From Messari by Red Sheehan Patryk Krasnicki

Key Insights

Primer

Sei (SEI) is an integrated, general-purpose Layer-1 network that aims to be the fastest network for exchanging digital assets. As an integrated blockchain, Sei combines the responsibilities of execution, settlement, consensus, and data availability into a single network. The blockchain is compatible with Cosmos’ Inter-Blockchain Communication (IBC) protocol and was built through modified forks of the Cosmos SDK and Tendermint Core protocol.

Sei launched in August 2023 alongside SEI, its native token that was airdropped to early users. The SEI token serves several functions for Sei, including (1) settling network transaction fees, (2) being staked by validators and delegators, (3) rewarding validators, and (4) participating in governance.

The network's built-in features, such as Twin-Turbo Consensus and transaction parallelization, enhance network performance by reducing latency and increasing transaction throughput. Sei's integrated approach optimizes for speed, aligning with its mission as the fastest blockchain for asset exchange. The upcoming Sei V2 upgrade will introduce three major upgrades to the network. These upgrades include compatibility for Ethereum Virtual Machine (EVM) smart contracts written in Solidity, optimistic parallelization, and a re-architecture of the network’s storage interface with SeiDB. After this, Sei will shift focus to its open-source Parallel Stack, enabling developers to launch modular Layer-2 blockchains that serve as parallel EVM execution layers. For a full primer on Sei, refer to our Initiation of Coverage report.

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Key Metrics

Financial Analysis

SEI’s price increased 37% QoQ, but its market cap increased by a greater amount, 59% QoQ, with the discrepancy due to a 16% increase in circulating supply. Despite the QoQ increase, SEI’s market cap rank remained at 59th from Q4 2023 to Q1 2024.

The SEI token serves several functions for Sei, including (1) settling network transaction fees, (2) being staked by validators and delegators, (3) rewarding validators, and (4) participating in governance.

SEI Token Unlocks

SEI’s circulating supply increased 16% QoQ to 2.7 billion. SEI tokens will continue to vest over the next 8 years until the initial supply of 10 billion is fully liquid.

In Q1, 364 million SEI were unlocked, increasing its circulating supply 16% QoQ to 2.7 billion. This quarterly rate of 364 million SEI unlocked will increase starting in August 2024 as an investor and ecosystem allocation begins vesting linearly each month until August 2032. Ultimately, an additional 1.3 billion SEI will vest by the end of 2024.

Revenue and Fees

Sei’s quarterly revenue (SEI) decreased 68% QoQ. Due to SEI’s price appreciation, revenue (USD) only decreased 32% QoQ to $437,000. In December, inscriptions caused a spike in revenue and activity, which gradually declined throughout the month. Despite the overall QoQ decrease, the median daily revenue increased 1,127% from 366 SEI to 4,491 SEI. In USD terms, median daily revenue increased 5,608% from $59 to $3,368.

A notable network change occurred in February when Sei approved Proposal 50. This proposal reduced the global minimum gas fee to 0.02 SEI, while aiming to reduce transaction fees by 5x. Due to the already gradual decrease in fees, the exact effects of the proposal are unclear.

On March 5, Grayscale introduced a private investment fund (Grayscale Dynamic Income Fund (GDIF)) that aims to hold and stake various Proof-of-Stake (PoS) cryptocurrencies. GDIF included SEI as one of the nine initially included assets. SEI’s price spiked ~20% in the week following this news, although the overall market also surged at the same time (e.g., Bitcoin had a ~5% gain that week).

Network Analysis

Daily active addresses increased 71% QoQ, while daily transactions decreased 17%. The decline was largely due to a massive transaction spike in December, which saw 184 million transactions from December 16 through 29 (an average of 13.1 million per day), due to inscription-related activity. SEI-20 Protocol was the inscription-based protocol causing the activity. For reference, the average Q4 daily transactions excluding this period were 4.1 million. In Q1, Sei’s 4 million average daily transactions aligned with both Q4 and Q3.

The transaction spike in December, largely driven by inscriptions, similarly caused Sei’s revenue spike. The source of this activity was inscriptions. The lack of a spike in daily active addresses aligns with inscription activity on other networks in December 2023. In nearly all cases the inscriptions were more akin to spam, as users weren’t actually buying or interacting with them. Inscriptions are arbitrary data included in a transaction, like using a blockchain network as a database. This transaction type was popularized on Bitcoin in early 2023 and has since popped up on almost every other large network, even causing outages on some of those networks from the high activity volumes.

The growth in daily active addresses was more spread out through Q1 and can be largely attributed to increased activity in the DeFi and NFT sectors, which are explored further in the Ecosystem Analysis section.

Staking

Active validators remained unchanged in Q1, at 39. The amount of SEI staked increased by 7% to 6.2 billion SEI, leading to an 11.7% decrease in annual staking APY down to 4.32%; however, this metric includes unvested/locked SEI tokens which can also be staked.

Liquid Staking

Sei does not offer native liquid staking, similar to nearly all other PoS networks with account-based accounting models. However, liquid staking is possible on Sei through independent protocols.

Ecosystem Analysis

The Sei ecosystem experienced extreme growth in both NFTs and DeFi in Q1. Having only launched in Q3 2023, it doesn’t yet feature many live platforms (~10 total), but the leaders, MRKT and Astroport, are growing quickly. Average daily NFT sales volume (USD) and TVL (USD) increased 1,062% and 715% QoQ, respectively. Despite the QoQ growth, daily NFT sales volume ($254,000) and TVL ($46 million) still rank 10th and 46th among all networks, respectively, as the ecosystem still has room for growth.

NFTs

NFTs decisively led overall Sei ecosystem activity by monthly active addresses in Q1. The NFT ecosystem on Sei is one of the most active sectors on the network with over $20 million in all-time total volume. Sei-native NFT marketplace incumbents like Dagora and Pallet Exchange saw competitors emerge in February, with MRKT launching. Still, Pallet Exchange remains the leading NFT marketplace on Sei and announced a $2.5 million private fundraising round in March.

Dagora held an early lead across NFT marketplaces on all metrics: sales, unique buyers, unique sellers, and volume. However, Pallet took over market share beginning in December 2023. Largely due to Pallet’s increased activity, average daily NFT metrics increased across the board in Q1. Average daily:

Sales activity peaked in late December and early January, but the number of unique collections traded daily continued to increase through mid-March. This dynamic suggests that the initial activity surge left users with sustained interest in the ecosystem.

Unique sellers and unique buyers were tightly correlated, though the number of sellers consistently exceeded the number of buyers. Pallet was even more dominant in trading volume than other activity metrics, accounting for 94% of overall trading volume in Q1.

DeFi

TVL (USD) on Sei grew by 715% QoQ. This increase was led by Astroport, Sei’s largest DEX, which grew 468% QoQ. As of March 31, 2024, Astroport made up 99% of Sei’s TVL. Denominated in SEI, TVL increased 494% QoQ to 56 million.

Sei’s average daily DEX volume increased 968% QoQ to $1.4 million. Notably, the average number of daily swaps only increased 230% QoQ to 7,700. This difference in metric changes was due to the increase in the average transaction volume. Additionally, the DeFi ecosystem became more diverse as unique DEX swappers increased 53% QoQ to 3,600 per day.

Regarding stablecoins, USDC and USDT are natively available on Sei due to the Cosmos’ Inter-Blockchain Communication (IBC) protocol. USDC is available via the Noble network, while USDT is available via the Kava network. Native USDC and USDT were made more accessible on Sei due to Astroport’s new transmuter pools, which allow users to convert wrapped versions to native versions.

Sei V2 will introduce compatibility for Ethereum Virtual Machine (EVM) smart contracts written in Solidity. This could unlock new opportunities by expanding Sei’s developer ecosystem and enabling established EVM protocols to deploy on Sei, attracting net new activity and TVL.

Uniswap is one of the notable protocols that plan to launch on Sei upon its V2 upgrade in H1 2024. Now that a proposal has been made and an offchain temperature check passed, Wormhole will be the cross-chain messaging provider. Many other protocols plan to launch after the Sei V2 upgrade. These include decentralized exchanges like Balancer and Algebra, as well as lending and borrowing protocols like Cedro Finance and Hoyu. Furthermore, bridging assets to Sei will be possible via day-one support from LayerZero, and Pyth Network pricing feeds will be supported.

Technical Developments

Development and testing of Sei V2 continued, with Sei’s Public Devnet upgrading to V2 in February and seeing significant activity. To recap our Initiation of Coverage report, Sei V2 plans to introduce the following three major upgrades:

Ethereum Virtual Machine (EVM) Integration

Sei V2 plans to introduce compatibility for EVM smart contracts written in Solidity, including the ERC-20 and ERC-721 token standards. EVM smart contracts will also be backward compatible, meaning that smart contracts on Ethereum and its Layer-2 networks can be seamlessly redeployed on Sei.In effect, Sei will simultaneously support two execution environments. Also, each user’s EVM and Wasm addresses will be linked and will share the same underlying account. EVM smart contracts and tokens will be interoperable with existing CosmWasm smart contracts and vice versa. This will be enabled through the use of Pointer Contracts and Precompiled Contracts.These contracts will make tokens accessible in both environments without needing a wrapped version of the token. In essence, Pointer Contracts act as a “translator” between the two execution environments. They allow users to signal what messages they want to send across either environment.

Optimistic Parallelization

Parallelization on Sei is currently optional. To take advantage of Sei’s parallelization capabilities, smart contract developers must define the state (account balances, smart contracts, etc.) used by smart contracts. Sei V2 plans to change from pessimistic parallelization by introducing optimistic parallelization, where all transactions will optimistically be assumed to be eligible for parallel processing. Similar to Sei’s optimistic block processing fallback, if dependencies between transactions exist (transactions interacting with the same part of Sei’s state), they will be re-processed sequentially. The change to optimistic parallelization will ease the developer experience by not requiring dependency mappings to be defined.

SeiDB

Sei V2 plans to re-architect the network’s storage interface. SeiDB would introduce a new storage layer on Sei that decouples the State Commitment (SC) Layer and State Store (SS) Layer. This is expected to:

In March, Sei’s open-source Parallel Stack was announced, with plans to enable developers to launch modular Layer-2 blockchains that serve as parallel EVM execution layers. These Layer-2s could use Sei’s validator set for sequencing services and customizing their settlement and data availability (DA) layers.

Governance

Sei uses an onchain governance process where proposals can affect network parameters. Parameters include those such as SEI’s minting schedule or increasing the maximum set of active validators. Sei’s governance does not have an official voting front end, but it can be interacted with through supported wallets such as Fin Wallet and Compass Wallet.As of March 31, 2024, 48 out of 53 active proposals have passed since Sei’s mainnet launch. These have included several small increases to the maximum set of active validators, increasing governance deposit parameters, updating the minimum network transaction fee, and upgrading network software. Notably, non-vested tokens can be staked to participate in governance.

Closing Summary

Sei experienced a spike in activity and network revenue across December and January, triggered by inscriptions. This activity preceded a large uptrend in SEI’s price, which finished up 37% QoQ at $0.82. This price increase coincided with daily transactions decreasing by 17% to 4 million. Meanwhile, daily active addresses increased 71% to 21,000, marking a diversification of users on the network. The NFT sector exploded as various metrics increased by between 1,000% to 2,000%. DeFi TVL grew by 715% QoQ to $46 million, led by Astroport with 99% dominance. At the same time, liquid staking on Sei grew to 8.4 million SEI with the emergence of Silo and Kryptonite. Over the coming months, users can look forward to the launch of Sei V2 and various EVM-based protocols such as Uniswap, Balancer, and LayerZero. The upgrade is intended to catalyze network growth by bringing in further usage and users.