Memecoins and onchain trading, how big is it? We specifically look at Ethereum-ecosystem memecoins, how they came to be and how much there is to trade. And oh boy, there is.
This blog post is based on publicly available Trading Strategy data. If you are interested in algorithmic trading of memecoins, or other onchain assets, reach out to us.
The rise of memecoin
Circa 2023, Solana started the memecoin craze with its more friendly user experience, better token standards and the popularity of Pump dot fun to "safely" launch memecoins.
But this was not the first time. In the 2021-2022 cryptocurrency cycle, we already had the bronze era memecoins on BNB Smart Chain. However, most of these memecoins were rigged ERC-20 token contracts with transfer taxes and other scam honeypot features. These tokens were not rug pulls, but outright scams: rigged trading venues, fake liquidity and so on.
When Solana came around, they made memecoins legit. While there are still "rug pulls", it is due to people selling, not because of rigged smart contracts. "What You See Is What You Get", and as memecoin trading became safer, more people flocked into this as they were not automatically scammed.
After the Solana memecoin movement established itself, the memecoin movement finally became mainstream. Memecoins started to launch on other chains as well, and this time without rigging, because the community understood that you can make it big if you do it legitimately.
Memecoins in Ethereum ecosystem
Ethereum itself still has its share of memecoins. While Solana is the main driver for micro-cap memecoins, Ethereum has OG memes and some memes have grown very large in market cap and TVL. PEPE alone has $70M lit liquidity (TVL) Uniswap.
New layer twos make it attractive for early ecosystem adopters to try to grab market share and "make it." Especially Base L2 from Coinbase has made waves in the memecoin market, mostly because Base has very tight integration with Coinbase, making user experience for everyday users.
The most important factor is
- Most of these tokens are only available on DEXes. They won't ever be listed on centralised exchanges because they are and will stay so small-cap tokens that it is not worth market making these on centralised exchanges. These tokens trade only automated market maker DEXes like AMM/CLMM Uniswap.
- If you want to trade these tokens, you must do so onchain.
While the onchain user experience is still bad, it is getting better, and more and more users are skipping the centralised exchanges altogether or just using them as fiat on and off ramps.
Ethereum memecoins
We explore the tradeable memecoins on Ethereum by having a minimum TVL ($25k) and volume thresholds ($200k/weekly).
In this post, we use CoinGecko labelling as the category source "what is a memecoin." We also look only Uniswap DEX v2 and v3 deployments, as that's where the most Ethereum memecoins trade.
You can find the source Python notebook here.
We can see that the number of tradeable assets has increased from a handful to ~80 over the last two years.
Buying all Ethereum memecoins, dollar equally weighted, would have netted ~$10M with the $10k starting capital. This is equally weighted index, not a sniper bot or such, so it is achievable.
The backtest has some knobs to tune how much visible TVL is tradeable at the given time and how much cash buffer is needed, which shows as the USDC in the chart below. In the backtesting notebook, we can tune these knobs to increase the risk we want to take with the price impact, but we mostly ignore those for this analysis.
This index, or "just buying Ethereum memecoins", has a super high performance of Sharpe 3.75 on 130% annualised volatility, meaning that it would have outperformed every fund manager on this planet, crypto VC and even some lottery winners.
The total lit liquidity in Uniswap (locked TVL) is almost half a billion, so there is real market depth there. This liquidity probably blowing away most national stock exchanges. Talk about the miracle of Uniswap.
The top liquid coin is PEPE with $60M TVL.
Base memecoins
For the comparison, to understand the memecoin phenomenon and get a reference point, we do the same analysis for Base.
Base is a young layer two chain, having meaningful trading history since late 2023. Base offers superior experience to Ethereum users:
- Vast variety of different assets to trade (we list 56,000 active trading pairs out of 1 million)
- Good volumes
- Backed by Coinbase to ensure there is a focus on good user experience for retail users
- Native USDC support
- Native Coinbase Wrapped Bitcoin (cbBTC) support
- Home for well-established DeFi protocols like Uniswap, Aerodrome, Aave
- Fast: low transaction latency
- Gas efficient: low transaction cost
- Immune to MEV, frontrunning and other public mempool-based malicious activities
You can find the source notebook here.
We get 1/3rd of memecoin trading pairs of Ethereum mainnet, reaching ~30 tradeable memecoins.
Put into an equally weighted index, the Base memecoin index give as impressive performance as Ethereum mainnet ones. DICKBUTT FTW.
On Base, we see that the index growth is much more liquidity limited: because there is no lit liquidity available, the index cannot invest all of its available cash.
Sharpe is over 4.5 for "buy all Base memecoins." Despite 50% drawdown. This can be explained by the fact that Base is a young ecosystem and has not yet seen a proper bear market - it's "up only market". If there is going to be a mass sell-off, we can see from the above chart that there is not going to be enough liquidity to exit - thus a lot of memecoin gains are paper gains unless you have robust position sizing system available.
Lit liquidity, or Uniswap TVL, is around $50M, or around 1/10th of Ethereum mainnet. This can be explained by their young age but also by the fact that more Ethereum mainnet older memecoins are centrally listed. These tokens have perpetual futures available to short, so it is safer to market make them and stay delta neutral.
Conclusion
Although memecoins are jokes, it does not mean the joke can be big. Memecoin markets have more lit liquidity than most national stock exchanges. All memecoins are super volatility. Most of them may go to zero, but not all of them. Memecoins, like memes, are here to stay, and we need to make the best out of the memecoin movement.