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Assessing the relative economic impact of public blockchains

Nic Carter
February 05, 2019

Assessing the relative economic impact of public blockchains

Nic Carter

February 05, 2019

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  1. • Developers: to receive market feedback on decisions • Builders:

    to determine which blockchain/protocol to build on • Users: to find out which network is the most vibrant • VCs: to calibrate attention & help founders avoid protocol risk • Asset managers: to build baskets/weighted financial products Why bother?
  2. • Huge incentives to skew the data and advertise your

    chain • Blockchains are inherently hard to read • Practitioner – academic gap Why is it hard? "When a measure becomes a target, it ceases to be a good measure.” – Charles Goodhart
  3. Problems with the “dominance index” • Doesn’t capture actual returns

    – use a real index! • Compares heterogeneous assets: currencies, tokenized equity, tokenized USD • Relies on “market capitalization” • Does the appearance of a new ICO or token actually lessen the significance of a major public blockchain? CoinMarketCap
  4. Issues with “market capitalization” for cryptoassets • What counts as

    supply? • Forks inherit the supply of the parent but often have very little uptake • Market capitalization can mask very low float & liquidity Coinmetrics.io
  5. More issues with with “market capitalization” These coins haven’t moved

    since 2011 and are presumed lost or out of circulation – do you count them or not? Coinmetrics.io
  6. Variable issuance/dilution rates Bitcoin Ethereum Stellar Ripple Monero 20.98 m

    147 m 142 b 100 b 22.5 m Asset 2050 expected supply n/a 72 m 100 b 100 b n/a Units at inception Defined at inception Being formalized Ad hoc Formalized 2017 Defined at inception Supply schedule 17.5 m 104 m 19.1 b 41 b 16.7 m Circ. supply 21 m Uncapped Uncapped 100 b Uncapped Ultimate supply Litecoin 83.9 m n/a Defined at inception 60 m 84 m No standard supply models means that consistent comparisons are nigh impossible
  7. Alternative measures: Transaction count BTC ETH EOS ADA BCH Tron

    Coinmetrics.io • EOS and Tron dominate – but at the cost of centralized validation • 0-fee chains are trivial to game and create illusory economic activity • Not an ideal comparative measure
  8. Alternative measures: On-chain transaction value BTC ETH EOS ADA BCH

    Tron • Measures the usage of the blockchain for final settlement • Transaction value is harder & costlier to fake • Adjustments are made to account for non-economic activity Coinmetrics.io
  9. Alternative measures: On-chain transaction value • Sample covers the last

    30 days worth of transactions • Weighting by txn value would underweight XRP, overweight BCH & Tether ** Stellar data covers XLM transfers only * XRP data covers all Ledger volume, xrpcharts.com Coinmetrics.io
  10. Alternative measures: ThermoCap • ThermoCap, or accumulated security spend, measures

    the accumulated economic work present in a blockchain • Assuming that miners mine at near marginal cost, miner revenue is a proxy for miner expenditures • Since miners are committed sellers of their new coins, miner expenditures roughly equal new investment • ThermoCap is a proxy for net inflows Coinmetrics.io Bitcoin’s Market Cap is $69b on rough net inflows of $11.2b
  11. Alternative measures: ThermoCap • ThermoCap gives similar results to market

    cap for BTC Dominance • The measure only covers Proof-of- Work chains Coinmetrics.io
  12. Alternative measures: Realized Cap Coinmetrics.io Realized cap: • Aggregate value

    of coins priced by their value when they last moved • Roughly measures average cost basis for holders Ethereum Bitcoin
  13. • Can be interpreted as platform revenues • How much

    are users willing to pay to transact on this blockchain? • Ethereum and Bitcoin dominate in fees, other chains are negligible • Some blockchains like EOS pay for security with inflation, not fees Alternative measures: Aggregate fees paid On-chain fees paid in the last 30 days
  14. Alternative measures: Addresses with a meaningful balance • Addresses with

    a meaningful balance measures on-chain ownership dispersion • Bitcoin’s forks tend to re-concentrate ownership Coinmetrics.io
  15. • No silver bullet! • To calibrate relative economic significance,

    a pattern of evidence must be built • No single metric captures all relevant information • Blockchain analysis is adversarial • The moment you define a desirable metric, someone will try to spoof it • Endless game of cat and mouse • Take a holistic approach • Public blockchains are mini economies, treat them as such Takeaways