SUI: An adoption arc signals emerging leadership

Jamie CouttsOct 18th 2024

SUI: An adoption arc signals emerging leadership

Deep Dives with Real Vision’s Chief Crypto Analyst, Jamie Coutts

September 27, 2024

Highlights:

Sui’s recent outperformance has triggered relative momentum buy signals against BTC and SOL.
YTD Active addresses have risen from under 20,000 to over 1.2 million on a rolling 14-day basis.
12% of Sui max supply will vest over the next 4 months.
Sui has received $767 million in asset net flows YTD, the largest of any L1 in percentage of market cap terms.
Sui has processed significant transaction volume but remains one of the cheapest L1s with transaction costs of $0.0025.
SUI: Next Gen in Blockchain Scaling
Gaming
Relative strength

SUI: An adoption arc signals emerging leadership

This year’s tracking of user adoption trends among Layer 1 blockchains has unveiled some surprises, particularly with Sui, which is now emerging as a top contender after several false starts.

Sui’s parallelized consensus mechanism offers superior scaling and innovative features. The platform’s aggressive incentive campaigns to attract developers and users are starting to pay off, with accelerating network growth and significant capital inflows, albeit from a low base.

For the first time since its launch, Sui’s network fundamentals and price movements are also aligning, which is not easy for a high FDV/low float project. With several major developments in scaling, gaming hardware, and other areas on the horizon, Sui is beginning to capture attention, evidenced by its relative outperformance of the past month.

This note presents a bullish outlook on the Sui platform, as the confluence of fundamentals and price momentum signals the potential for continued outperformance in the upcoming liquidity-driven bull market. However, this is not guaranteed. Sui needs to grow its small dapp footprint and the monetary velocity in the network. While the worst unlocks are behind it, the supply schedule remains unfavourable for the next four months.Yet in a crypto bull market, platforms with robust network adoption often see supply take a backseat.

This report aims to provide subscribers unfamiliar with Sui a clearer understanding of the network’s fundamentals, frequently drawing comparisons to Solana.

Highlights:

Sui’s recent outperformance has triggered relative momentum buy signals against BTC and SOL.
YTD active addresses have risen from under 20,000 to over 1.2 million on a rolling 14-day basis.
12% of Sui max supply will vest over the next 4 months.
Sui has received $767 million in asset netflows YTD, the largest of any L1 in percentage of market cap terms.
Sui has processed significant transaction volume but remains one of the cheapest L1s with transaction costs of $0.0025.

SUI: Next gen in blockchain scaling.

Sui (SUI) is a Layer-1 blockchain built for scalability, security, and mainstream adoption. It was launched in May 2023 by ex-Meta engineers from the Diem and Novi projects.

In my (probably naive) opinion, Sui is a true 3rd generation smart contract blockchain, and it’s the real deal when it comes to scalability. Sui’s throughput scales horizontally, meaning the network’s performance improves as more validators contribute additional computing power. Its consensus framework enables validators to propose blocks concurrently, maximizing the utilization of bandwidth, CPU, and I/O resources. The upcoming Pilotfish upgrade is likely another game-changer, distributing execution across multiple machines for each validator, achieving significant throughput improvements with minimal latency.

I’m no blockchain engineer, but the potential of parallelization and sharding here is hard to miss — it could seriously change the game for blockchain scalability. It’s what got me interested in NEAR Protocol as I investigated how it was facilitating millions of daily addresses without congestion or spiking gas fees.

If the industry is serious about bringing billions of people on-chain, this tech is essential in order to handle that load.

Another standout feature in the Sui tech stack is the Move programming language, which offers enhanced flexibility and safety compared to other Web3 programming languages, with the creator of Move now at Mysten Labs, the firm behind the Sui protocol.

There is also a compelling user experience with features like gas fee abstraction via sponsored transactions and OAuth-based authentication through zkLogin.

Recent ecosystem developments

The rest of this report gets heavy into the price action and onchain data, so I will front-load some of the exciting developments in the sectors that provide the most promise for the network.

Gaming

Sui is following Solana’s lead into hardware with the release of a handheld console, SuiPlay0X1, next year. I am not a gamer, but it could be a massive win for the network, potentially pulling in millions of hardcore gamers. Developed by Mysten Labs, this is the first console to directly integrate Sui’s blockchain tech into gaming. It’s bridging Web2 and Web3 by supporting both traditional PC games and Sui-powered exclusives like XOCIETY and DARKTIMES.

With the gaming industry booming and the ability to buy the console using SUI tokens, we could see serious demand for both the hardware and the token. Add in NFT integration and developer incentives, and Sui is setting itself up to lead the blockchain gaming space while locking in a dedicated user base. While gaming has been a perennial disappointment, it does seem that years of relentless improvements in scaling, hardware, and user experience are about to intersect.

DeFi

USDC’s native launch on Sui is a big step forward for its ecosystem. As the second-largest stablecoin by market cap, USDC will use the Cross-Chain Transfer Protocol (CCTP) to enable transfers between blockchains, strengthening Sui’s interoperability. With USDC already live on 15 other networks, this integration is another piece of the puzzle as Sui works to build out a competitive DeFi ecosystem, which is crucial if it keeps pace with Solana and attracts more users. This move by Circle is a step in the right direction.

File storage

Walrus, Sui’s decentralized storage solution, has big potential, especially in a world where more content is censored. Offering a decentralized alternative for storing large data could help ensure that information stays accessible and un-censorable. It could also serve as a rival data availability solution for L2s.

Albeit years into the future, the kicker is Walrus’s potential to make SUI deflationary. As more users store data, more SUI gets burned through transaction fees, which could significantly impact the network’s inflation rate. It’s a win for decentralized content storage and a significant lever for SUI’s token economics.

The charts

Weekly chart

Starting with the weekly chart helps put things into perspective. The horizontal volume chart shows the significant volume that turned over in the $0.50 to $0.80 level during the market correction of the past months. We will get into the reasons for the dump but suffice it to say that the turnover of tokens, most likely unlock-driven, laid the foundation for the current rally.

With the token teleporting to the $1.60 -$1.70 level in just the past 3 weeks, it may be due for a pause. However, given the improving liquidity backdrop it’s likely a matter of when, not if, SUI breaks through overhead resistance.

Short-term overbought can be long-term bullish.

The price has doubled in under a month, and it’s rare for an asset to reach 85 on the 14-day Relative Strength Indicator (RSI) without correcting.

However, using the RSI as a pure mean-reversion signal can be misleading if you are investing on a longer timeframe. An ‘overbought’ RSI reading often signals continued outperformance or trend continuation. This was the case in November 2023, when SUI broke out of its post-launch downtrend, with the RSI climbing above 75. Instead of pulling back, SUI consolidated for a month before surging 3.5x over the next five months.

Sui daily chart

A fitting comparison would be Solana in the previous cycle. During DeFi summer 2020, Solana experienced its first major surge, with the RSI hitting 85 before the price collapsed by 75%. This marked Solana’s first wave. SUI’s rally from Q4 2023 to Q1 2024 resembles a similar first wave.

Solana had three major waves during the 2020/21 bull market, each pushing the RSI to extreme overbought levels. Applying a similar pattern to SUI suggests we are currently in the second wave higher.

Solana daily chart 2020-2022

Relative strength

Compared to the rest of other relative outperformers this cycle, such as Bitcoin, Solana, or the broader Altcoin market, Sui is showing unequivocal relative strength. These ratio charts have triggered a bullish relative momentum signal in the past 3 weeks. For simplicity, my relative strength signal is an unoptimized 50/200-day SMA crossover.

SUI vs. BTC

SUI vs. SOL

SUI vs. Altcoins

Don’t fade the ATH breakout.

While Sui could very well correct from here, the fact that it is within striking distance to its all-time high (ATHs) places it near the top of L1s ranked on this measure. I mention this because, as scary as it may sound, buying assets that break their ATHs statistically has been a robust strategy in stocks and index investing. The original work has been built and layered on over the years.

Behavioural economists often attribute this to underreaction, anchoring, or the disposition effect. Wonkish terms that boil down to one simple idea: people tend to underestimate the significance of an asset making new highs which creates a FOMO feedback loop, amplifying the price movement as more investors rush in.

Global liquidity.

Everything hinges on where we are in the global liquidity cycle as this fuels the outsized gains in crypto. In the last report, I covered the macro and liquidity framework I use, which helps me optimise the best risk/reward times for crypto assets.

Since flagging the decisively bullish pick-up in the macro and liquidity indicators, we have seen a 50-bps cut in the U.S. Even more bullish is the additional stimulus out of China, which was already easing. Chinese authorities this week announced a crisis-mode stimulus package via a cut to the bank reserve requirement ratio (RRR), adding $113 billion of liquidity support to the equity market, potentially even a ‘stock stabilization fund,’ and will also lower borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.

The response in the Chinese equity market was predictably positive.

The bottom is in for global central bank liquidity for this cycle. Sit back and watch the other CBs join in. This is bullish for Bitcoin and will be rocket fuel for Alts.

Alts have already started to respond. In the two weeks since my last report, the Alt-season indicator, which tracks the percentage of assets outperforming BTC on a 90-day lookback period, has shot up from around 12% to 28%.

Below is the Top 200 equal weight index, a proxy for altcoins, and my Central Bank balance sheet liquidity indicator in the sub-chart. I have also added the chameleon trend indicator, which helps illuminate how the altcoin bull market correlates with the central bank stimulus (green in the sub-chart).

While the so-called Alt-season typically starts when BTC dominance is falling, we are already seeing some of the alts start to move. These early relative outperformers often become the leaders in the next wave.

While the liquidity landscape sets the stage for a major move over the next months, long-term investors might want to focus on the network fundamentals to ensure the emerging story holds up. Price momentum is one thing, but lasting value comes from the network’s ability to generate meaningful on-chain activity.

Sui’s fundamentals.

Signs that incentive-drive activity is creating network effects.

Sui’s network activity surge in the latter half of last year — rising from a few thousand to 200,000 active addresses (14-day rolling average) between August and November — was primarily driven by subsidized testing for gaming apps. When the incentives ended, activity vanished. However, these tests proved Sui’s parallel transaction execution could handle hundreds of thousands of users without spiking fees.

The real shift came in June when active addresses jumped from 16,000 to 1.4 million in one month, mirroring NEAR’s rapid adoption jump in Q3 last year. The key question was sustainability. When the campaigns stopped and activity cooled, addresses did not return to zero, instead they stabilized at around 400,000, signalling traction among developers and users. The latest surge suggests new all-time highs in activity are likely, as shown in the chart.