The Memecoin Frenzy Has Ignited a Scalability Arms Race

Following a spell of TradFi breakthroughs, all-time highs, and intense optimism in the crypto industry, selling pressure across most major cryptocurrencies are slowly beginning to ease, with trading volumes submitting to more tenable growth levels. Amidst this growth, one category-defying group of tokens has witnessed persistent success regardless of the current market backdrop: memecoins. Known for their unabashed lack of substance, utility, and satirical nature, memecoins emerged from hibernation in Q1 of 2024, and have deviated from the bull hype cycle curve, despite all odds.

The following opinion editorial was written by Andreas Brekken, Founder of SideShift.ai.

According to a report by VanEck on the state of the crypto market in March 2024, “the market capitalisation of all crypto tokens increased by 13 percent to $2.89 trillion USD.” This comes amid a narrative focus on service, capability, and performance (SCP) capability scaling, as well as “memecoin domination” of on-chain activity. This might be best demonstrated by how March’s memecoin speculation caused the TVL of Coinbase layer-2 protocol ‘Base’ to double while revenue surged by 200 percent.

How Did Protocols React?

The surge in memecoin trading activity and the inherent irrationality and unpredictability of memenomics has meant memecoins have emerged as the perfect ‘stress test’ for leading blockchain protocols. There’s no better (and perhaps no more harmless way) to expose scalability and congestion issues across existing DeFi-enabled blockchain networks. Case in point: Solana.

While experiencing an unprecedented demand for memecoins, Solana observed a spike in transaction failures, at one point recording a 75 percent failure rate for two consecutive days, coinciding with the surge in Solana’s on-chain traffic. While Solana co-founder, Anatoly Yakovenko, was not impressed with the memecoin absurdity, it’s clear that the protocol succumbed to scalability constraints. With that said, we cannot discount the fact that Solana’s lightning-fast speed, low barriers to entry, and liquidity across its ecosystem have kept it afloat as a key contending memecoin facilitator. The remarkable growth witnessed by the chain has cemented its path to being the next in line for DeFi behind Ethereum.

Why Should We Care?

Before we delve into the cause, impact, and learnings from March’s memecoin mania, let’s step back and examine why a traditional (more cautious) investor might now be inclined to invest in notoriously volatile memecoins.

Originating from internet memes, memecoins are cryptocurrencies inspired by popular social media jokes, puns, and popular satire — take for example the Jeo Boden memecoin. The inceptor of the memecoin trend, dogecoin, started as a joke in 2013, referencing a meme known as ‘doge’ (a photo of a cute Shiba Inu dog using broken English to represent its inner thoughts).

These generic crypto tokens often have no technical edge on first-wave assets like Bitcoin or Ethereum, or indeed any utility whatsoever — which, remarkably, is what makes them so appealing. Average memecoin investors find amusement in the concept of owning a coin with no real-world purpose.

For this reason, the memecoin market has long been laced with skepticism, and indeed criticism from traditional (risk-averse) investors. While concerns about the perceived lack of substance, volatility, scams, and misallocation of resources are valid, to fully understand the value proposition of the memecoin asset class, one must truly understand the principles of money and how society assigns value.

Memecoins challenge traditional perceptions of investment rationality. They emphasise the power of collective sentiment and cultural relevance in shaping financial markets. In a world of ever-growing cynicism about the ‘true’ value of things, memes represent an interesting departure from the conventional valuation metrics and investment principles that govern traditional finance. This is emblematic of an even wider cultural movement. This reliance on culture and communities implies that memecoin prices tend to rise and fall in tandem with the swings in emotion of their associated communities. Just as quickly as FOMO can boost prices, panic selling can trigger a crash.

So what impact have memecoins had on the chains which they rely upon? Data cited by Bitcoin.com illustrates that before the Dencun upgrade, the significant uptick in ERC20 tokens, including memecoins, incited a substantial increase in Ethereum’s transfer fees. This pushed the average fee to $22.19 USD for each operation (a 2-year high for the protocol).

On the flip side, owing to its notoriously low transaction fees, Solana experienced major network growth in the earlier half of this year’s memecoin mania. Industry hype circulating the ‘Book of Meme’ and ‘SLERF’ memecoins on Solana translated into Solana’s TVL surpassing Ethereum’s transaction volume by March 15. That said, while Solana’s uncompounded affordability, speed, and accessibility meant that user trade fees were almost untouched by the increased trading, network congestion led to about half of all transactions failing during peak times.

Here’s where the tables started to turn. After the Ethereum Dencun upgrade was implemented in mid-March, Coinbase’s Layer-2 (L2) network ‘Base’ began to steal the scene as the protocol of choice for memecoin traders. The objective of this ‘hard fork’ was to augment the consensus layer on Ethereum (which determines how network participants agree on the state of the protocol) and to improve the way transactions are managed and processed on the execution layer.

The result? Faster transaction speeds and significantly lower costs for trading on Ethereum L2 blockchains. For Base, this meant that average fees were reduced from about 10 cents to 1 cent or less. One man’s loss is another man’s gain as they say, and in this case, the speedier transaction times and lower costs on Base lit the match for the protocol to compete with Solana in the latter half of the hype cycle.

The upgrades didn’t stop here. At the same time as the Bitcoin halving event, Runes Protocol launched to provide an avenue for Bitcoin-native issuance on the Bitcoin network. Created by the founder of the Ordinals protocol, the Runes protocol enables Bitcoin developers to mine and trade fungible tokens (including memecoins) on the network, thus boosting the bitcoin mining industry. However, similar to Solana, the network also experienced mass congestion in light of the increased transactions.

The potential of memecoins to test a blockchain’s ability to withstand sudden spikes in activity is readily apparent. Inflection points in the market cycle, like what we saw with the recent memecoin craze, help protocol developers identify previously undetected weaknesses in the blockchain protocols.

To Anatoly’s point, memecoins are preparing current projects for the future of Web3 adoption as we envisioned it, where trillions of dollars in crypto and stablecoins are transacted daily. We’ll likely see continuous shifts in the memecoin protocol playing field, as developers work to refine and enhance their on-chain transaction capacities and go through similar phases of low and high trading activity. Thus, to qualify a protocol based on its current scalability output would be an unfair assessment in the long run. One thing we can ascertain though, is that when engaging with the problem-review process of protocol design… Memecoins are a great place to start.

What do you think about the memecoin frenzy? Share your thoughts and opinions about this subject in the comments section below.

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