“That’s Our Two Satoshis” - The Blockspace Cycle Turns

Jeff Dorman, CFA
Sep 11, 2023

Thats Our 2 Satoshis Logo

Special Edition Written by Nick Hotz, CFA - Analyst at Arca
Reintroducing the Blockspace Cycle
In October 2022, we hypothesized the Blockspace Cycle, where valuations, narratives, and relative performance of digital assets tend to move in waves that are driven by the inherent cyclical supply/demand nature of our most important commodity, blockspace. Blockspace can be defined as the space on a blockchain that is used to run code or post data and serves as the resource that fuels the blockchain economy. Users of applications consume blockspace, but it’s important to note that not all blockspace is created equal - users need to trust a blockchain’s security - and be willing to pay for it.
When we last mused about the cycle in early October 2022, it was clear the blockchain economy was ice cold. We saw ourselves in the later stages of a cyclical winter consisting of decreasing demand and prices. At the time, we had clearly been through some tough times in the digital assets space, though the collapse of FTX (November 2022) was still ahead of us, which really put us at the bottom, in terms of sentiment.
Source: Arca Internal Research (10/3/2023)
While we were roughly accurate on the timing of transitioning out of the feared bottom-right blockspace quadrant, our prediction that applications will appear attractive compared to the infrastructure, looks, if anything, too early. In the time since our last post, we’ve seen even greater attention to building infrastructure and less focus on what to do with said infrastructure. Layer-2 blockchains, wallets, blockchain architectures, and re-staking have surpassed DeFi, NFTs, and especially DAOs as preferred topics of conversation in digital assets investor circles.
As we mentioned nearly a year ago, an absolute onslaught of new infrastructure will hit the market this year (or in some cases, already has), with innovations making it easier than ever to access cheap and secure blockspace. Ethereum’s EIP-4844 promises to slash costs on Layer-2 rollups, bringing transaction fees down to pennies, and Optimism’s OP Stack has recruited more than a dozen projects to build blockchains, including heavy hitters like Coinbase and Worldcoin. A slew of new general-purpose L1s and L2s including StarkNet, Polygon zkEVM, zkSync Era, Aptos, Sui, Sei, Linea, Mantle, and others, have all launched to generally underwhelming excitement. We are at the opposite end of the mid-2021 cycle when“sky high” Ethereum gas fees had users salivating for more reasonable options, and but we’re now at a point where even paying users to check out your new blockchain isn’t working all that well.
Looking at market valuations, there are zero non-pegged asset applications sitting in the top 20 tokens by market cap. Even when expanding our scope to the top 40 tokens, only three make the cut (UNI, OKB, LDO). Compared to March 2021 when UNI sat at #8 in terms of market valuation, AAVE sat in the top 20, and 4 additional asset applications sat in the top 40. Judging by market cap alone, it’s clear that the market is just not putting any sort of premium on applications right now.
Source: CoinMarketCap, Arca Internal Research
The Blockspace Cycle Turns
Despite the negative sentiment and valuations for crypto applications currently, there are “green shoots” that could represent the early instances of products capable of attracting mass adoption. These projects have only started cropping up in the past few months as builders increasingly move on from iterating on old themes (a 2022/  early-2023 favorite) in order to experiment with new ones.
Recently, Crypto Twitter flocked to an app called friend.tech, which allows users to buy tokens (called “keys”) that represent Twitter influencers in order to provide access to private chat rooms. Despite a shoddy user experience, privacy red flags, and referral code gating, the app facilitated over 1.5m transactions and $60m of transaction volume in just under two weeks. We’ve since seen a wave of building on top of the app with FriendMex providing a trading interface and wrapped friend keys enabling further composability. In the past few days, we saw traction among non-crypto figures, including the esports influencer FaZe Banks and Grayson Allen of the Milwaukee Bucks.
Similar applications, like Bitclout, have seen mixed success, gaining initial traction but quickly fading as influencers lose interest. However, friend.tech’s launch on Coinbase’s Base L2 means that transaction fees are unlikely to be a limiting factor and its app-like mobile onboarding experience is far superior to what we’re used to in digital assets. While it’s unlikely friend.tech will reach mass adoption, it does demonstrate how blockchain-enabled composability, a superior onboarding experience, and playing into digital asset financialization can quickly start a trend.
Source: @msilb7 on Dune
While many projects in 2021 attempted sustainability through new NFT mints and other circular crypto-ecosystem games, projects like DeGods, Pudgy Penguins, and Kanpai Pandas are instead offering real-world experiences and products that bring utility and financial value to their holders. These projects are creating real intellectual property businesses while looping holders into the economic equation, and in turn, creating an army of well-capitalized evangelists, and possibly unlocking a real business model for future NFT projects.
Over on the Solana blockchain, the advent of compression technology reduced the cost to mint NFTs by orders of magnitude helping unlock use cases completely unfeasible on Ethereum. With the ability to create 1 million NFTs for around $100, applications are starting to experiment with new models on top of the technology.
  • Helium minted its nearly 1M user accounts as NFTs in its transition to Solana, sharply improving the ease, cost, and minting NFTs made the migration to a new chain more secure
  • DRiP Haus allows creators to mass airdrop thousands of NFTs to their fans thus improving the ability to distribute and collect desirable content
  • Dialect is a messaging platform built entirely on Solana that allows built-in payments and NFT sticker collecting
Source: Delphi Digital
Digital assets facilitated infrastructure networks (DePIN) offer another interesting use case of bringing blockchain utility into the real world. This was seen on display recently with Helium rolling out its 5G mobile service in partnership with T-Mobile, offering plans for $5/month - an 80-90% discount to comparable providers. Akash Network’s AKT token soared in recent weeks as it prepares to launch a network linking GPU providers with those needing compute power, which is especially useful for the AI industry as it desperately hunts for chips. And Bittensor’s decentralized machine learning network has nearly 1,000 different AI models working together to give responses that are better than the sum of the parts.
Speaking of AI, one of the more out-there use cases gaining steam recently is how blockchains might be the best rails to host AI bots (called “agents”). While still in the proof-of-concept phase, the combination of blockchain infrastructure plus generative AI models allows for the creation of  trading bots that can evaluate prediction markets (maybe something like Polymarket in the future) and look up recent information about the topic to make a prediction about the market, and then automatically trades based on that prediction - all in less than 15 minutes. WILD.
Source: X
Springtime In Digital Assets
To be sure, most of these applications aren’t ready for prime time yet. But in contrast to where the industry was  nearly a year ago, we now have strong examples of applications that can eventually make a big impact along with ones that are solving new problems, not just rehashing old ones.
While not all prices are moving in the right direction, new experiments are being run and new ideas are being born. We truly believe in blockchain’s ability to enable permissionless applications that improve society’s ability to coordinate at a grand scale. And while it may not be obvious yet, some part of the building we’re seeing right now will get us closer to that vision. So take off your winter coat, and shake the snow of out your hair.
The blockspace cycle rolls on.
Source: Arca Internal Research


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Michael Dershewitz - Chief Operating Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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