State of the Blockchain: Q2

This report is a rehash (with our commentary) of the CoinDesk Q2 in review, which you can find here.

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Thanks to Atul Saranathan for putting together a ton of the material for this report, and providing his analysis!

2Q18 was slightly negative quarter for the digital asset markets with the total market cap remaining relatively flat (down 1.5%, from $250B to $245B)

In the following weeks since the close of Q2, we’ve seen a significant decline in marketcap, driven mostly by alternative cryptoassets losing substantial value, and indicating that money is slowly flowing out of the markets.

Market conditions

Market capitalization: TMC declined by ~$3.12bn amidst some volatility, as the markets retraced the gains seen in April and early May.

  • Volatility continued to decline throughout 2Q, as did trading volumes, indicating that interesting in Bitcoin (and cryptocurrencies) is waning from the wider population.
Volatility over Time (Data from the BitMEX Volatility Index)

Bitcoin: Bitcoin transaction and exchange weakened in June, as did its price. The world’s most popular cryptocurrency saw an 11% decline to the $6,000 area after approaching the $10,000 resistance in May.

Other major coins: LTC, BCH, and ETH exhibited similar trends to BTC, locally peaking in May and declining into June with thinning volume

Crypto correlations: Apart from brief periods of decoupling, correlation tended to revert to the mean, and other major coins remained highly correlated to BTC throughout 2Q18.

  • Correlations began to unwind in the weeks leading up to the August 9th ETF decision, as people moved into Bitcoin from alts. Overall marketcap increased more slowly than BTC during this time period, showing us there was not much new money entering — but rather a redistribution of funds was occurring.
Correlations of Specific Alt Coins vs BTC

Search interest: Search interest in the space continued it’s downward trend as market sentiment declined relative to the all-time highs in December and January.

Fees: Fees remained low through the quarter, with several market leading digital assets, including BTC, seeing declines in quarterly average fees; however, the Ethereum network saw a substantial 6.53x uptick in fees.

  • Fees have been a talking point for some time, with critics pointing towards high fees as a fatal flaw in the Bitcoin & Ethereum system. Over the next year, scaling will be the most important improvement to tackle.

Bitcoin dominance: Bitcoin continued to dominate the crypto asset market, with BTC comprising ~45% of the total crypto market capitalization, down 2% on the quarter. Altcoins continue to gain traction with ~55% of the total market cap; this growth is astonishing, considering alts were around 20% of TMC in the same period in 2017. Bitcoin dominance(As of August 15th, 2018) now stands at 53%.

  • We expect the alternatives market to grow, as existing and new projects continue to scale and enter the market. However, in the near-medium term, BTC will remain king. Generally dominance goes in cycles, and down over time.
  • The Ledger Group believes that over time, Bitcoin dominance will decrease due to increased competition in the cryptocurrency space. We view Bitcoin specific dominance unlikely to hold above 50% over the next year.


Mining: Blockchain mining infrastructure growth slowed relative to Q1 (47% growth), but remained robust, with BTC hash rate closing the quarter up 26%. Mining revenue share splits looked similar to 1Q18, with BTC and ETH dominating other major tokens.

  • Moving forward, we believe we believe that Bitcoin and Monero will become the dominant Proof of Work coins, with other coins either needing to switch to Proof of Stake or face the consequences of a 51% attack. Proof of Work as a system is only secure for the biggest and most used coins utilizing the system. Due to the ease of switching what coin you’re mining, all other coins are at risk of large players moving a portion of BTC mining power to attack their network.

The Lightning Network: The Lightning Network expanded rapidly in 2Q18, as BTC capacity increased two-fold and the number of nodes and channels within the network grew 77% and 108%, respectively. (Avi comment)

Exchanges and exchange activity: Bitcoin trading volume fluctuated, but declined over the quarter, and trading volume was mostly concentrated in the top 4 exchanges, CoinBase, BitFinex, BitStamp, and Kraken. No new exchanges entered the top four relative to Q1; however, it is worth noting that Kraken, BitFinex, and BitStamp saw increased volume shares relative to CoinBase.

Bitcoin Volume over Time

Futures: BTC futures increased in popularity last quarter with open positions among large and small traders growing substantially. It is worth noting that the majority of large traders took a bearish view on BTC through short futures, and the majority of small traders had a bullish view on the market, taking out more long than short futures.

  • The majority of large market BTC futures market participants are institutional players, and traditional finance is bearish on crypto at current valuations. This difference in perspective was strongly reflected in the long/short futures data. As the market continues to evolve and fundamentals improve, we expect more traditional actors to adopt a bullish lens when evaluating digital assets. For now though, it seems like large traditional players are putting money where their mouths are and shorting the crypto market.

Human Capital: Blockchain startups are continuing to hire more employees to further their growth, and workers seek to enter the blockchain space. The number of blockchain startups with 10 or more employees is greater than 300, some of which with over 250 employees.

Hacks and Attacks

In the second quarter, the crypto market recorded ~$89mm+ in lost funds across three separate, major hacks and attacks: BitCoin Gold (51% attack), Bithumb (exchange hack), and Coinrail (exchange hacks). As the market continues to evolve and grow, we expect more nefarious actors to attempt to profit through these means.

We saw four 51% attacks from miners that accumulated >50% of network hashing power: MonaCoin ($50k), Bitcoin Gold ($18mm), Verge ($2.7mm), and Zencash ($500k).

The Crypto Capital Markets

The crypto capital markets saw strong volume in 2Q18, with cumulative ICO funding reaching ~$20bn on $7.3bn in second quarter funding. As the blockchain space continues to gain more traction, average ICO funding, on a per-project basis, has continued to rise, reaching $31mm as of 1Q18. Large raises dominated totals. The EOS token raise dominated the ICO market last quarter, raising $4.2bn across 350 unique events/rounds, the largest ICO in history.

Despite the correction the market has experienced over the last two quarters, ICO volume by number of ICOs remains robust, with ~390 ICOs closing in 1H18, 192 of which were executed in 2Q. Recent market conditions have failed to discourage issuers from seeking capital, as more new projects seek to go to market to fund growth. The USA, China, and Switzerland are the three top countries for Blockchain funding, with cumulative funding figures in the $bn’s.

Capital continued to flow into the market from VCs; $1.1bn in VC funding was raised over 178 deals in the second quarter, bringing cumulative funding to $4.3bn. However, the majority of blockchain projects utilize ICOs as their preferred method of fundraising, as it favorable to issuers, allowing for more flexibility than traditional, regulated vehicles.

The SAFT market saw $304mm in quarterly issuance volume, as blockchain companies continue to use the funding mechanism as a ‘more’ regulatory compliant replacement for pre-sales.

Enterprise Blockchain

Several enterprises, including large corporates such as JP Morgan and IBM, launched their enterprise pilots in the second quarter, all promising developments for the sector.

Ripple: Santander launched a forex service with Ripple’s xCurrent

Batavia: Founded by IBM and UBS, Batavia executed its first cross border transactions with corporate clients

JPM: J.P. Morgan used its Quorum platform to test a $150mm debt issuance; outside institutions adopt Quorum

IBM: The corporate launched live trials on its platform (a trade finance consortium) and tested its first token using Stellar

American Express: Amex rolled out a new rewards system on a Hyperledger blockchain

Microsoft: The tech giant launched the Azure Blockchain Workbench to simplify decentralized application development as well as a royalty management program for Xbox fueled by blockchain

We have a long way to go before large-scale adoption, but it is promising to see that several western tech giants are eyeing entry into these markets:

Oracle: touted its cloud based blockchain services as a part of its SaaS offerings

Amazon: AWS announces a protocol agnostic blockchain as a service product and partnered with Kaledio to offer enterprise blockchain solutions

Salesforce: Marc Benioff intends to have a blockchain and cryptocurrency solution ready for Salesforce’s upcoming annual conference

Facebook: Amidst its recent privacy scandal, the tech giant began to explore ways to “best leverage blockchain across Facebook” spearheaded by David Marcus, the head of Facebook Messenger

Overseas, Asian enterprises have continued to build on their blockchain offerings:

Baidu: The company launched an image rights management platform on the blockchain

Alibaba: Ma’s Alibaba tested a supply chain management blockchain platform for tracking food, and an affiliate launched a remittance service between Hong Kong and the Philippines

JD: The finance arm partnered with several banks to test ABS issuance on the blockchain

MUFG: In partnership with Akamai, MUFG announced a blockchain-based payments network capable of handling millions of transactions per second

Tencent: Tencent announced that it is building TrustSQL, a blockchain as a service platform with features ranging from digital asset management to authentication

As more large corporates build blockchain as a service platforms, we will see the technology proliferate as an increasing number of SMEs begin to integrate the technology into their product and service offerings.

Sentiment Survey

The quarter two report included a sentiment survey, conducted by CoinDesk, from which interesting insights can be drawn regarding the attitudes of market participants.

Bulls and Bears

Market participants were overwhelmingly bullish regarding the future of the digital asset markets at the end of 2Q18.

An undervalued market: an overwhelming 65% of survey respondents believed that digital assets were highly undervalued at the end of the quarter, and 59% of respondents believed that the current downturn is unlikely or very unlikely to lead to a prolonged bear market. The strong sentiment around token valuations provides comfort to investors, especially given the choppy market backdrop in the first half of 2018.

Overspeculation to blame: 85% of survey respondents agreed that overspeculation was the culprit behind the sharp market correction in 1H18. Promisingly, at the end of the quarter, participants viewed the market as undervalued, signifying an underlying belief in the market that the correction has run its course. Perhaps we will see more speculators re-enter the market in 2H18.

HODLing all the way down: Most survey participants retained their bullish bias during the market correction, as 75% HODLed all the way down, reflecting an underlying view that the market is still immature and has the potential to grow far beyond the highs seen this winter.

Speculation vs. transactions

HODLing > spending: For the market to mature, network and transactional values must increase and infrastructure promoting crypto usage must scale. As of now, 70% of participants view HODLing as more important than spending/usage and 70–90+% (depending on the coin) almost never spend their cryptocurrency. This is illustrative of the highly speculative nature of the market and highlights the need for infrastructure growth and shifting attitudes to promote crypto usage and bolster network value.

Confidence in merchant adopton: 72% of survey respondents believe that the merchant adoption of cryptocurrencies will increase in 2018, illustrating confidence in the potential for the crypto ecosystem to further scale in 2H18 and the potential for more transaction value in networks.


Is PoW an environmental concern: PoW consensus mechanisms utilize significant amounts of power; the amount of electricity used to power the bitcoin network is greater than the amount of electricity consumed by over 100 countries on a yearly basis. Regardless, the majority of participants believe that whether concerns are overblown or legitimate, there should be no change to PoW.

ASICs vs. GPUs: 31% of participants agreed that they would support a hard fork to prevent the use of ASICs, while 20% said that they would not.

Attitudes on BTC and ETH

Bitcoin: 70% of participants maintain a positive view on BTC despite recent negative price action. The majority of respondents hold Bitcoin as a hedge against central monetary policy and for its immutable nature as a sort of digital gold with counterfeit protection. Unfortunately, ranked last was Bitcoin’s value as a medium of exchange and as a consumer tool — we still have a long way to go until a ubiquitous Bitcoin exchange ecosystem, with strong fundamental network value, is in place.

Ethereum: Attitudes regarding ETH are mostly positive, especially given the recent SEC statement that ETH is not a security, which caused an immediate, strong pump on high volume. Participants overwhelmingly view the Ethereum protocol and dapp ecosystem as the two most positive aspects underlying the project, with scaling and smart contract failure concerns ranking as the two most negative aspects. However, in regards to scaling, a strong majority believe in leadership’s ability to deliver on its promises to push forward Casper and PoS as well as deliver on scaling through sharding.

Political ideology

Coindesk surveyed participants on their political ideology, and the results were fairly interesting. The majority of crypto market participants (52%) lean right, as decentralization is in the same spirit as limited government and a power to the people mentality.

45% of the market leans to the left, with the remaining 3% being nihilists. We see a fairly clean split in representation based on political ideology in the blockchain space because, regardless of what school of thought you subscribe to, the benefits of blockchain are clear and lack boundaries, whether they be geographic, political, or sector specific.