Detailed overview of Jamie Coutts’ Q3 2023 report on smart contract platforms

On October 4, 2023, Jamie Coutts, a crypto market analyst at Bloomberg Intelligence, published part one of his report for the third quarter of 2023. According to Coutts, the market capitalization of smart contract platforms has increased by 6% year-on-year. He also noted that active addresses grew by 25%, adding 1 million new addresses. Coutts reported that quarterly sales increased by 82.9% and the industry significantly reduced its losses from $2.28 billion to $420 million. However, he pointed out that both capital and activity volumes have declined.

Coutts noted that when comparing the third quarter to the second quarter of 2023, the market capitalization of smart contract platforms decreased by 12%. He also stated that core adoption metrics have suffered, largely due to the rise in meme coins in the second quarter. Despite this, Coutts highlighted that active addresses have shown resilience by being less price sensitive and only down a modest 2.9%.

According to Coutts, the total market decline remains around 70%. He pointed out that Ethereum’s Layer 1 (ETH L1) and Layer 2 (ETH L2) platforms have seen price increases of 25% and 20% respectively over a twelve-month period. In contrast, he noted that alternative Layer 1 platforms (Alt-L1s) have declined by 29%. Coutts stated that this has contributed to Ethereum’s market capitalization, which has increased to 72%.

Coutts noted that active addresses have declined slightly by 3% but have shown resilience, indicating a level of user engagement despite a decline in transaction costs and volumes compared to the second quarter.

Coutts highlighted that the rise of Ethereum’s Layer 2 solutions has been a major factor in helping the network regain market share from Alt-L1 platforms. He reported that active address growth on Layer 2 over the past year has been twice as much as Alt-L1s, albeit from a lower base.

According to Coutts, Alt-L1 platforms account for 80% of active addresses, but their growth is declining. He stated that most transactions still take place on Alt-L1 platforms, but the legitimacy of these transactions is unclear. Coutts also noted that despite high transaction throughput and volume, few Alt-L1s are profitable, attributing this to capacity oversupply and sub-optimal market fit.

Coutts reported that Ethereum’s Layer 1 has been very effective at converting transactions and active addresses into fee revenue, with a 26x ratio for fees to active addresses and 8.4x for fees on transactions. In stark contrast, he noted that Alt-L1s lag by a ratio of 2.3x and 0.3x, respectively.

Coutts stated that despite a slowdown in adoption and challenges such as liquidity and US regulatory headwinds, the network effects of the incremental increase in active addresses are seen as positive. He also mentioned that improvements in technical scalability and falling costs are contributing to network growth.

Coutts concluded that while the pace of adoption has slowed, the positive network effects resulting from a modest increase in the number of active addresses during the 2022/2023 bear market are notable. These effects persist despite issues such as liquidity constraints and U.S. regulatory restrictions. Coutts also noted that technological advances in scalability and declining operational costs are gradually supporting the growth of smart contract platforms. On Ethereum, despite uncertainties in the government bond market that could call into question existing positions, Coutts remains largely optimistic. On the other hand, he maintains a less promising future for many Alt-L1 platforms due to lackluster demand and ineffective tokenomics.

Featured image via Midjourney