In the last decade, we have witnessed a growing explosion of Web3 projects building decentralized versions of Web2 platforms and services. Compound is building the Web3 version of Bank of America, Uniswap is NYSE, Yearn Finance is decentralized Blackrock, etc.
In theory, the 9,000+ Web3 projects in existence today promise to be open source, permissionless, and backed by token economies. However, while many new Web3 projects label themselves as decentralized networks, protocols, DAOs, and dapps, most are actually businesses with products that won’t grow if they don’t start thinking of themselves as such.
Ideology doesn’t sell in the long run, and assigning terms like “protocol” and “DAO” doesn’t remove the requirement to develop and scale a product that people actually want to use. And indeed, in the case of Web3 projects, their outputs should be an order of magnitude best than their centralized counterparts to offset the significant UX friction of using a product with a crypto backend.
But this still leaves the question of how to measure success. Until recently, Web3 projects were judged primarily by two metrics: price and market capitalization; call it “speculative value” if you like. Y As we know from history, this is not a great indicator of long-term success.
Here are some really useful native Web3 growth metrics as they apply to three main categories: DeFi, Layer 1s/Layer 2s, and Play-to-Earn Gaming.
DeFi: value growth through financial inflows, integrations
Decentralized Finance (DeFi) applications include decentralized exchanges like Uniswap and lending platforms like Compound. Most DeFi projects are developed by a centralized development team that then seeks to distribute the management of their operations to a decentralized community of token holders. Key growth metrics:
Total value locked — TVL has been OG’s metric of success for DeFi applications since its inception. It represents the total value of crypto assets deposited in a DeFi protocol for things like trading, staking, and lending. While TVL is a great metric for lending/lending protocols like Aave and Compound, it is less useful for decentralized exchanges like Uniswap that measure growth primarily by trading volume. One downside to using TVL to measure long-term growth is that users and traders often jump from one DeFi app to another in search of higher returns, and some whales can create the illusion of activity, making TVL unusable. be a very sticky usage metric. It is, however, a great metric for trust. Blocked assets have tangible value and bear an opportunity cost of other productive uses.
active portfolios — While traditional markets measure daily active users (DAU) and monthly active users (MAU), in DeFi users simply connect their wallet and start buying, selling and staking. The analog measure for DAU and MAU in DeFi would be Daily Active Wallets and Monthly Active Wallets.
Number of integrations — Since DeFi apps are composable, or can interact with and build on other DeFi apps, another growth metric is the number and quality of integrations where the app is used across other wallets, exchanges, and DeFi products. Developer activity is key to achieving project growth and market leadership in DeFi.
Layer 1 and Layer 2: growth through developer activity
Layer 1 refers to the base-level blockchains that define projects like Ethereum, Solana, Near, Avalanche, and Flow. (Layer 2 projects, such as Polygon, sit on top of existing Layer 1 projects to provide scaling.) The growth of these projects comes mainly from applications built on top of these protocols. Metric wrenches:
Number of developers and applications — Since Layer 1 and Layer 2 projects are open source, anyone can build on and integrate with them. The number of developers and the number of applications built on top of a given protocol are perhaps the most important growth metrics for L1/L2 projects. A good way to quantify the number of developers contributing to a project would be to look at the number of active users in development environments and libraries like Github. The more traction spin-off apps get from both users and investors, the more growth there will be for the base project. The Flow blockchain, for example, grew from having 50 apps on its network in December 2020 to 650 apps by the end of 2021. Projects building on Flow raised more than $700 million in funding last year and contributed transaction growth and user adoption. of the Flow blockchain.
Number of active portfolios — Most L1/L2 projects have their own crypto wallets that allow users to buy, sell, trade, bet and interact with decentralized applications (dapps) built on top of their infrastructure. As was the case with DeFi, the number of daily active wallets (DAWs) and monthly active wallets (MAWs) is a key growth metric. Third-party wallets like Metamask (Ethereum), Blocto (Flow), and Phantom (Solana) often become important hubs for user assets within that protocol’s ecosystem.
Total number and size of transactions — The number of transactions, the number of large transactions (over $100,000), and the volume of transactions on a given protocol is a good measure of the use of a network as a medium of exchange (although this is not necessarily the end goal of many projects) ). The dollar share of total transaction volume can also be used to measure market share against competitors.
Play To Earn Gaming: Growth Through Partnerships, Player Incentives
Play-to-earn (P2E) games are video games where the player can receive rewards with real value. Unlike regular video games, where game items are kept on private data networks and owned by the creators of the game, NFTs allow players to own the unique assets they purchase. Furthermore, once a player owns an NFT asset in the game, they can freely sell it outside of the platform it was created on, something that is not possible with normal games. Players also have a say in the governance of the game itself. While we have yet to see a sustainable model for crypto gaming that we can use as a blueprint for success, here are three useful metrics for evaluating P2E projects:
Number of active players — The number of daily (or monthly) active users is the key measure of a game’s growth and popularity. While rich game content is critical to success, a content-rich game with few users will be worthless. Equally important is the ability of a project to to retain your number of active players. In Axie Infinity, for example, built on the Ronin chain, the average daily user has it fell from 120,000 to around 20,000 in the last six months, while SLP earnings in in-game currency fell.
Transaction volume per user — This metric refers to the average amount of funds transferred per player, which reflects both the level of user engagement and the strength of the token design. Growing average transaction volume per user is also key to increasing revenue. When evaluating projects, look for stability and growth in the average volume of transactions per user.
Number (and quality) of trade associations — In Web3 games, growth and distribution are usually achieved through player referrals and associations with guilds. A crypto gaming guild is a group of players who play together, share in-game data and assets, and support other players. Guilds such as Yield Guild Games, Ancient8, Good Games Guild, and Merit Circle allow new players to get started by lending them in-game assets that they might not otherwise be able to repay. They also help P2E games get more daily active users through grants, online marketing, and direct investments. Guilds choose which games to support by looking at three factors: the quality of the game, the strength of the community, and the strength of the game economy.
As Web3 matures, so will the need to understand customers, revenue drivers, and real growth metrics. While the metrics mentioned in this article don’t tell a story by themselves, and often come with various caveats and restrictions, they do provide a good indication of the direction a Web3 project is headed. Understanding them will help guide business and product decisions, as well as community incentives. I look forward to seeing a variety of new growth models emerge in Web3, and look forward to the progress of the projects and accompanying metrics.
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