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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. Assessing the relative economic
    impact of public blockchains
    HBS Blockchain and Crypto Club
    The Path Forward
    Nic Carter

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  2. • 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?

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  3. • 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

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  4. 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

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  5. 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

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  6. 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

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  7. 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

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  8. 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

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  9. 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

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  10. 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

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  11. 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

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  12. Alternative measures: ThermoCap
    • ThermoCap gives
    similar results to
    market cap for BTC
    Dominance
    • The measure only
    covers Proof-of-
    Work chains
    Coinmetrics.io

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  13. 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

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  14. • 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

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  15. 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

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  16. • 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

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