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Users versus speculators as a measure of long-term value

As valuation methodology for blockchains continues to evolve, the user versus speculator metric has emerged as an important measure of a network’s fundamental health

A recent blog post by fintech writer Tony Sheng, describes the importance of blockchain projects converting speculators into actual users, because of the positive price feedback loop this creates.

The theory is driven by the concepts of fallibility and reflexivity conceived by George Soros. The principle of fallibility is that a "participant’s view of the world is always partial and distorted," and leads to reflexivity, "that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions."

Evidence of the real world legitimacy of these theories is not hard to find within crypto markets. During the bull run of late 2017/early 2018 the entry of legions of curious buyers to crypto markets led to skewed perceptions about the quality of elements with the blockchain ecosystem. As a result, ICO projects were routinely able to raise tens of millions, and some — like EOS and Tezos — were able to raise billions.

Consider Ethereum, the primary network that ERC20 ICO funding smart contracts were built on top of. Its blockchain had huge growth in active addresses, transaction volumes and price during the bull run. As well as the network having utility as a facilitator of ICOs via smart contracts, its native token ETH and market benchmark BTC were generally used as liquidity onramp onto crypto projects during this time period.

Fallibility likely influenced Ethereum holders to view ICOs of the time with ‘distorted’ or rose-tinted glasses, internalizing a strong belief in the ability of these ventures to become disruptive industry game-changers, because of a skewed desire to derive utility out of their invested tokens.

Reflexivity is what drove believers of Ethereum to over-invest in these projects, an action that can be considered ‘inappropriate’ given the issues in the investment proposals of a number of these projects, such as back doors in the smart contracts of the projects, and a lack of regulatory or custodial protection for funds.

Fallibility and reflexivity positively affected the price of ETH, as more money was pumped in by speculators, who then used their tokens for ICO investment. Belief created utility, which created more belief, and this fed back into the price of the token.

PIC 1 flywheel-positive

Blockchain based tokens live two quite separate existences; one as security-like tools for financial investment and trading (which to date has been the primary use case for most), and another as instruments to access specific operations within blockchain networks-making them assets with underlying ‘utility’.

The general perception of this interaction; is that nearly all curious crypto participants enter crypto markets as speculators, purchasing tokens for financial purposes, with very few accessing the network specific operations the tokens allow access to.

The more speculators that convert to users, the more belief that is created in the underlying token, the more price is pushed upwards. In a bear market this mechanism can work in reverse.

Tony Sheng defines the cycle for converting speculators to users as:

  • Acquisition, as the attraction of new user
  • Activation as convincing new user to take some action
  • Contribution as getting the activated user to produce a contribution to the network

This provides an opportunity for blockchain projects to retain value within their external tokens, based on their ability to retain long term contributors and activators. They are conceivably less likely to sell their stakes because of their added financial and time investment into platforms, during periods of negative external speculation. This should dampen the effects of downward price pressure, and add to bullish momentum during positive price runs.

How good are blockchains at retaining users

One potential method for assessing whether a blockchain is effectively moving beyond speculation, and actually has activators and contributors, is to compare payment count as a ratio of total transaction count, for smart contract based tokens.

Coinmetrics.io, measures ‘payment count’ for platform, smart contract based cryptographic assets such as Lisk, Ethereum, and Ethereum Classic, as Onchain transactions of ‘Transfer’ type or, without more complex smart contract based operations such as contract creation, invocation (calling or invoking a smart contract) and contract destruction transactions. Actual volume for these operations is not considered within the metric, meaning at this stage, it is difficult to reach definitive conclusions with.

One would assume that smart contract based transactions to be more reflective of token holders at the activation or contribution phase of blockchain operations, because participating in a smart contracts requires, to a certain extent, increased educational and financial investment, into the smart contract platform initially invested in.

The non payment count element of total onchain transaction could include the creation of a Cryptokitty ERC-721 token, or a within Dapp purchase on a platform such as Bancor.

Transactions within the ‘payment count’ metric would appear to be more reflective of ‘acquirers’ who are speculating and HODLing, and are yet to interact with the smart contract capabilities of their held tokens.

Pic 2

Figure 1: Lisk- Payment Count as a ratio of Total Onchain transaction count: Average Historical % difference: ~95% payments, ~5% More complex Smart Contract Operation

Pic 3

*Figure 2: Ethereum Classic- Payment Count as a ratio of Total Onchain transaction count: Average Historical % difference: ~72% payments, ~28% More complex Smart Contract Operation *

Pic 4

*Figure 3: Ethereum- Payment Count as a ratio of Total Onchain transaction count: Average Historical % difference: ~54% payments, ~46% More complex Smart Contract Operation *

While it may not look like it, figure 1,2 and 3 display identical metrics for 3 Platform based blockchains and their tokens, Lisk (LSK), Ethereum (ETH) and Ethereum Classic (ETC).

What is striking with figure 1, is how large of a proportion, payments, the orange area, makes up within total transactions on the Lisk blockchain. On a number of observed days, the difference between Payment Count and Total Onchain Transaction Count is 0, meaning no real smart contract usage.

This implies that most users aren’t using Lisk for its intended purpose as a Smart Contract and DApp hosting platform, and have not moved beyond the token ‘Acquisition’ phase.

For Ethereum, as figure 3 indicates, based on the growing divergence between blue and orange densities, the difference between Total Onchain Transaction Count and Payment Count of ETH has steadily increased over the blockchain’s lifecycle. This implies a steady growth in implementation of Smart Contracts operations across the Ethereum network versus simple payments.

In figure 2, Ethereum Classic’s ratio lies somewhere in between the ratios of Ethereum and Lisk, evidencing some ability to convert speculators into smart contract users. The vast majority of smart contracts that can be run on Ethereum (ETH) can also be executed on Ethereum Classic (ETC), for example the ERC20 format is executable within ETC. Some projects have chosen to run on Ethereum Classic as opposed to Ethereum, however, this appears to be the exception rather than the norm.

Potentials reasons for these differences between the smart contract operations as a portion of total transactions across the blockchains, may be factors such as the ease of developing Dapps or ICO projects on the respective platforms, the first mover advantage for Ethereum as the network that popularized the smart contract, and the suite of developer tools available for users of each network.

The framework mentioned in the first half of the article would allude to Ethereum being better protected from downward price pressure during the crypto bear market, given the positive price pressure that is created by converting speculators into users, and generating more belief in the underlying blockchain.

Respectively since achieving all time highs (based on global daily spot prices) earlier in the year, ETH is currently down ~94%, ETC is down ~97% and LSK is down ~97%.

This suggests that Ethereum’s ability to create more invested user activity, has only generated marginal price benefits versus its two less utilized competitors.

In his article, Tony Sheng airs his grievances at the usage of price as a metric to judge the performance & quality of blockchain projects, saying: "Discourse around price is largely driven by speculators that make it noisy, misleading, and distracting for projects and believers with longer time horizons."

Smart contract operation data, suggests that the Ethereum network is actively being used for utility beyond speculation, signalling strong underlying value. Regrettably, however, in a market where there remains little understanding of what fundamental characteristics of a token are important value metrics, this is not reflected in recent price performance.


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