there are sandwich traders and sniper bots, among others. On a single platform, an average of 25,000 new tokens are issued daily, each counted as an active address.

As a more accurate indicator, it might be helpful to look at the monthly traffic data from some major encryption currency data platforms. As of February 2023, a well-known data platform had a monthly visit count of 73.96 million, while another platform had 22.8 million. Even considering that some users may have shifted to using DEX data platforms, the two largest platforms had monthly visit counts of 13 million and 6 million, respectively.

Objectively speaking, some blockchains have indeed successfully attracted new users, but we may not have entered the golden age of Web3 adoption yet. On the contrary, long-term users seem to have built a more comprehensive infrastructure. Given the current liquidity and fragmented user experience, this is inevitable. However, the overall number of retail investors does not appear to have increased significantly.

The data on mobile encryption wallet users in the report appears optimistic, but it is important to consider that mobile devices account for the vast majority of web traffic in certain emerging markets. For example, 86% of Nigeria's web traffic comes from mobile devices, 79% in India, and 57% in Argentina. This indicates that users in emerging countries are the primary users of mobile devices. As mobile wallets become more user-friendly and feature-rich, their market share is growing. Furthermore, users often need to install multiple different wallets in the current blockchain environment.

These data reflect the widespread adoption of encryption currencies in emerging countries, which has been the mission driving Web3 and DeFi from the very beginning, and is now finally starting to become a reality.

Killer Applications of Encryption Currency

The a16z report identifies stablecoins as one of the most obvious "killer applications" of cryptocurrency, a viewpoint that is indisputable. Stablecoin transactions are faster and cheaper. Many countries have already established relevant legal frameworks, and many businesses have started to pay income tax in stablecoins. As the legal frameworks improve, more and more users may turn to using stablecoins to replace traditional remittance methods.

The fact that the trading volume of stablecoins exceeds that of Visa is indeed remarkable. However, it is worth noting that stablecoins are primarily used for large transfers, while everyday small payments still rely on traditional payment methods.

Although it cannot be denied that stablecoins are a killer application, it is still somewhat disappointing to see the annual report emphasize stablecoins so much. A few years ago, we would have been discussing DeFi here, which was indeed a groundbreaking innovation. And now, it seems we have not been able to launch more revolutionary applications this year.

Infrastructure

Improving infrastructure is crucial for the next generation of distributed applications and high-load applications (such as games, consumer applications, social applications, etc.). However, these advancements have yet to bring significant benefits to everyday users. While some games (most of which are not fully on-chain) and local consumer applications have emerged, transaction capacity does not seem to be the main issue. For example, in games, the primary use case is the tokenization of in-game assets and the open market for these assets, which do not require ultra-high transactions per second.

It is necessary to maintain an optimistic attitude towards the progress of infrastructure, as it creates opportunities for Web3 innovation and new use cases that have yet to be imagined. However, considering that the most popular application this year may be a gaming project, there is some concern about the development prospects in the field of distributed applications.

Decentralized Finance

The DeFi section begins with the statement "DeFi is still very popular and continues to grow." This is indeed accurate for 2023, although we have not yet reached the levels of 2022. In 2022, the total value locked in DeFi approached $180 billion, while now that figure is only about half of what it was then. Even taking price differences into account, we have not yet returned to that level.

The growth of the industry is mainly attributed to new areas such as liquid staking, re-staking, and RWA. Institutional capital has finally started to flow into DeFi. However, looking at the monthly active user statistics of a major DeFi protocol, the current monthly user count is close to 6,000.

What does this mean? In my opinion, the recent growth of DeFi can be attributed to several core factors: the average deposit value and overall market value have increased compared to 2023.

AI x Crypto

Artificial intelligence and encryption both have tremendous potential, offering decentralized economies that can drive more affordable, community-centered advancements in the field of artificial intelligence.

The correlation between artificial intelligence and encryption traffic may stem from their shared characteristics: both are emerging, promising technological fields with significant speculative value. Web3 is at the forefront of technological innovation and has quickly begun to attract the interest of artificial intelligence users (and vice versa). These two industries have similar user bases and areas of interest, neither of which belong to the conservatives.

Decentralized computing use cases, such as internet sharing methods proposed by some innovative projects and collaborative AI agents, demonstrate enormous potential.

Summary

In 2024, the development of cryptocurrencies is mainly reflected in significant technological advancements behind the scenes. However, these innovations have not yet captured the attention of a broader Web2 audience, as they are often highly technical or designed for specific users such as institutional investors.

For cryptocurrency newcomers focused on quick profits, these advancements may not be appealing. This is why many are drawn to the memecoin craze and prediction markets.

In 2024, people's optimism towards airdrops and reward programs gradually faded. Users now see them as a form of additional annual yield, which has driven a liquidity rotation among more risk-seeking passive investors following token generation events. Similarly, the hype surrounding GameFi has also gradually cooled with the arrival of reality. While some games have successfully attracted users, none have reached the level of success seen with mainstream AAA games. This is completely normal—innovation takes time to mature.

In other words, we remain optimistic about the future of the encryption industry. But are we in the golden age of Web3? The answer is no. The industry still needs time to develop and refine in order to truly realize its potential.