Digital asset markets remain quiet and stable. This week, Ethereum (ETH) continued trading within a tight range of $68 (a 3.6% range), fluctuating between a low of $1,861 and a high of $1,931. Aside from a brief uptick following the Shanghai upgrade, ETH prices have remained largely unchanged since mid-March.
As the market continues to move sideways, we are observing increasing signs of shifting preferences beneath the surface. Many signals appear to indicate a contraction in risk appetite. Trading volumes remain low, DeFi usage is becoming increasingly automated, and there is growing market preference for stablecoins—particularly Tether (USDT).
In this report, we explore these underlying trends and examine how they can be observed through both on-chain and off-chain data.
Automated Arbitrage Dominance
While ETH prices have remained relatively flat and range-bound since March, gas prices experienced a notable spike in May. The average gas price rose to 76 Gwei, equivalent to approximately $1.14 for a standard ETH transfer. In early May, the average Ethereum gas price reached as high as 155 Gwei (about $6.53 per ETH transfer)—a level comparable to peaks seen during the 2021-22 bull market cycle.
Interactions with smart contracts consume significantly more gas, often costing multiple times more than simple transfers. In late April, gas usage related to DeFi protocols surged by 270%, pushing the industry's daily gas consumption above 20 billion gas units.
A protocol-level analysis of DeFi gas fees quickly reveals that the increased activity was primarily driven by trading on decentralized exchanges. Uniswap remains the dominant platform, with its gas usage increasing by 388% since April. It now accounts for 14.4% of Ethereum’s total gas demand, up significantly from its previous 7.7%.
For those closely following market news, the recent memecoin frenzy—particularly around tokens like PEPE and HEX—might seem like the obvious driver of this activity surge. However, a deeper analysis of Uniswap trading volumes reveals a more nuanced picture.
Data shows that Uniswap's primary trading pools over the past 30 days were dominated by major assets like ETH, stablecoins, WBTC, and Coinbase’s staked derivative, cbETH.
When comparing the top 10 trader addresses against known labels, we find that all but one were associated with MEV (Maximal Extractable Value) bots. The infamous MEV bot, jaredfromsubway.eth, earned over $300 million in the past month.
Although more research is needed to determine what percentage of global trading is driven by bots, the top ten volumes alone reveal how much of Uniswap’s activity may be the result of automated arbitrage trading.
One way to understand this dynamic is to consider the scope of arbitrage opportunities available within Ethereum DEXs:
- As the price (and slippage) of each token changes, the actual gas fees paid determine whether an arbitrage trade is economically viable.
- Every DEX liquidity pool hosting that token represents a platform for arbitrage.
- Thus, the number of potential arbitrage opportunities grows exponentially based on the number of DEX liquidity pools and the variety of tokens available for trading.
If we consider that many trades are executed by arbitrage bots or those performing so-called "sandwich attacks," the true 'organic' trading volume on Uniswap may account for less than two-thirds of all DEX activity.
Although this bot activity may be unfavorable for end-users on Ethereum, it benefits validators. Over the past month, validators have received higher rewards not only due to increased priority fees but also from MEV-boost payments. These payments largely come from traders and bots willing to pay to ensure their transactions are ordered in the most advantageous way within a block.
In many ways, this highlights a growing trend within the Ethereum ecosystem—holding ETH is becoming a premium asset. It also establishes a native interest rate hurdle that other tokens must compete against to attract capital inflows.
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Signs of Risk-Off Rotation
Strong indicators suggest that capital is shifting from high-risk assets toward stablecoins and Bitcoin, reflecting a slide down the risk curve as liquidity tightens. We begin with the Ethereum futures market to gain perspective beyond the crypto-native traders active in decentralized exchanges.
Following the FTX collapse, futures volumes plummeted to around $7.5 billion per day. Although there has been some recovery in 2023, the 30-day average volume ($12 billion per day) remains well below the yearly average ($21.5 billion per day).
Unlike the recovery in Uniswap trading activity, the continued contraction in futures trading in May suggests that institutional-level interest and liquidity remain relatively subdued.
We can observe that trading volume in perpetual swap markets is dominated by Bitcoin and Ethereum compared to other assets—a trend that is strengthening. Although the two reached parity in late 2022, Ethereum’s share of the futures trading market declined significantly throughout 2023.
Ethereum now accounts for only 34.5% of the trading volume between the two major assets, indicating that market liquidity is sliding down the risk curve, with a relative preference for capital concentration in Bitcoin.
On-chain data provides another perspective on capital flows and rotation within the cryptocurrency market. The chart below compares the total USD value of ETH versus stablecoins flowing into and out of exchanges. A noticeable shift in investor preference occurred during the massive deleveraging in 2022, with ETH’s dominance in capital flows dropping from ~35% to 10%.
In 2023, we observed a strong reversal, with ETH’s share of exchange flows recovering to 25%. However, this trend stalled in early May, suggesting a potential shift in risk appetite. Investors who benefited from strong Q1 returns may be starting to transition capital back into stablecoins.
We can corroborate this by comparing the daily exchange inflows for each asset to gauge buying and selling pressure. In this simplified model, we treat Bitcoin and Ethereum exchange inflows as a proxy for selling pressure, and stablecoin inflows as a proxy for buying pressure.
Since early April 2023, negative inflow values indicate a net seller environment, as Bitcoin and Ethereum inflows began to outpace stablecoin inflows. This contrasts sharply with the strong buying pressure seen in Q1, which began to fade in early April—coinciding with the start of the market correction.
In general, capital tends to flow into digital assets via the two primary assets, BTC and ETH, or through stablecoins. Thus, we can estimate the direction of total capital flows by aggregating and comparing two metrics:
- The realized capitalization of BTC and ETH (the net value change of on-chain transfers).
- The circulating supply of stablecoins (considering USDT, USDC, BUSD, TUSD, and DAI).
It becomes evident that capital inflows into the crypto market have been primarily driven by Bitcoin (increasing by $4.47B monthly) and Ethereum (increasing by $3.5B monthly). However, this growth has been partially offset by significant redemptions in the stablecoin sector, resulting in capital outflows of approximately $1.2B.
Recent stablecoin outflows have been predominantly influenced by the second and third largest assets, USDC and BUSD, whose supplies declined by $15.7B and $11.5B respectively in 2023. Tether (USDT) absorbed much of this liquidity, reaching a new all-time high supply of $83.1B.
This may reflect geographical differences, with US-regulated entities typically showing a preference for USDC over USDT.
Finally, we note that a similar trend is visible in the year-over-year change in Bitcoin supply by geographical region. The dominant position of US entities in 2020-21 has clearly reversed, with the US share of supply declining by 11% since mid-2022. Over the past year, European markets have held a neutral stance, while we observe a notable increase in supply share during Asian trading hours.
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Conclusion and Outlook
Over the past month, activity on decentralized exchanges has increased, particularly on Uniswap. While one might mistakenly attribute this increased activity primarily to memecoins, deeper investigation reveals that much of the volume is occurring in larger, deeper WETH-stablecoin pools. Notably, only a small fraction of this trading activity appears to originate from real users, suggesting it is predominantly driven by arbitrage, MEV, and algorithmic trading.
With US interest rates exceeding 5%, non-interest-bearing stablecoins have become less attractive for investors with access to US capital markets. On the other hand, Tether has found greater adoption outside the US, where local currencies are often weaker and access to dollars is more limited. Similarly, capital appears to be flowing out of the US—likely due to increasing regulatory scrutiny—and towards Eastern markets within the digital asset space.
This broadly reflects a prevailing risk-off sentiment, with remaining capital becoming concentrated in more liquid, mainstream assets and a growing preference for stablecoin capital.
Frequently Asked Questions
What does 'risk-off' mean in cryptocurrency markets?
Risk-off refers to a market sentiment where investors become more cautious and prefer to move their capital into less risky assets. In crypto, this often means shifting from volatile altcoins into Bitcoin, stablecoins, or even exiting the market entirely.
How does MEV impact ordinary Ethereum users?
MEV (Maximal Extractable Value) activities like arbitrage and sandwich attacks can lead to higher transaction costs and worse trade execution for regular users. However, they also contribute to network security by providing additional revenue to validators.
Why is USDT supply growing while USDC is shrinking?
The growth of USDT and contraction of USDC largely reflects geographical preferences. US-based investors and institutions often prefer USDC due to regulatory clarity, while international users, particularly in regions with capital controls, favor USDT for its wider accessibility and liquidity.
What are the implications of automated trading dominating DEX volumes?
High levels of automated trading can create a false impression of organic market activity. It may also increase market efficiency through arbitrage but can simultaneously raise transaction costs and make the market more vulnerable to sudden liquidity changes.
How can investors identify genuine market trends versus automated activity?
Investors should look beyond surface-level volume metrics and examine the composition of trading pairs, the concentration of trading activity among large wallets, and on-chain flow data between exchanges and external wallets to distinguish organic trends from automated trading.
Does the shift toward stablecoins indicate a market bottom or further decline?
While increased stablecoin dominance often occurs during market downturns, it can also represent accumulation phases. It typically indicates caution but doesn't necessarily predict the exact timing of market movements.