Grayscale: AI and financial applications perform well amid geopolitical turmoil in Q1 2026

Source: Grayscale Research; Compiled by Golden Finance

Key Points:

• Q1 2026 characterized by volatility: geopolitical risks and macroeconomic re-pricing drove sharp market swings.

• Industry-wide decline: returns across six major crypto sectors were negative for the second consecutive quarter, with risk aversion and deleveraging intensifying.

• Leading in financial applications and tokenization projects: supported by institutional adoption and clearer regulations, these projects outperformed the broader market.

• AI-related tokens performed strongly: as interest in artificial intelligence accelerates and agents’ on-chain financial settlement needs become clearer, the AI sector stood out.

Overall Performance

The first quarter of 2026 was another challenging period for the crypto market. Amid rising geopolitical and macroeconomic uncertainties, all six major crypto sectors posted negative returns. However, closer analysis reveals a more constructive underlying environment—tokenization activity continues to grow, and AI-related projects remain robust.

GrayScale Research, in collaboration with FTSE/Russell, organized the digital asset market using their Crypto Sectors framework. As of the March 2026 rebalancing, this framework classifies 208 tokens into six distinct market sectors (Chart 1), with a total market cap of $2.1 trillion.

Chart 1: Crypto Sector Framework Helps Organize Digital Asset Markets

Fundamentals

From a macro perspective, fundamental indicators of blockchain activity in Q1 2026 were mixed (Chart 2), but granular data points to more positive trends.

While blockchain is not a corporate entity, its economic activity can be measured similarly. The three most important indicators are: users, transaction volume, and transaction fees. Due to the pseudo-anonymous nature of blockchains, “active addresses” serve as an approximate measure of users. Fees reflect users’ willingness to pay for transaction validation.

Active trends vary across crypto sectors. Both the cryptocurrency and smart contract platform sectors saw daily average transaction volumes increase by about 14% quarter-over-quarter. Total transaction fees across all sectors declined by over 30%, mainly due to price declines (in USD), not reduced usage. Active addresses in the crypto sector slightly decreased, while smart contract platform active addresses grew nearly 20%, indicating user activity shifting toward networks with more robust and diverse applications.

Chart 2: Fundamentals Continued to Decline in Q1 2026

Beneath the surface, some sectors saw continued growth in applications during the quarter. For example, tokenization activity remained strong. As shown in Chart 3, tokenized assets hit new highs, up 245% year-over-year. Stablecoins grew by 35%. Trading activity also accelerated: daily stablecoin trading volume more than doubled YoY, approaching record highs in mid-March.

Chart 3: Tokenization and Stablecoin Metrics Grew in Q1 2026

Tracking Price Performance

Returns across the six major crypto sectors were negative for the second straight quarter (Chart 4). AI and Financial sectors showed relative resilience, while Utilities & Services and Consumer & Culture sectors declined the most, reflecting a shift by investors from momentum-driven and speculative sectors to more fundamentals-based areas.

Chart 4: Q1 2026 Sector Returns Were All Negative

Although nearly 90% of assets declined in Q1, some tokens performed exceptionally well. Chart 4 lists the top 20 tokens, adjusted for volatility, that performed best in Q1 2026 and meet index inclusion criteria. Most of the top performers are concentrated in AI and financial infrastructure sectors.

Chart 5: Top 20 AI and DeFi Projects by Performance

AI innovation is accelerating and impacting broader markets and related crypto assets. Given blockchain’s advantages over traditional finance, it is likely to become the track for AI agents, as highlighted in a popular report by Citrini Research on the disruptive potential of AI. Two notable examples of AI sector outperformance this quarter include:

• Kite (KITE): A Layer 1 blockchain built specifically for AI agents, providing native infrastructure for agent wallets, identities, and payment channels. Kite announced it joined Google’s Agent Payments protocol as a partner and outlined its development roadmap ahead of mainnet launch.

• Bittensor (TAO): A decentralized network for AI development, comprising 129 subnets covering model training, inference, and AI agents. Bittensor’s subnet Templar recently announced the largest-ever pretraining run of a decentralized large language model (LLM).

Blockchain’s financial applications—such as tokenization and DeFi—also continued to grow. Market volatility exposed the limitations of traditional trading hours. Demand for continuous on-chain trading is rising. Investors seem more focused on projects that facilitate institutional adoption and enable on-chain transfer and management of financial assets.

1. Hyperliquid (HYPE): A perpetual contract exchange that expanded its scope by supporting traditional assets (e.g., stocks and commodities) via its HIP-3 protocol (see Chart 6). HIP-3 allows price discovery outside standard trading hours, providing traders greater flexibility during volatile markets.

2. Morpho (MORPHO): A decentralized lending protocol with over $10 billion in deposits and approximately $4 billion in outstanding loans. The platform also offers non-custodial vaults, enabling users to earn passive income through carefully curated lending strategies. Institutional interest in the platform is growing.

3. Sky Protocol (SKY): A decentralized lending application (formerly Maker) allowing users to borrow and stake using its native stablecoin USDS. The protocol enables users to mint USDS with over-collateralized positions, fostering on-chain liquidity and credit creation in DeFi.

Chart 6: Significant Growth in HIP-3 Open Contracts for Traditional Assets in Q1 2026

Beyond the financial sector, two smart contract platforms related to tokenization themes also performed well this quarter:

• Canton (CC): Designed for traditional financial institutions to conduct transactions while meeting privacy and compliance requirements. Canton has been adopted by major institutions like Broadridge, Citadel, and Bank of America, and collaborates with DTCC to support tokenized asset settlement and post-trade infrastructure.

• LayerZero (ZRO): A cross-chain messaging protocol that recently announced plans to build its own Layer 1 smart contract blockchain, called Zero. Major institutions including DTCC and Intercontinental Exchange (parent of NYSE) are exploring how Zero can support tokenization of stocks, ETFs, and government bonds, and enable 24/7 trading.

Outlook for Q2 2026

In the face of rate re-pricing and geopolitical tensions, the near-term outlook remains uncertain. However, positive developments unique to crypto continue to emerge, offering encouraging signs for long-term adoption and price appreciation.

A key driver is regulatory progress, notably the proposed Clarity Act, which aims to establish a framework for crypto capital markets similar to traditional finance. The bill covers registration and disclosure requirements, asset classification, and insider trading rules. It has passed the House and is currently under review in the Senate. According to Polymarket odds, the bill has over a 50% chance of being approved by the end of the year (see Chart 7).

We believe that passage of the Clarity Act would be a major victory for the industry, especially for sectors supporting tokenized financial assets, such as smart contract platforms and financial institutions.

Chart 7: Clarification of Regulatory Policies May Be Just Around the Corner