Token-lytics: How do we evaluate Blockchains?

Understanding the financial state or activities of a publicly traded company is reasonably straightforward. Using financial statements, tax returns and earnings calls/press releases, which are publicly available on a regular but limited basis, we can understand how a company has performed compared to past quarters/years, understand strategy and avenues for future growth. Public disclosures provided by a company are often due to legal requirements which are focused on preventing foul play. Now these requirements aren’t perfect. Malicious, profit seeking behavior does occur in spite of these legal requirements; bad actors continue to engage in insider trading or other malfeasance, which is not always apparent in financial reporting. 

Now, in the web3 world, how do we assess the viability of individual public blockchains or decentralized apps (dApps)? 10-K reports aren’t exactly readily available! Well, one of the basic tenets of a blockchain is that at its core, it is a public, immutable ledger which stores all approved transactions of the network. This means its past history is open for everyone to see. The question is how do you access this information?

Data tells all

Data is key. Just as technical analysis uses data to support investment theses, using data to make a determination of value or understanding blockchain performance and health is crucial. Analytics dashboards called blockchain explorers allow you to view transactions and wallet addresses on the blockchain. However, this is like looking at the individual entries in an accounting ledger. It’s granular and doesn’t give a person an understanding of what’s going on at an entity or blockchain level.

Just as the TradFi world has the ubiquitous Bloomberg Terminal, the web3 world has analytics platforms, like Dune and Token Terminal, which analyze blockchain data based on web3 specific metrics. So what do these metrics look like? At a high level, we can view this in terms of financial, operating and performance metrics, as described below.

Financial Metrics

Broadly, these are used to evaluate and assess the financial performance, health, and stability of a company or an investment, and in the web3 space, for blockchains and dApps. Some key indicators include market capitalization, TVL, P/F ratio, dApp revenue, and TVE.

1. Market Capitalization: similar to public equity markets, this represents the total size of the network’s market and compares to the free-float capitalization in the public equities market. This is calculated as price multiplied by the total supply in circulation. Market cap, for short, can be used to gauge risk, liquidity and investor sentiment. For example, as of this date, Ethereum (ETH) has a market cap of $358.7 billion, which points to its dominance in the web3 market.
2. TVL: Total Value Locked represents the value of assets locked within smart contracts. Higher TVL demonstrates higher confidence of users to lock capital in DeFi protocols, and thereby higher liquidity and higher yields. Lido (LDO), a liquid staking protocol, has $29.2 billion TVL and has the highest liquidity among DeFi protocols as of date.
3. Price to Fees (P/F) ratio: ratio between market capitalization and annualized fees generated by the network. This is comparable to the Price to Sales ratio for the public equity market. Higher metrics indicate that a blockchain could be overvalued or the market perceives high growth potential, while a lower metric is a red flag. ETH has a P/F of 175x, compared to Lido which has a P/F of 1.9x.
4. dApp revenue: income earned by a protocol from user fees. This can be measured for layer 1s, dApps and infrastructure services. This is a more useful metric for mature projects, reflecting the more sustainable, end-user demand. Ethena, which produces a synthetic dollar protocol called USDe, generated monthly revenue of $24.1 million ($293.9 million, annualized), and is poised to being the highest generating web3 project, apart from layer 1s, Ethereum and Tron, in 2024, indicating its growth in adoption.
5. TVE: Transaction Value Enabled is the monetary value of transactions facilitated by a protocol over a period of time. This can be applied to third-party services like Oracles, to evaluate the success of the service. In CY 2023, Chainlink, a leading Oracle, had over $9.3 trillion in TVE, up from $6.9 trillion year-over-year. 

As with public equity markets, the key is understanding how these metrics compare within sectors (L1s, L2s, dApps) and over stages (early, growth, mature) within the web3 world.

Operating Metrics

These metrics are focuses on the operations of the network or project, rather than in monetary terms. Some operating metrics we’ll focus on here are active users, transaction volume per user and MEV.

1. Active users: this can be tracked on a daily and monthly basis, which provides insight into the adoption of the network as well as retention rate. This can be used to measure the success of a single application, while unique addresses are more indicative of the success of a blockchain. Tron has 2.1 million daily active users, the highest in the web3 space, as of date.
2. Transaction volume per user: this also provides an understanding of platform engagement and utility, with increasing volume indicating the ability to ramp up transaction throughput and achieve mass adoption. For example, Uniswap, a decentralized exchange, experienced a valuation bump as its transaction volume per user grew, indicating user confidence and trust in the platform.
3. MEV: Maximal Extractable Value (originally called miner extractable value, before the onset of proof of stake) refers to the peak value a miner or validator can extract by transaction ordering. Also called an invisible tax on users, MEV exploits inefficiencies and vulnerabilities in the network for profit-taking, and can have detrimental impacts on transaction speed and higher user fees. Yet, some argue that it’s not all bad, in that it reduces pricing discrepancies and brings more efficiency to the network. This is harder to monitor and measure, and involves getting deeper into the developer network to better understand.

Performance Metrics

Metrics focusing on the performance of the network or project include transaction speed, throughput and fees, as well as measures set up to enable security.

1. Network performance: metrics such as transaction speed, transaction throughput and gas fees are used to evaluate a network’s performance and user experience. High transaction speed and throughput, and low fees can significantly contribute to user adoption and growth of the platform. For instance Solana has performed well with its higher transaction speed and low fees, compared to Ethereum.
2. Security: having in place a regular cadence of security contract audits and limited security breaches or other incidents contributes to higher confidence in users and investors. This is an obvious one; security is non-negotiable when it comes to blockchain projects or dApps. Bitcoin, the oldest cryptocurrency, is often cited as the safest in the ecosystem. Since the first transaction block in 2009, the network has never shut down and no bitcoin has ever been stolen from the blockchain.

This list is certainly not exhaustive. For lending protocols, like Aave, interest earned and number of active loans are relevant metrics, while for stablecoins, total stablecoin supply and transfer value (both total and bot-adjusted) are important to understand.

The transparency and on-demand nature of financial, operating and performance data makes it a super power for blockchains and, especially, the DeFi space. With web2 services and companies limited to quarterly or annual bursts of information, real time data available readily for web3 projects can help anyone better understand blockchain valuations, revenue potential, and develop an opinion. I think there is a gap in interpreting and extracting the relevant information in a user-friendly way for multiple blockchains and dApps; although Token Terminal certainly does a good job at this, it is limited to “14+ blockchains”. Moreover, having a single pane of glass to monitor these metrics across blockchains projects and dApps is necessary to achieving TradFi-like adoption.