The author of this report may personally hold a material position in ZRO, ZK, and ARB, The author has not purchased or sold any token for which the author had material non-public information while researching or drafting this report. These disclosures are made consistent with Delphi’s commitment to transparency and should not be misconstrued as a recommendation to purchase or sell any token, or to use any protocol. The contents of each of these reports reflect the opinions of the respective author of the given report and are presented for informational purposes only. Nothing contained in these reports is, and should not be construed to be, investment advice. In addition to the disclosures provided for each report, our affiliated business, Delphi Ventures, may have investments in assets or protocols identified in this report. Please see here for Ventures’ investment disclosures. These disclosures are solely the responsibility of Delphi Ventures.

1. Introduction 

In launching the first vampire attack in crypto history, SushiSwap provoked a reluctant Uniswap into launching UNI. Uniswap airdropped 15% of the supply to its 250K users, with the minimum 400 UNI airdrop worth $3.6k today. Uniswap’s airdrop set the standard for token go-to-market. 

At their best, airdrops decentralize the protocol, reward early users, align incentives, and solidify a community. At their worst, airdrops alienate the user base, curb hard-earned momentum, contaminate community discourse, and leak massive amounts of value to sybils. 

Airdrops have become increasingly scrutinized and are rarely celebrated now. Entitled users and tone-deaf project teams sit at opposite ends of a polarized spectrum. Airdrops have taken on a PvP dynamic between users and the protocol, which is causing many to wonder if airdrops are still viable. In this report, we will explore recent airdrops, analyze protocol health pre/post airdrops, and discuss potential solutions for the issues facing token launches. 

2. Airdrop Frenzy

Since the UNI airdrop, we have seen a number of high-profile airdrops that have rewarded early adopters, including dYdX, ENS, Jito, Arbitrum, and many more. This strategy worked well for many projects in attracting capital and users. Users started expecting a future airdrop from every new project, and projects sustained this expectation by saying that their airdrops were “returning part of the value created to their users.” 

Returning value to users was a smart incentive, especially when attracting liquidity and attention is what can make or break a project. Airdrops also helped projects initially distribute their token supply to a large set of users, making Governance more distributed. The expectation of a future airdrop was often enough for degens to move their attention and liquidity from established protocols to riskier, untested protocols.

Not all airdrops are equal. Some, such as Internet Computer and APE coin, have mostly trended downward in price since the airdrop. Meanwhile, airdrops such as BONK (280x), TIA (2.5x), and UNI (2.9x) are trading at multiples of their launch valuations. 

Four of the top 10 airdrops distributed over a billion dollars each to their early users and community members. While the dYdX airdrop was valued closer to $800M at its launch, any user with over $100k in trading volume received an airdrop equivalent to $60K. 

The UNI airdrop outperformed every following airdrop and was worth a whopping $6.4B at its peak. The 50 biggest airdrops in crypto have distributed value worth over $26.6B. This multi-billion dollar opportunity has attracted sophisticated actors looking to exploit the system.

This has created a new cohort of crypto users – the Airdrop Farmers. Airdrop farming is extremely lucrative as the risk associated with most of these programs is usually minimal. Airdrop farmers follow a simple process: [split] 

1. Explore the platform 

2. Identify how the airdrop allocations will be calculated (e.g. transaction count, transaction volume, locking liquidity, etc)  

3. Make transactions that add little value to the protocol but rank those users at the top

4. Repeat across several wallets

Every exciting protocol launch in crypto is now synonymous with inorganic activity from sybils and bots to acquire a large portion of the initial airdropped token supply. Airdrop farming has now developed into a small sub-sector in the industry, with airdrop-oriented CT influencers, campaign platforms, airdrop farming applications, and the farmers themselves.

This farming activity heavily skews application performance and traction metrics. To counter this farming activity, airdrop criteria have evolved significantly since the UNI drop. Protocol and application teams know this behavior and have now started counter-farming such users through the promise of the future airdrop or their points program.

3. Evolution of Airdrop Design

Airdrops started by retroactively rewarding users for their behavior (trading volume on dYdX, registering an ENS domain, etc.). But now, most airdrop programs follow an extensive points program, wherein the protocol team determines how to value user behavior and allocates tokens accordingly. 

The UNI airdrop started with a flat reward (400 tokens) for each swapper. Then, we saw tiered airdrops, where protocols started to make a general tiered distinction between users, and the airdropped amount within each tier remained constant (Jito). The Optimism team popularized multiple criterion-based airdrops, with qualifying users receiving incremental tokens for each criterion they satisfy. This methodology was utilized by many protocols, including Arbitrum and zkSync. We now observe most teams using linear allocation in their airdrop strategies, with Ethena and Kamino being recent examples of this approach.

Another trend that has become popular in the past year is airdropping tokens to strong crypto communities that aren’t direct users of your protocol but help improve the project’s visibility. Milady, Pudgy Penguins, and MadLads have received several popular airdrops in the past year, including Celestia, Ethena,

LayerZero, Wormhole, and zkSync. In my opinion, this trend was popularized due to the success of the Bonk Airdrop, which distributed tokens to many communities in the Solana Ecosystem. 

In the remainder of the article, we dive deeper into how protocol usage changes post-airdrop and provide some new methods for understanding user behavior and organic traction. The aim is to provide users and investors in the ecosystem with a better toolkit to measure true usage that they can utilize to improve their liquid investment process. 

4. LayerZero

LayerZero is an interoperability protocol that connects blockchains, allowing developers to build seamless omnichain tokens and applications. The most popular application of LayerZero’s protocol is bridging assets from one chain to another.

If you aren’t aware of these massive clusters, you missed out on the biggest campaign to identify the inorganic usage of a protocol. LayerZero recently concluded its sybil identification campaign that was conducted in two phases: 

1. Self-Reporting and Initial Identification

2. Open community bounty to identify sybil clusters

Even after these 2 phases of identifying and eliminating airdrop farming operations, many Sybil wallets bypassed the filtration and collected their now slightly larger share of rewards. One week after announcing the snapshot for their airdrop. Activity across the biggest dApps had dropped significantly, with at least 70% WoW drawdowns across the board.

4.1. Applications LayerZero team considers to be Sybil farming dApps

In their blog post explaining airdrop qualification and Sybil detection, the team mentioned that wallets interacting heavily with applications like Merkly, L2Pass, and L2Marathon (apps with transactions like circling a low-value NFT across chains) are likely Sybil wallets.

The monthly usage metrics for these dApps show a sharp decrease after the snapshot date. The LayerZero team has correctly categorized many of the transactions originating from these apps as Sybil-driven, but the large drop in activity has hit all LayerZero-based applications.

The number of messages relayed for Stargate, the flagship application of the LayerZero protocol, also dropped by 70% in the month following the snapshot announcement. The applications labeled as Sybil dominated have dropped between 82-86%. There are 2 factors that explain the rapid decrease in volume across all LayerZero applications – 

1. The majority of activity on all LayerZero applications (including applications like Stargate) was airdrop farming-driven 

2. Airdrop farmers have moved to use other bridging applications like deBridge for its upcoming airdrop, leading to an overcorrection in transaction volume

LayerZero saw its first day of relaying fewer than 40,000 messages across 80 supported chains on 19th May (after 422 days). Many chain paths to and from chains like Polygon, BNB chain, Gnosis Chain, and Celo were likely being used by airdrop farmers due to the low transaction fees associated with these chains that a user would have to pay. They allowed airdrop farmers to interact with LayerZero smart contracts on an additional chain, which was believed to be a possible airdrop criterion. The activity originating from these low-cost chains is down 93.1% from its peak and 71.2% lower from the month before the snapshot.

Purely examining the dip in messages relayed paints an incomplete picture. To benchmark the comparative performance, we can see that net bridging volume across all bridges dropped to $8.3B in May from $10.1B in April—a 17.8% drop. At the same time, LayerZero-powered Stargate’s bridging volume decreased from $1.67B to $406.7M—a 75% drop in transaction volume.

This occurrence is not limited to Stargate but is a recurrent theme we have seen across most bridges. Wormhole, the other major protocol in the general-purpose messaging category and interoperability solutions, airdropped its token recently and has seen a drastic drop in usage. Portal, the flagship bridge enabled by the Wormhole protocol, has dropped in bridging volume facilitated.

After these major airdrop announcements, a lot of bridging-related activity migrated to Across in the month of May, when Across did four times the combined volume of the flagship bridges for LayerZero and Wormhole. With the launch of Stargate V2 at the end of May, Stargate has rebounded in volume and has gradually flipped Across for the position of the leading bridge on June 27th. 

Since its launch about two years ago, LayerZero has had almost 6M unique wallet addresses interact with it. On June 19, 2024, the team announced user token allocations and its plan to airdrop tokens to 1.28M wallets. The other 4.7M+ wallets aren’t eligible for the airdrop due to low activity, self-reporting, or third-party identification as Sybil. By doing so, has the LayerZero team themselves deemed 78% of interacting wallets as inorganic or inactive users?

5. Layer-2 Airdrops

In 2024, we have seen a number of general-purpose Layer-2s launch with minor technical advancements but new incentives and user acquisition strategies—such as Blast, Manta, and Zircuit. For Layer-1/2 protocols, we have a much wider net of metrics that we can monitor. We limit ourselves to reviewing a few of these metrics that cover different stakeholders.

5.1. Transaction Fees Generated

Transaction fees collected by L2 sequencers have drastically reduced since the launch of blobs (i.e. the rollout of EIP-4844) and alternative data availability layers like Celestia. Purely looking at the absolute fees collected by these L2 sequencers will always display a decrease due to the reduction in call data costs. Comparing fees collected between multiple layer-2 protocols would better estimate fee-generating demand on these rollups. 

In a pre-EIP 4844 Ethereum, Arbitrum had been able to more than triple the fees they were collecting in a year from their airdrop, as fees grew from $120k-170k in March 2023 to $480k-$1.2M in March 2024. zkSync and Starknet did lead in fees collected compared to Arbitrum in the months following the ARB airdrop. 

Post EIP-4844 and leading up to the ZK airdrop, zkSync generated fees on par with Arbitrum daily. However, since the snapshot announcement and subsequent token distribution, the fees collected have been trending down. We observed the daily fees paid by users falling below $10k for the first time since the launch week of the zkSync Era. Daily fees collected by Starknet have been consistently $3k from the second week of April.

Manta Pacific ran campaigns like “New Paradigm” and “Into the Blue” and added gamification around their NFTs that were later converted to token allocations. During the months of December and January, Manta was generating fees comparable to Arbitrum and zkSync even though it was using Celestia as its data availability layer. But their campaigns ended up attracting more airdrop farmers than actual users that would return to the applications post airdrop. Fees collected from transaction processing have dropped more than 95% from ATH, and Manta Pacific has not been able to generate more than $20k in daily fees since the last week of March. 

5.2. Development Activity

We saw earlier that the transaction fees that any L2 can generate can become comparable to existing market leaders in the thick of airdrop farming campaigns. We look at the number of smart contracts deployed to get a different perspective or metric to measure the organic interest in the ecosystem. This metric is also fairly simple to skew on a short timeframe, but maintaining that divergence over longer timeframes is extremely difficult. 

Developers need to make an informed decision to deploy, maintain, and grow a protocol on a particular blockchain. Even multichain dApps need to take a decision on which chains they would want to expand to, as it consumes time and resources that can be spent improving and growing their existing products. Moving around different chains is thus an important decision for developers compared to application end users and can be used as an indicator for gauging interest in a blockchain ecosystem. Manta whilst able to match L2s like Arbitrum and zkSync briefly in transaction fees, it was never remotely close to them in the number of contracts being deployed. 

5.3. Transaction Activity and Active Users 

zkSync has been showing signs of a slowdown in transaction activity since April, even before the snapshot had been announced – possibly due to certain sybil activity wrapping up on the L2 and moving to farm newer protocols. Arbitrum was the most active Layer-2 ecosystem around its airdrop in March 2023, and it was still able to more than double its daily transaction count. Starknet and Manta Pacific have seen a drastic drop in transaction activity, with both L2s facilitating less than 100k transactions on most days in the past 2 months (i.e. Both these L2s have a current scaling factor of less than 0.1).

On a positive note, the transaction count and fees generated on Manta began a steady increase in the first week of June. For Manta, the number of active users on the chain has dropped below 10k, with an average of 8+ daily transactions per active wallet on the network representing a narrow base of highly active users. On chains like Arbitrum and zkSync, the average transaction count per user ranges between 2-4. Arbitrum’s recent growth in active users helps it maintain a 50% lead over Base as the most active Layer-2 by DAUs.

6. Kamino

Kamino Finance (Kamino Lend) and marginfi (mrgnlend) have been the frontrunners of Solana’s DeFi lending ecosystem. MarginFi was the category leader until March 7th, 2024, when Kamino Finance announced the snapshot date for their points program. By declaring the token distribution to be linear to points accrued about a month before the snapshot, they incentivized major depositors and borrowers (whales) on mrgnlend to migrate their positions to Kamino’s lending product. 

Kamino is a very interesting case study to analyze for its airdrop strategy since it helped them efficiently execute their user acquisition plan and dethrone marginfi as the leading money market on Solana. Mrgnlend’s TVL has now stagnated below its early March TVL, but Kamino Lend’s TVL has grown by $725M. But TVL doesn’t convey the entire story behind the user behavior and protocol adoption.

The TVL on Kamino has held up decently post the snapshot date, with some users withdrawing funds, but it has rebounded back close to its all-time highs. We should observe other usage metrics to understand better the organic activity, change in activity, and protocol usage post-snapshot. 

6.1. Number of interactions with Kamino smart contracts 

Kamino has 2 flagship products – Kamino Lend and Kamino Liquidity. Just trying out the various features on the Kamino platform, such as lending, borrowing, providing, and withdrawing liquidity from the liquidity product, would lead to 4 interactions with the smart contracts. 

One of the simplest sybil strategies includes trying out all the product’s various features to secure a minimal airdrop allocation. By breaking down the number of wallets by the number of interactions with the protocol smart contracts – we can get a ballpark estimate of the number of users experimenting with the protocol with the expectation of a minimal airdrop. Going beyond identifying the airdrop driven usage, this segmentation also helps us spot the number of power users that exist for an application (e.g. 100+ transactions initiating wallets). 

About 190k of the total 390k wallets that have interacted with Kamino Protocol have initiated fewer than 5 transactions. A large fraction of these wallets are likely Sybil operations or individual airdrop farmers. 

6.2. Depositors and Withdrawing Users

Protocols, especially DeFi protocols that require locking up capital with significant inorganic activity from airdrop farmers experience an outsized number of withdrawals as compared to deposit transactions post the snapshot. In Kamino’s case, the number of wallets withdrawing exceeds depositors, but the Lend product’s TVL is inching closer to its ATH in SOL-denominated TVL). Kamino is gradually losing its Airdrop farming TVL, and on the flip side, it is acquiring TVL from recurring users.

Since the snapshot for season 1 of Kamino’s Points program, the Average net flows on TVL growth days have been $23.6M compared to $23.08M for TVL contraction days. The difference between them is trivial, but the TVL growth days outweigh the TVL contraction days 55:6—representing almost 9 days of net inflows for 1 day of outflows. Since their airdrop snapshot, almost $3B of net inflows have occurred in Kamino’s Lend product.

6.3. New Versus Recurring Users

The active user count on Kamino has been declining since the airdrop and they have been able to maintain over 3k daily active users. Of these users, the share of returning users has reached 98%. Combining the results indicates that: 

1. Kamino was able to attract many new users to use the protocol pre snapshot but can no longer do so; new wallet activity was mostly airdrop driven. 

2. Kamino’s user base has shrunk to a smaller power user group, and much of the inorganic activity has been moving away from the platform. 

The plan of action by the Kamino team to announce a linear distribution of tokens based on the points accrued was in part to attract these power users/whales from marginfi and the rest of Solana DeFi. They were very successful in doing that, but the protocol has not been able to retain a lot of the smaller users, as their airdrop allocations ended up being minuscule compared to these whales. Focusing on retaining these smaller users would’ve been detrimental as the stickiness of this capital has been historically low in EVM-based DeFi ecosystems. 

7. Parcl

Parcl is a decentralized real estate trading platform. It offers city indexes that allow users to speculate on the price movements of real estate markets worldwide. Parcl’s points campaign was very popular, with almost 160k wallets on Solana interacting with the platform and driving TVL to the high of $185M. 

Users could earn points by depositing liquidity, opening trade positions, and referring other users to the platform. At the end of their points program, they adopted a hybrid approach in distributing rewards with the top wallets with maximum points receiving a capped amount of tokens determined by the team. 25% of wallets interacting with the platform had fewer than 6000 points and were deemed ineligible to receive airdropped tokens. The remaining users were given a linear airdrop, i.e., pro-rata allocation to the points they earned. 

7.1. TVL constantly leaving Parcl

Users have mainly been withdrawing funds from Parcl after the airdrop, with less than 12 days of net inflows since the announcement date. The average magnitude of withdrawals/outflow days ($2.25mn) also exceeds the average deposit/positive-inflow days ($447k) by a factor of 5x. TVL has shrunk by 74% to $47mn since the airdrop.

7.2. Number of Daily Transactions 

For a lending protocol or yield protocol with transactions spread far apart, the drop in active users can still be explained by the low interaction frequency. But for protocols designed for trading purposes, the drawdown in Users and transactions should be the biggest concern.

Since the airdrop distribution, the number of daily transactions and unique wallets interacting with the protocol has fallen dramatically. Recently, Parcl has averaged close to ~500 unique DAUs and about 2,500 transactions on the platform daily, a sharp falloff from the 10k+ wallets that were interacting with the protocol. 

7.3. How frequently do wallets interact with Parcl smart contracts?

Over 158k wallets have interacted with the Parcl smart contracts, i.e., depositing into the Liquidity pool, withdrawing funds, opening a trade position, etc., fewer than three times. It is likely that most of these wallets interacted with the protocol for farming the airdrop with no intention of continued usage post-snapshot. 

7.4. Activity from Users post snapshot

We have limited the above set of event emissions to a small subset to mainly include events that involve users’ actions with their deposits on the platform. The general trend of Interactions with the protocol post snapshot has been actions like Removing liquidity, Closing an LP position, Processing settlement, and Withdrawing margin as opposed to Adding liquidity, creating a margin account, or depositing margin. All of these factors point towards Airdrop farmers exiting their positions and taking out funds from the protocol. 

The Parcl team executed one of the better points and airdrop campaigns in the last six months, but the activity and users who joined the platform were driven by the airdrop incentives and have since left the platform. The sharp decrease in the activity on Parcl can be attributed to another factor: trading Real estate has lower inherent volatility, and most of the attention on Solana at the same time had been shifting towards trading memecoins with higher risks and higher rewards that appeal more to the average onchain user.

8. Jito 

Jito Labs is building high-performance MEV infrastructure for Solana. Their aim is to make Solana more efficient, minimize the negative impact of MEV on users, & maximize MEV returned to users and stakers. Jito also has a liquid staking service, Jito Stake Pool, allowing users to stake their SOL tokens in exchange for Jito Staked SOL (JitoSOL) tokens that earn both staking and MEV rewards and are composable with most Solana DeFi applications. 

Airdrops and Points systems aren’t necessarily a down-only event for a protocol. Teams that find a product-market fit and execute an airdrop campaign that is well-received by the community can experience continued growth. Jito was one of the earliest projects to implement a simple points program before most users became fatigued by the points meta. This campaign went under the radar as compared to most points programs today as it was launched in the depths of the bear market.

Deposit transactions have far outweighed withdrawal transactions for most weeks since the airdrop. November and December were the only months in which Withdraw SOL and Withdraw Stake transactions were even comparable to the Deposit transactions.

In the two weeks following the Jito airdrop announcement, over 10k users deposited SOL each week. Recently, we’ve seen more users utilizing the Deposit Stake function, i.e., they are migrating their stake accounts from other LSTs and validators to Jito.

The number of new users (wallets) interacting with Jito has been on par with the number of recurring users, signaling the interest in using Jito even after the airdrop. 

Jito’s share of Solana’s liquid staking market has grown from 43.5% to 46.2% since the airdrop, which initially looks like a small step up. This feat is, in reality, impressive because, since the JTO airdrop, a wide variety of new LSTs from ecosystem teams like Bonk (bonkSOL), Helius (hSOL), Jupiter (jupSOL), Drift (dSOL), Laine (laineSOL), Cubik (iceSOL), Pathfinders (pathSOL) have been launching with new incentives for their respective communities and users. 

The Solana Liquid staking market has grown 36% in the past six months, and in the same time period, SOL staked through Jito has grown from 6.76M SOL to 11.05M SOL—a 63% increase.

From the week Jito announced their airdrop, they’ve seen 24 weeks of net SOL inflows and 5 weeks of outflows. On an average inflow week, Jito receives 227k SOL deposits, and during an average outflow week, the protocol sees 63k SOL exiting from their stake pools. This shows that until now, an average week of 

inflows can counteract almost three and a half weeks of outflows from Jito’s liquid staking product. 

Adoption in DeFi

The success of Liquid staking tokens hinges on their usability within DeFi and the liquidity for users to swap out of their holdings immediately. Lido’s stETH became the market leader by rapidly integrating stETH across DeFi, and the network effects and liquidity allowed it to cement its position. Similarly, jitoSOL is by far the biggest LST on Solana measured via the adoption of the token in DeFi and the available liquidity.

Jito’s airdrop is an extreme outlier, but it is an example of how one airdrop can kickstart exponential growth for an entire ecosystem. Solana’s DEX volumes now rival Ethereum Mainnet. DAUs and transaction counts exceed Ethereum Mainnet, and TVL has been on a constant climb since the End of November, i.e. since the Jito Airdrop. 

9. What can we do? 

The opportunity to invest in more transparent and accessible liquid markets in crypto is one of the biggest advantages over tradFi that I find amazing. The 4th Uniswap fork on the 7th Layer-2 launched this year has better real-time and publicly available analytics than many web2 public companies, who are only obligated to share their performance and financials every quarter. But the entire meta around points and airdrop farming skews the performance and traction metrics making the investment process in liquid secondary markets more difficult. 

Even though most value is being realized in private markets, the market and all the publicly available information allow valuation repricing to happen over time. A large opportunity in liquid investing arises if we are able to identify the organic vs. inorganic traction that crypto products have before the rest of the market participants.

As an investor in the liquid markets, one can ask a wide range of questions and view the relevant data available to get insights into what fraction of a protocol’s usage is/was organic. We can observe a multitude of data points before the airdrop snapshot, after the snapshot period, and in the steady state after the airdrop. 

9.1. Active Users

• Daily Active Users (DAU) and Monthly Active Users (MAU): Track these metrics over time to see if there’s a drop-off after the airdrop snapshot is announced. A sustained number of active users post-airdrop indicates more organic engagement.

• Given the nature of Airdrop farming in crypto right now, almost every protocol will observe a dropoff in active user count post-airdrop. So, to better ascertain the protocol’s ability to retain users, we can measure and compare Active users to competitors, other projects in the same L1/L2 ecosystem, and similar products on other chains. 

9.2. Retention Rate 

• User Retention Rate: Measure how many users continue to use the platform after pre-determined periods (e.g., 1 week, 1 month) post-airdrop. Higher than usual retention rates suggest that users find ongoing value in the protocol

9.3. New User Share 

• New User Share: Measuring the fraction of DAUs or WAUs that are new users as compared to recurring users. A higher share of new users signals better PMF in a post-airdrop environment, as the largest incentive to spin up new wallets interacting with the protocol is reduced drastically. 

• Having a high fraction of recurring users is not a bad indicator either, as most of the recurring users after the airdrop indicate the organic usage of the platform. 

9.4. Transaction Value and Volume 

• Transaction Count: Simple metrics like monitoring the number of transactions initiated daily and the average transaction count per user before and after the airdrop. A sharp decline after the airdrop period indicates that many transactions were driven by airdrop expectations. 

• Median Transaction Value: Assess the total value of transactions. A consistent or increasing median transaction value post-airdrop indicates genuine usage as the low-value sybil transactions disappear. 

9.5. Nature of Transactions

• Feature Usage: Monitor which features are being used and how frequently. Sustained or increased use of core features post-airdrop indicates ongoing interest or product market fit. The simplest way to do this analysis is to parse through the events emitted by the protocol’s smart contracts. 

9.6. Engagement Metrics 

• Wallet Cohort Analysis: Group wallets based on their total activity on the platform. Wallets with minimal transactions, i.e., those that test the various features and functionalities once, are strong contenders for being airdrop farming wallets that can be eliminated in the process of identifying organic activity. 

• Depth of Engagement: We can look at the number of transactions per user per session (e.g., trades made and features used). A high depth of engagement suggests users are deriving more value than other applications with a lower depth of engagement. 

9.7. Governance Engagement 

• Forum and Support Activity: Monitor activity on community discussions and governance forums. High voter engagement and ongoing discussions can signal a committed user and token holder base.

10. Conclusion

Airdrops are amongst the most anticipated events surrounding crypto projects. But they have increasingly become stress tests for projects as community backlash around the snapshot announcements has become a recurring theme. This is in part due to the dilution of rewards due to high Sybil activity and protocols trying to farm users for traction metrics for extensive periods. Running anti-Sybil campaigns like LayerZero can be a prohibitively expensive endeavour that cannot be conducted by most teams.

A possible path ahead is for major protocols to conduct these anti-sybil campaigns and other smaller protocols to utilize the findings to remove Sybils from their token distribution process. I don’t believe linear airdrops are the silver bullet that can solve all challenges associated with Airdrop campaigns, as they are heavily skewed towards whales. We need to design better airdrop campaigns and set stringent eligibility criteria that are harder for Sybils to satisfy. 

As participants in crypto liquid markets, utilizing the ideas and metrics shared above can help make more informed decisions before buying into tokens for projects with inflated metrics and even more inflated valuations. 

Disclaimer

This report is the original document written by Delphi Digital. It is provided for informational purposes only and should not be considered investment advice. Before making any investment decisions, refer to the original document and seek professional advice. Tiger Research does not guarantee the accuracy, completeness, or timeliness of this report and is not responsible for any losses or damages resulting from its use. All disclaimers, risk warnings, and conflict of interest disclosures in the original Delphi Digital document also apply to this report.

TL;DR

• BTC ETF approval led to increased volumes around US market hours

• Trading has seen an uptick towards the end of US trading during benchmark “fixing windows”

• Liquidity has improved on benchmark constituent exchanges

This week we’re looking into the impact of spot exchange-traded funds (ETFs) on Bitcoin’s market structure. The US SEC approved 11 on January 11, with 10 launching the next day. Hong Kong previously approved Bitcoin and Ethereum ETFs, launching in late April.

To examine the impact of these products we’re going to look at trading volumes and liquidity at the market close across US and Hong Kong trading hours.

Our research shows that trade volumes rose on crypto exchanges included in Bitcoin benchmark reference rates. In particular, volumes increased around the US market close following the approval of spot BTC ETFs in the US.

The increased activity between 3 pm and 4 pm New York time (US market close) is linked to the ETFs’ net asset value (NAV). Issuers calculate this based on benchmarks fixing prices, which are calculated over this hour period. More on this below and how benchmarks work below.

1. THE ROLE OF BENCHMARKS IN BTC ETFS

First a quick primer on Bitcoin benchmarks and the constituent exchanges. Each Bitcoin benchmark provides an index price, denominated in USD, for one BTC once a day. These benchmarks calculate their price based on aggregated trade data from selected exchanges.

ETF trading can contribute to increased spot Bitcoin liquidity throughout the ETF trading day as liquidity providers and market makers for the ETF trade and hedge in the spot market. The ETF benchmark fixing window can have an even more significant impact on spot trading volume.

The ETF determines its NAV based on the fixing price, which is used for share creations and redemptions. To reflect the benchmark price as closely as possible, the buying and selling of Bitcoin for creations and redemptions must occur during the fixing window. Therefore, we expect increased spot volume during this time.

Bitcoin reference rates calculate the index price based on trade data received between 3 pm and 4 pm New York time. The most common exchanges used are Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital. Each ETF then calculates its net asset value (NAV) using its benchmark index price following market close at 4 pm.

2. UPTICK IN US TRADE VOLUMES

Since the approval of spot BTC ETFs BTC trade volumes have significantly increased. Volumes rebounded in October from multi-year lows hit during the summer, when signs of an imminent ETF approval became evident. The overall market euphoria was supported by a constructive macro environment for risk assets, with market pricing in six U.S. rate cuts in December 2024.

The increase in trading activity since the launch of spot ETFs has been concentrated around US market hours. In particular, volumes during the benchmark fixing window, between 3 pm and 4 pm New York time, have improved. This changing dynamic helps to improve liquidity and price discovery in BTC markets but could also lead to increased intra-day volatility.

3. THEN AND NOW: COMPARING RECORD HIGHS

When BTC set its previous record high in November 2021 less trading took place at US market close — between 3 pm and 4 pm New York time (8pm-9pm UTC during Eastern Standard Time).

That has begun to change since the launch of spot BTC ETFs in January, as trading becomes more concentrated on US trading, especially at the end of the day. Using weekly data — which shows the average of the 5 days’ volumes during that hour — volumes have notably increased since October.

Cumulatively, there was over $17.6bn in BTC trade volume on weekdays between 8 pm and 9 pm UTC in the first quarter, making it the second most popular hour for trading, behind 3 pm UTC. As a result, the benchmark fixing window between 3 pm and 4 pm New York time accounted for over 6.7% of all volume, up from 4.5% in the fourth quarter of 2023.

4. THE DEATH OF THE WEEKEND WARRIOR

As we previously reported, the share of BTC trade volumes during weekends has consistently declined since 2021. This downward trend has been exacerbated since the introduction of spot ETFs. Currently, the BTC weekend trading volume stands at an all-time low of 16% in 2024, marking a 12 percentage point decrease from its peak of 28% in 2019. The advent of spot BTC ETFs has contributed to the accelerated widening of the gap between weekday and weekend trading volumes.

Comparing the share of trade volume on constituent exchanges between weekdays and weekends further highlights the concentration of BTC trading volume on weekdays.

During weekdays, the US market close accounts for over 6.6% of all trading volume on benchmark exchanges. In contrast, this figure drops to just over 4% during weekends, with no discernible pattern or clustering of trading activity.

5. HONG KONG ETFS MISS A BEAT

While the launch of spot ETFs in the US has significantly impacted Bitcoin trading volumes, the recent introduction of both BTC and ETH spot ETFs in Hong Kong in April has had a more muted effect.

Analysing weekly data reveals that the average BTC trading volume during the Hong Kong market close increased to $37mn the week spot BTC ETFs were launched in Hong Kong. However, it remained significantly below its peak of $73mn in March.

This is due to the fact that Hong Kong is a significantly smaller market than the US and market conditions at the time of the spot BTC and ETH ETF launches in Hong Kong differed notably from those during the US launch. The Hong Kong funds were introduced after Bitcoin’s fourth halving, during a period of stagnant price action, and coincided with outflows from many US spot BTC ETFs for the first time. Moreover, market sentiment in April was notably more bearish than earlier in the year, with BTC perpetual funding rates transitioning into negative territory.

6. BENCHMARK BOON

The impact of ETFs on spot BTC markets has been more pronounced on US-regulated exchanges. If we take the world’s largest exchange, Binance, which is not regulated in the US, we can see that the average hourly trade volume during the first quarter peaks around the open US market open. Volumes then consistently fall throughout the rest of the day. No ETF benchmarks include Binance, as most of its BTC trading volume is against stablecoins, and ETF benchmarks can only consider BTCUSD prices.

The situation differs significantly when comparing it to the largest exchange across all Bitcoin reference rates, Coinbase, which is a US-regulated exchange. On Coinbase, volumes were heavily focused on the US market open and increased to an average of $220 million at the close, during the benchmark fixing window.

7. LIQUIDITY PROFILE LOOKS GOOD

The introduction of spot BTC ETFs in the US has enhanced liquidity conditions, reflecting the market’s growing ability to handle large orders as bitcoin trading evolves. Although potential risks, such as outflows affecting liquidity during market stress, were identified, the case for ETFs boosting spot market liquidity remained strong.

Part of the argument for improving liquidity was based on ETF issuers’ so-called “authorised participants.” These firms create or redeem shares in the ETF daily based on demand. Authorised participants for US-based ETFs include firms like JP Morgan, DRW, and Jane Street. These firms have contributed to improved liquidity as price discrepancies between ETF shares and the underlying BTC have been efficiently arbitraged out of existence.

In the first quarter of the year, the average daily BTC 1% market depth has increased on US exchanges, with the institutional-focused LMAX exchange showing the most significant percentage increase.

ETFs offer a cost-effective hedging alternative for market makers, potentially reducing inventory costs and subsequently lowering trading costs for takers.

However, the impact on BTC’s cost to trade measured by the bid-ask spreads, has been mixed. Initially, spreads on top US exchanges — Coinbase, Bitstamp, and Kraken — narrowed following the launch of spot ETFs. Nonetheless, they widened again in March as volatility rose and Bitcoin reached an all-time high before declining again in Q2.

Similar to trade volume, we observe a shift in the share of BTC market depth towards US markets. The share of liquidity on US exchanges has increased to 45% since the start of the ETF-led rally in October, up from 35% a year ago.

8. CONCLUSION

The overall impact of ETFs on the Bitcoin spot market has been positive. Both trade volumes and market depth have increased this year.

The positive liquidity development has been primarily concentrated on US markets, particularly on weekdays and around US market close. This concentration could result in increased volatility outside US opening hours, potentially penalizing retail traders. Additionally, the impact on trading costs, as measured by the bid-ask spread, has been mixed.

US exchanges, which are included in Bitcoin benchmarks, benefited from improved volumes and more consistent liquidity during US market open and close.Intro

Security breaches, funds mismanagement, or bad governance, have too often been associated with cryptocurrency exchanges, causing reputational damage to the whole industry. Just last week, Mt. Gox, which was once the world’s largest bitcoin exchange, was back in the headlines a decade after its bankruptcy filing, moving thousands of bitcoins as part of a plan to repay creditors by October 31st, 2024.

This event reminds us of the importance of regularly monitoring cryptocurrency exchanges’ compliance, business practices, technology, and trading activity. Kaiko’s latest quarterly exchange ranking provides a fully transparent score for 43 cryptocurrency exchanges, based on a variety of parameters.

Disclaimer

This report is the original document written by Kaiko. It is provided for informational purposes only and should not be considered investment advice. Before making any investment decisions, refer to the original document and seek professional advice. Tiger Research does not guarantee the accuracy, completeness, or timeliness of this report and is not responsible for any losses or damages resulting from its use. All disclaimers, risk warnings, and conflict of interest disclosures in the original Kaiko document also apply to this report.

1. Introduction

What’s on your mind? Like right now, what are you thinking about? Perhaps I have you hanging onto every word. But I’m not vain enough to think that’s true. Your mind is probably a storm — family, friends, work, sex, drugs, rock and roll.

Whatever you’re thinking about, it’s not just this riveting research report. You’re scattered. That’s okay, so am I. We’re all drowning in digital stimulation. Price alerts. Emails. Telegrams. Tweets. Texts. Calendar invites. Browser tabs. DMs. FaceTimes. Such is life in 2024. We have more technology but less control.

Staying present is hard, especially in our land of magic internet money. Here, markets trade 24/7, blocks don’t take weekends, and Twitter never sleeps. Keeping up with crypto often feels like a Sisyphean task. It’s a war we all wage but rarely talk openly about.

Almost everyone sees the importance of attention on a personal level, but few see how it shapes everything around us. Attention is the most valuable yet misunderstood resource in the world. This report explores the role attention plays in our economy, markets, and minds. We will focus on three big dimensions — the past, present and future:

1. how Big Tech monetized attention

2. how crypto tokenizes attention

3. why AI will disintermediate attention

So, grab a coffee or stiff drink, whatever you need to lock in, and let’s talk attention.

2. Attention Must Flow

In Dune, the great Houses struggle over spice. To control spice is to control the universe. But here on Earth, our spice is attention. And the great Houses — the Big Tech companies — engage in a bloodless war over it.

The Big Tech Bene Gesserits have ruthlessly iterated, A/B tested and honed the Internet into an attention-warping machine. They employ legions of highly paid PhDs who devote their lives to ensuring that you never escape the digital matrix. If it were up to them, you would scroll, click, and add-to-cart forever.

Their ultimate creation is algorithms that monetize our attention. It’s probably the closest we’ve ever come to alchemy — attention in, profit out.

Netflix’s CEO, Reed Hastings, wasn’t kidding when he said the streaming giant “competes with sleep” for users’ attention. Every second counts when your business model is putting ads in front of eyeballs.

The game for Big Tech is threefold:

1. capture attention

2. retain attention

3. monetize attention

Remarkably, these three bullets built much of today’s Internet. Consider Google. These guys gave us an entire suite of free software — Gmail, Maps, Docs, etc. — all to serve more ads. More recently, these companies have invested billions to build some of the world’s most advanced AI — all to better analyze and predict our attention. We wanted flying cars, instead we got the ‘for you’ page.

The term ‘attention economy’ gets thrown around so much that it’s become cliché. But that doesn’t mean it’s not real. It very much is — Big Tech proves that.

We’re talking about the most valuable corporations ever. And all they do is monetize our attention via industrial-grade spice harvesting machines. All the “connect the world” and “do no evil” doublespeak just obscures this reality.

If Big Tech is the aggregator and distributor of spice, then every other company under the sun is the buyer. Consider Alo — the athleisure brand that competes with Lululemon. Alo makes money by selling clothing. And it does so by producing cool and comfy clothes. So, a big part of their operating strategy is to “make doper stuff than Lulu.” But similar to a tree falling in the woods, if Alo makes a better product and no one knows, does it even matter?

As a result, Alo is forced to play the attention game. It’s why they pay big bucks to influencers like Jimmy Butler to wear their stuff and why they pay Zuck even more to serve ads. Anyways, the point is, they got me. After seeing a cool Jimmy Butler ad on Instagram for like the 20th time, I finally capitulated and bought some underwear. Alo won my attention — and my moolah.

The point of this riff is just to say — the real economy has totally reoriented itself around attention. Every time I talk to friends in marketing, I’m always amazed at how much of their job comes down to “muh Instagram clicks.” It’s all one big machine. And everyone is competing for the world’s scarcest resource — our attention — whether that’s Zuck, Alo, or anyone in between.

Naturally, the financial markets have woken up to the attention game. If you listen to a Meta earnings call, all the analysts talk about is time spent on platform. Zuck usually throws them a bone with some compliance-approved lingo on MAUs and retention. But these are mere abstractions. The real fundamental drivers of Meta’s business are shown in the chart below — Ad Impressions x Ad Price. If you were valuing META stonk from first principles, these would be the two model drivers.

In the non-tech world of spice buyers, things function in a similar way. The market is laser-focused on Alo, Lulu, or any ‘real world’ company’s ability to convert attention → sales. While this might sound overly reductive, it really isn’t. At the end of the day, all the marketing, ads, and influencers are designed to do one thing: capture our attention. Attention = sales. Don’t believe me? Well, this was the first analyst question from Lulu’s most recent earnings call:

“Great. Thanks so much for taking the question. I just wanted to hone in on the comments on the challenging consumer behavior. Just wondering, are you seeing that in some pockets of the business more than others, or is it broad-based? Is it a traffic or a conversion problem, or how do you see that?”

On the surface, it concerns the strength of the consumer. But if you read between the lines, the analyst is really trying to understand whether Lulu is being impacted by a minor macro slowdown or, more ominously, if they lost their customers’ attention. The “is it a traffic or conversion problem” is the tell — Wall Street is hyper-aware that attention is all you need.

Aside from the Meta and Lulu anecdotes, the real elephant — or should I say ‘tendie’ — in the room is, of course, Gamestonk. The movie Dumb Money on Netflix offers a hilarious and nostalgic postmortem on the GME saga, but I shall try my best to TLDR.

It was late 2020, and the whole world was stuck inside quarantining. Everyone was a little confused, maybe scared, but most of all, bored. We all had a lot of time on our hands. And thanks to the stimmies and lack of stuff to spend money on, we had cash to burn. Around this time, a dude named Keith Gill / Roaring Kitty / DeepFvckingValue — depending on your social media platform — started bullposting about Gamestock.

Mr. Kitty said Wall Street was wrong and the shorts were gonna get burned. At the time, GME was one of the most heavily shorted stonks in the world. Investors were bearish because video game sales were in the midst of a secular shift from brick-and-mortar to digital. Not to mention the COVID lockdowns, which absolutely decimated in-store sales. From Wall Street’s perspective, GME was an obvious short.

But over the course of 2020, Roaring Kitty used Reddit’s r/wallstreetbets to build a cult-like community around GME stonk. People joined for all sorts of reasons, but the most popular were:

short squeeze: the crowd believed they could ‘burn the shorts’ if they pumped the stonk

populist movement: many saw Wall Street as evil and GME as a way to fight back

social phenomenon: people liked the community’s vibes and wanted to be part of a larger movement.

media coverage: as the story blew up, it drove attention, hype and FOMO

For whatever reason, thousands of individual investors put their hard-earned dollars at risk to bet on a company that was objectively struggling. Then, in early 2021, things got weird. The GME hype on Reddit reached a crescendo and the stonk actually started to rise. As more investors piled into GME, it created an insane reflexive loop that looked something like this:

retail buys → price up → shorts forced to cover → attention → retail buys → price up...

Another wrinkle here is the GME apes bought such an ungodly amount of OTM long GME calls that market makers were forced to hedge by buying spot GME. So, while the Gamestonk crowd often gets cast as a bunch of illiterate degens, they were actually doing some pretty sophisticated stuff.

This loop played out throughout January 2021. And by the end of the month, GME had mooned from $17 to $347—an increase of over 20x.

Gamestonk was a watershed moment for Internet culture, American politics, financial markets, and even crypto. At its core, it’s a David vs. Goliath story. A bunch of random strangers coordinated to pamp a downbad stonk and took down some high-powered hedge funds in the process. It served as a reminder of the latent populism that drove the Trump and Bernie campaigns and inspired the Occupy Wall Street movement.

GME also caused an earthquake in financial markets. The Street was officially put on notice over the rise of retail investors, so much so that several short sellers shut down in the aftermath. Others shifted to long-only strategies as retail investors began to hunt their short positions using the GME playbook.

On the crypto front, Gamestonk was a jarring lesson in centralization. Many have since forgotten, but what actually ended the GME saga was Robinhood quite literally removing the buy button. As the preferred venue for WallStreetBets traders, the ban kneecapped GME’s momentum and ultimately ended its short- lived pump. For once, the “crypto solves this” meme actually applies here.

For our purposes, though, the key takeaway from Gamestonk is all about attention. GME did not pump because of the stonk’s fundamentals; it pumped because of attention. What started as a small group of loyalists quickly snowballed into a viral movement that lit social media on fire and drove a tsunami of retail buying.

After the GME mania faded and the Congressional hearings ended, Mr. Kitty disappeared. He went off to touch grass and enjoy his profits — that is, until yesterday when he tweeted this:

The post immediately blew up and now has over 16 million views in 16 hours. Today, GME stonk was paused several times due to volatility as the stonk surged and short sellers were once again torched.

It appears the man, the myth, the legend — Mr. Kitty — is back and has graciously provided the perfect ending to this section on how attention has reshaped financial markets. A movement at this scale would have been impossible a decade or so ago. But now, armed with weapons-grade financial technology — Reddit and Robinhood — individual investors are able to compete with the big guns. Sometimes, all it takes is a simple meme to coordinate the Internet in the age of attention.

3. Pay Attention to Fundamentals

Last cycle, memecoins were mostly a joke. This cycle, they’re still funny but their price action is no laughing matter. DOGE and SHIB are outperforming BTC and ETH, again. And the newer crop of memes like WIF and PEPE boast returns that dwarf just about everything else.

The so-called ‘memecoin supercycle’ has triggered some existential angst and soul-searching within crypto.

• Do fundamentals matter?

• Is everything a meme?

• Is crypto just a casino on mars?

I don’t promise to have all the answers to these somewhat philosophical questions, but I do hold three core beliefs:

1. crypto remains 99% speculation, 1% utility

2. most tokens are worthless

3. valuations are driven by attention

We’re 15 years into Satoshi’s grand experiment and still struggling to solve everyday problems for everyday people. Reasonable minds can debate over whether or not crypto has PMF. But at the end of the day, it’s all semantics. We’re still early. By my last count, only 5% of the world uses crypto, which is probably a generous figure.

Today, crypto’s only real world use case is giving the entire world new ways to make money. As a result, the market rationally values tokens as purely speculative instruments. While some people try to use DCFs and P/E ratios to justify investments, we all know deep down that the market does not trade off these. The market trades off speculation. It’s why tokens remain so tightly correlated with global liquidity — crypto is the ultimate risk-on asset class.

Many investors view crypto as a high-beta play on currency debasement. While many of us see it as more than just a monetary hedge, the market will continue to pigeonhole it until we build apps with millions of users who come to crypto for something other than making money. Until we actually solve real problems for real people, altcoins will pump, dump, and endure soul-crushing drawdowns like they have every cycle.

Another reason why token valuations are so subjective and volatile is structural. Legally, projects cannot deliver value to holders without running afoul of securities law. So, to avoid the long arm of Gary Gensler, most teams opt for governance tokens with precisely zero value capture. While there exist notable exceptions, the vast majority of tokens offer few guarantees to holders and fall junior to equity in projects. In a sense, many gov tokens are just memecoins with a fancy suit on.

The lack of regulation limits the types of investors that can play in crypto. In TradFi, the market is highly diverse — long-only, short, distressed, liquidation, M&A, etc. This doesn’t exist in crypto — everyone is essentially a highly liquid VC. The upshot is this means most of the market is long the same trade, which tends to increase volatility. In TradFi, buyers will set in when they believe securities have fallen below their intrinsic value. Warren Buffet did this following the 2008 Financial Crisis. But the only way this is possible is if there’s a robust regulatory framework that gives buyers the confidence to pursue liquidations, M&A, and other law-adjacent maneuvers. In crypto, there’s no such thing.

Given crypto’s nascency and structural challenges, it’s no surprise that tokens trade off the amorphous value of attention. It may be ephemeral, but valuing attention is easier than discounting highly volatile future cash flows or praying for some miracle regulatory overhaul.

All this “attention is value” stuff may seem kinda dystopic and self-defeating. And on some level, it is. Many came to crypto to make money but stayed to change the world. If you’re reading this, it’s probably because you genuinely believe that. I certainly do. The only problem is no one knows how to get there. How do we go from memecoins and speculation to world-altering technology? I don’t have a magic solution, but if I did, I would probably build a ZK L3.

On a more serious note, crypto’s big unlock is giving people the opportunity to make money on all sorts of new assets. For now, that happens to be memecoins and a million L2s. But one day, these investable assets will span just about everything. Every market shall be tokenized — by Larry Fink himself if need be.

What does tokenizing everything mean? It means crypto lets us share in the upside of the stuff we pay attention to. On Instagram, we pay attention to brands and influencers. For me, that’s Alo and Jimmy Butler. But the most I can do is repost and share this content with friends. The value of my attention is 100% captured by other people — Zuck, Alo and Jimmy Butler — likely in that order.

But crypto is different. Crypto ~democratizes~ attention by letting us own it. If you find yourself spending a lot of time on [insert ur favorite project: FriendTech, DRiP, pump.fun] you can actually own and profit from your attention. This may seem dumb and obvious, but it represents a seismic shift in the Internet’s economics.

Memecoins take the “attention is value” framework to its logical extreme. They offer the purest way to buy a token because of the future attention you think it will command. You don’t have to worry about product roadmaps or technical milestones, just attention. Memecoins are transparent about their utter lack of intrinsic value, which, funny enough, many people actually find refreshing.

Many view memes as a revolt against the perceived excess of the bourgeoisie, aka “the cabal” in CT speak. Whether we agree or not, there’s a perception that insiders fund projects that launch at inflated valuations and then dump their bags on retail. From the perspective of the proletariat, the game is rigged.

The logical retail reaction is to opt out. They know they can’t win a game with the rules skewed against them — no value capture, no access to private deal flow, and limited visibility into unlocks.

So, the disillusioned invented a new game, one with a more level playing field — no private deals, no high FDVs, and no unlocks. The rules of the game are simple — spin up a token and meme it all over Twitter and other socials. The winners are the most viral memes that are embraced by the culture.

The crazy thing about crypto is number go up (sometimes) makes the tech better. Just look at Bitcoin. In many ways, Bitcoin was the OG memecoin. At first, it was worthless, niche, and certainly didn’t offer any protection against WW3. But as its price rose, Bitcoin gained holders, advocates, developers and miners — all of which add real value to the network. Today, Bitcoin offers a singularly unique and highly valuable service — uncensorable non-sovereign money. But it wasn’t always this way — first, Bitcoin had to meme.

As Nic Carter’s “Visions of Bitcoin” so beautifully illustrates, Bitcoin’s narratives are in a constant state of flux. At first, it was e-cash designed to replace all fiat money. Then, a way for dark web hackers to transact. Today, Bitcoin is digital gold and a non-sovereign speculative asset.

This visual also underscores why Bitcoin remains so difficult to value. It has no cash flows, interest payments, or product roadmaps; it just has narratives. At its core, Bitcoin is an idea — an idea that’s proven to be bulletproof.

Satoshi was the first to recognize that the value of money has little do to with its “kernel of usefulness” and mostly “comes from the value that others place it in.”

One of the many things that makes the orange coin unique is that there’s no blessed canon — Bitcoin contains multitudes.법정화폐는 가치를 잃을 것이다..

• Fiat to zero

• Money printa go brrr

• Government is corrupt

• WW3 is coming

• Crypto to the moon

Whatever you believe, Bitcoin is a way to express it. This dynamism is what makes it such a powerful and enduring meme. Bitcoin doesn’t have ‘fundamentals’ like traditional assets. It has memes, which lie upstream of ideas and, ultimately, narratives that offer themselves up for belief. The flow of attention looks something like this:

To be clear, this is not to say that some random memecoin will be the next Bitcoin. Far from it. 99% of memes will die violent and unmemorable deaths. Bitcoin is singular. And nothing in crypto will ever compete with its virgin birth or digital gold narrative. But that doesn’t mean other memes can’t or won’t capture enduring attention and value.

DOGE is a great example. It’s the OG dog coin and perhaps crypto’s very first meme, although I’d want to double-check with memecoin historians on that. Anyways, DOGE was created way back in 2013 by a couple of engineers as a joke. It wasn’t until 2020 that things really started to take off. Similar to GME, it started small with a group of diehard bulls who actually believed DOGE was the people’s currency. But it soon spread — this time to TikTok and then Reddit. It captured so much attention that even Elon Musk was tweeting about it and engaging with DOGE devs over the design.

As the attention was reaching a boiling point, it was announced that Elon was slated to host Saturday Night Live. This was like the ultimate catalyst for a token whose whole value prop is attention and making people laugh. In the week leading up to that Saturday night — May 8, 2021 — DOGE pumped over 100%. The whole market was watching with bated breath to see whether Elon would mention DOGE, and if so, how often and how early into the show. Ultimately, Elon called himself the Dogefather midway through the show during the Weekend Update, and almost immediately, DOGE put in its all-time high and began to fall back to earth.

Fast forward to today, and Dogecoin has become synonymous with crypto culture. When normies think of “cryptocurrency,” they usually mean BTC and DOGE. Its parabolic run in 2021, Elon’s SNL shill at the pico top, and its rise from the ashes this cycle has all but cemented DOGE in the lore. What exactly that’s worth is anyone’s guess, but the attention DOGE commands suggests the market will continue to ascribe significant value to crypto’s first dog(e).

Since most of crypto is open source, almost everything can be forked. We’ve seen this dynamic play out many times — Bitcoin forks, EVM forks, Uniswap forks, and most recently, memecoin forks. In most cases, the forks fail not because of the tech but because of the community and attention the original project commands. As the modern-day philosopher Kim Kardashian once said: “They can steal your recipe, but the sauce won’t taste the same.”

Back in 2017, many people genuinely believed Bitcoin Cash was better tech than Bitcoin. And in some ways, they were right. But it didn’t matter because Bitcoin’s community held strong. Attention stayed with BTC. The same thing happened with Ethereum Classic and Sushiswap. Tech can certainly be a moat in crypto, but you can make a strong argument that community is just as important.

Another way to mooch off an incumbent’s clout is to create a derivative work that, in some way, pays homage to the OG. Last cycle, Shiba Inu coin (SHIB) executed this playbook well. But this cycle, memecoin derivatives have hit another level. Nowadays, every chain has its own dog and cat coin. Dogwifhat on Solana is probably the most prominent example, but there are literally thousands more. All of these coins trade off the hope of being the “next Dogecoin.” In a relative value world, the top doge is king.

Outside of forking or spinning up a derivative work, one final way to attract attention from specific communities is to simply give them free money. Airdrops have become the primary method of user acquisition in crypto because who doesn’t love free money? Airdropping to specific NFT communities has become a way for protocols to connect with power users and gain influential supporters. Projects like Pudgy Penguins and Mad Lads have been frequent recipients, mostly due to their status as blue-chip collections. This is in part why people were so shocked by the recent Ethena airdrop to Miladys, SchizoPosters, and Redacted Remilio Babies. Unlike Madlads and Pudgies, these communities are, uh, not always the most PC Internet users.

But when asked why Ethena chose these NFT communities, Guy Young, the founder of Ethena Labs, gave a fascinating answer:

“There’s two reasons. The first is I just sorta vibed with the communities. And I’ve been hanging out in their Discords for a while and just liked the vibes of the people associated with it. There’s actually a bit of a backstory for my profile picture on Twitter. I approached @notsofast who used to own my profile picture, and none of the rare versions of the SchizoPosters had actually been sold at all. So, I was just trying to see if he would do a deal direct. And he basically said, “hey, you can just have it, like zero strings attached or anything.” So, I remembered that in mind and I was going to pay it back for the generosity.

But thinking about this as a strategy, I’m quite a firm believer that valuations and the ways things trade in crypto are like 10% fundamentals and 90% narratives and attention. I do actually think that attention is the only scarce resource within crypto. And these [three NFT] communities on Twitter are pretty loud and grab people’s attention. So, associating what is supposed to be a reasonably serious project with what looks like quite a ridiculous NFT community is just something that people are gonna talk about. And we just wanted to grab that virality.”

Attention drives valuations in crypto. “The fundamentals are strong” can certainly become a powerful narrative that captures attention, as we’ve seen with Ethereum, Banana Gun, and Rollbit to varying degrees in the past. But fundamentals only matter if people believe they matter. And right now, no one in crypto believes that. So, we must come to peace with this reality and invest accordingly.

For now, memes have the market’s attention. This may prove to be fleeting, as attention often is. But this report’s core thesis is that attention lies upstream of capital flows — aka the hot ball of money in crypto. We should be careful to avoid drawing arbitrary red lines over what’s “deserving” and “not deserving” of the market’s attention. When we do that, we are imposing our personal beliefs on the market. We’re saying, “I know better than the market.”

Instead of getting frustrated with the memecoin meta, we should seek to understand it and ultimately front run it.

So, in the spirit of understanding, let’s channel our inner empaths and steelman the arguments for why memes are capturing so much attention this cycle. Whether we agree with all, some, or none of the points below does not matter. What matters is that other people believe them. And understanding the market’s psychology is key to front-running the flows that inevitably follow the attention.

• Fastest Horse: Memecoins are the highest beta assets in crypto. In bear markets, they drawdown more than anything, but in bulls, they go up more than everything. If you have a bullish view on crypto, memecoins are an easy way to get high beta exposure with no leverage.

• Favorable comps: The crypto market loves relative value. “X is worth $100 million, and Y is similar, so Y should trade near $100 million.” The popularity of the ETH/BTC ratio is a testament to this. Obviously, all memecoins go ahead and comp themselves to DOGE and SHIB, which last cycle hit a combined market cap of nearly $100 billion. This lets meme holders dream bigger than any other comp in crypto.

• Financial nihilism: Millennials and GenZ are staring down crushing debt, unattainable housing, and wages that are insta-eroded by inflation. Many feel the system is rigged against them, and the only way to win the new rat race is to hit 100x and turn $10k into $1 million.

• Protest vote: Retail is tired of buying high FDV/low float tokens and getting dumped on by insiders. They know these coins offer little upside by the time they hit public markets, so they have learned to look elsewhere for coins VCs can’t or won’t touch.

• Regulation: Regulation limits how much value tokens can share with holders without being deemed a security. Retail is not dumb; they realize most governance tokens are worthless. So, what’s the difference between holding a gov token and memecoin if neither has any intrinsic value? At least the memes are honest about it...
  

• TINA: There Is No Alternative. Last cycle birthed DeFi and alt L1s. Those early to either trade printed biblical returns. This cycle, the new infra has been less inspiring, and the market has been choppier, with greater dispersion and no obvious trend. Memecoins have become perhaps the most compelling Schelling point for the trade of the cycle.

Again, whether we agree with these memecoin talking points is irrelevant. All that matters is the degree to which the market believes them. As of today, memecoins remain a highly contentious topic, as evidenced by the nonstop CT debates and TL cope whenever they pump. From a cycle timing perspective, this is actually bullish if you are a memecoin bull. It means a good chunk of the market is underexposed and implicitly short the meme meta. The day memecoins become consensus is the day they top. Until then, there’s probably still juice in the fabled memecoin supercycle.

In summary and summation, attention is crypto’s most important fundamental. It lies upstream of all good things — developers, users, and capital flows. Until crypto solves everyday problems for everyday people, its best product will be helping people make money. The projects that lean into this dynamic — whether they be serious, memes, or something in the middle — will likely outperform. Big Tech got rich off our attention; now it’s our turn to do the same.

4. Attention Amid Abundance

What do the economy, markets, and chatGPT have in common? They are all driven by attention. The title of this report comes from the landmark AI research paper that made chatGPT —and every other LLM — possible. Written by a team at Google, the paper introduced the transformer architecture, which helped unlock the scaling laws that have powered most of the recent progress in AI.

The paper’s core insight was finding that neural nets perform better when they ‘focus their attention’ on the most relevant parts of the input data. This is analogous to the way humans focus more on certain aspects of their environment while ignoring others, depending on whatever is relevant at the moment. While the paper’s technical nuances fall outside our scope, AI’s impact on crypto and attention does not.

chatGPT is an answer machine. You ask it a question — any question — and it responds with an answer. It’s a wildly different experience than ‘Googling’ something and being forced to click through a dozen or so links, all while navigating annoying pop-up ads. chatGPT does all of this for you. No links, no ads, just answers. This is obviously a huge UX improvement for consumers, but it represents an existential threat to the attention economy as we know it. As we riffed on in the opening section, everyone from Zuck to Alo to Jimmy Butler relies on putting ads in front of eyeballs.

For now, the threat is limited. chatGPT’s usage remains relatively niche compared to Google Search’s dominance. But this is mostly a function of AI’s immaturity. As these models become more useful, more people will use them. And the threat to Google — along with every other player in the attention economy — will grow.

Illia — co-author of the Attention paper and founder of NEAR — believes we’re now “in the middle of a massive business model transition from an attention to data economy.” If he’s right, the Internet’s current construction is untenable. Its advertising-centric business model will burn as eyeballs are replaced by AI agents.

Everyone and their mother is trying to figure out what the next version of the Internet will look like. At the end of the day, no one knows. But it does look increasingly likely that we will engage with the Internet — and probably the world — through an AI filter. Google and OpenAI are already taking steps to make this a reality, with both rumored to be releasing AI assistants — think Siri, but actually smart — this week.

The future is path-dependent and often impossible to predict, but one thing that’s clear is the attention economy will need a new way to engage users. Brands like Alo will no longer be able to rely on Google to connect them with human eyeballs as Google ads will soon be disintermediated by answer machines.

Despite AI’s immense power, it is not a new form of distribution. Mobile was a new form of distribution that enabled novel businesses like Uber, which previously were impossible. But to date, AI has only reinforced existing forms of distribution like Google, Facebook, and Twitter. In part because of its high entry costs, AI will likely continue to overwhelmingly benefit the incumbents who have the capital necessary to compete.

This leaves startups or smaller brands like Alo stuck between a rock and a hard place. How can Alo connect with its customers if it can no longer rely on existing distribution channels like Google? Should it build its own AI? Create its own social media? These sound hard, especially for a non-tech company. Something that’s much easier is connecting with your community via crypto. Crypto is a new distribution channel. Similar to mobile, it’s a new way for businesses to connect with their users. And we’re still scratching the surface of what those relationships and the value flows between them will look like.

As we’ve discussed throughout this piece, crypto already solves the “attention” part of the equation by giving people ownership (read: upside) in digital goods. Now, it needs brands like Alo to come in and build enduring relationships with their users. Even if crypto were to capture a fraction of the value in the pre-AI attention economy, this would have massive ramifications across the space. Google printed $305 billion in revenue last year — mostly by placing ads next to links. This revenue model will simply not survive the shift to an AI-centric Internet. New ways of engaging with users will be needed, and if crypto has proven one thing — it’s that it knows how to get people’s attention.

5. Attention Is Dead, Long Live Attention

Attention has built trillion-dollar companies, coins, and soon AI models. It is by far the most important resource in our world. Our entire economy revolves around it. And to date, it’s been the most profitable hustle known to man. But all good things must end, and the attention economy is no different. For the first time ever, Big (ad) Tech looks vulnerable. They are struggling to attract top talent and fend off regulators. Some have even taken to paying out dividends to placate their worried investor bases.

Meanwhile, crypto is on the rise. Speculation still dominates, but it’s planting the seeds of a hyper-financialized future. This cycle in particular, we’ve seen more and more people embrace crypto’s free markets ethos. This is a good thing. Crypto’s strongest area of PMF is giving people new ways to make money. Memecoins are the ultimate example of this. They let us own the culture we all contribute to. And as history shows, Internet culture always wins.

AI will accelerate these trends and break the Internet as we know it. CAPTCHAs and other sybil safeguards will not survive first contact with sufficiently advanced AI, nor will the web’s advertising-centric business model. Agents will replace eyeballs and put trillions of dollars in value up for grabs. How this all shakes out is anyone’s guess, but every company in the world will be searching for ways to break through the chatbot forcefield and connect with real, human users. The old world is dying, and the new world struggles to be born: now is the time of attention.

Disclaimer

This report is the original document written by Delphi Digital. It is provided for informational purposes only and should not be considered investment advice. Before making any investment decisions, refer to the original document and seek professional advice. Tiger Research does not guarantee the accuracy, completeness, or timeliness of this report and is not responsible for any losses or damages resulting from its use. All disclaimers, risk warnings, and conflict of interest disclosures in the original Delphi Digital document also apply to this report.

TL;DR

• The cryptocurrency exchanges continuously faces stability issues due to security breaches, funds mismanagement, significantly damaging its trustworthiness.

• Therefore, continuous monitoring of exchanges is crucial, including regular analysis of their compliance and trading activities.

• Exchange liquidity is a key metric and must be analyzed comprehensively, considering not only trading volume but also market depth and other factors.

1. Intro

Security breaches, funds mismanagement, or bad governance, have too often been associated with cryptocurrency exchanges, causing reputational damage to the whole industry. Just last week, Mt. Gox, which was once the world’s largest bitcoin exchange, was back in the headlines a decade after its bankruptcy filing, moving thousands of bitcoins as part of a plan to repay creditors by October 31st, 2024.

This event reminds us of the importance of regularly monitoring cryptocurrency exchanges’ compliance, business practices, technology, and trading activity. Kaiko’s latest quarterly exchange ranking provides a fully transparent score for 43 cryptocurrency exchanges, based on a variety of parameters.

This article will mostly focus on the liquidity of the top 10 ranked exchanges for this quarter. First, we’ll identify the metrics that drive the liquidity of each exchange, with a special focus on volume and market depth. Then, we’ll show you how to replicate these metrics using Kaiko’s handy data tools.

2. HOW DEEP IS YOUR BID?

It’s often said that an asset is as valuable as it is liquid, and cryptocurrency exchanges are no different. Liquid exchanges offer superior trading conditions, such as reduced slippage and lower execution risk. While liquidity can be calculated in various ways, we’ve opted to develop a liquidity score for this quarter’s exchange ranking, using five metrics, including volume and market depth.

Looking at the 43 exchanges’ liquidity rankings, Binance, the world’s largest exchange, unsurprisingly takes the lead. However, Binance places third after Coinbase and Bitstamp when considering additional factors like governance scores, where it falls short compared to its top competitors.

Zooming in on the determinants of Binance’s dominance in liquidity, it seems that trading volume, volume contribution, and market depth are driving most of it. Bybit and Yobit are also interesting cases to focus on, since their high liquidity scores are also driven by volume and depth. However, they have much lower market quality scores, which better reflect their overall lower ranking when all parameters, besides liquidity, are taken into account.

Overall, this liquidity score is computed using five liquidity metrics:

• Trading Volume

• Share of Volume (Volume Contribution)

• +/-1 Market Depth

• Cofficient of Variation (CV) Dispersion Score

• Market Quality Score

More information about each metric can be found in the ranking’s underlying methodology. Each score ranges from 0 to 5, with 0 being the worst and 5 being the best, and is computed using trading volume data, market depth data derived from order books, and web traffic data.

3. BINANCE BENEFITS FROM WIDE RANGE OF ASSETS

Volume is an essential component of our ranking, as it reflects the already processed liquidity by the exchange, providing us with an idea of the exchange’s capacity to handle liquidity.

Looking now at the top 10 ranked exchanges for this quarter, Binance appears to be both the most liquid exchange and the one that registers the highest trading volume on average over the three months considered. Interestingly, Binance is followed by the South Korean exchange Upbit, which, despite its apparent high volume, ranks 10th overall in this ranking due to a low business score. The exchange has only one identified member of its executive team.

(* Tiger Research: According to Kaiko's global exchange ranking methodology, the business score of an exchange is evaluated based on materials written in English rather than the local language. In the case of Upbit, the exchange does not provide disclosure materials and related information in English, resulting in low information accessibility for global investors. Consequently, its business score was rated low.)

The difference in volume between Binance and Upbit, as well as other exchanges, is intriguing. Binance, which offers twice the number of assets as Upbit, has a trading volume four times higher than Upbit’s. The variety of assets available on Binance is likely one of the reasons it appears to be the exchange with the highest volume and liquidity in our ranking.

4. ORDER BOOK QUALITY STILL STANDS OUT

However, a larger selection of assets on an exchange doesn’t always mean greater liquidity. For example, when comparing market depth to the number of assets, LMAX, which only offers five assets on its spot trading platform, has the highest average market depth among the top 10 exchanges this quarter. This indicates that other factors, such as the quality of the order book and the types of clients an exchange serves, may be more crucial in determining market depth.

To clarify the weak correlation between market depth and the number of listed assets, let’s define this liquidity metric. Market depth is the cumulative volume available to buy and sell between the best bid and ask prices and another selected price level. In this ranking, we’re examining market depth from the best bid and ask to prices 1% higher and lower.

Why does LMAX, with only five assets, have an average market depth of $230 million? Unlike high-volume exchanges like Binance, LMAX primarily serves institutional clients who require more liquidity for larger trades and greater depth to absorb large orders without impacting the price. Additionally, Binance’s average depth may be lowered by small caps liquidity.

On top of that, LMAX’s depth trend over time seems to correlate with major institutional news. It started significantly increasing in November 2023, when the first beliefs around the approval of US bitcoin ETFs began to rise, and then again in February 2024.

5. EXCHANGE VOLUME DATA MADE EASY

Our exchange ranking and liquidity analysis were made possible by Kaiko’s extensive exchange coverage and APIs, particularly the user-friendly Exchange Metrics API, which quickly provides aggregated volume time series in USD for over 150 exchanges with historical data back to 2010. This eliminates the need to spend hours or days aggregating and converting billions of individual trades data initially accessible at the instrument level.

For example, one can request daily data for Binance from January 1, 2023, to January 1, 2024, by providing just these four pieces of information.

With that query, you’ll receive two output levels:

• Daily aggregated data at the exchange level, including the volume in USD, the total number of trades recorded during each day, and the number of assets and pairs listed on the exchange. This data is highly powerful when compared between exchanges, as we did for the present liquidity ranking analysis.

• Daily aggregated data at the asset or pair level on that exchange, including the same metrics as above. Using this layer, one can, for example, identify which asset drives most of an exchange’s volume. In Binance’s case, on January 1, 2023, 62% of the trading volume registered on the exchange was due to bitcoin.

6. CONCLUSION

The reality is both volume and market depth metrics reveal different aspects of each exchange, and together, they provide a more balanced and relative measure of an exchange’s liquidity. While large exchanges with numerous assets tend to have higher volumes, examining market depth highlights exchanges that offer excellent trading conditions but have more specialized activity.

Moreover, as mentioned on a previous deep dive, neglecting the market depth component when assessing an exchange’s liquidity can lead to overlooking wash trading practices on exchanges.

To get a comprehensive picture of the current state of exchanges, check out our latest exchange ranking.

Disclaimer

This report is the original document written by Kaiko. It is provided for informational purposes only and should not be considered investment advice. Before making any investment decisions, refer to the original document and seek professional advice. Tiger Research does not guarantee the accuracy, completeness, or timeliness of this report and is not responsible for any losses or damages resulting from its use. All disclaimers, risk warnings, and conflict of interest disclosures in the original Kaiko document also apply to this report.