Original title: The fallacy of daily active addresses

Original author: Donovan Choy, Blockworks

Original translation: Deep Tide TechFlow

Better use of blockchain metrics

Blockchains generate a large amount of public data. On Crypto Twitter, people constantly compare Blockchain A and Blockchain B, and investors, researchers, and opinion leaders (KOLs) have many metrics to refer to when defending their views. However, the misuse of these numbers often obscures people's understanding of the field.

In today's 0x Research article, we will explore three metrics and the problems associated with them: active addresses, blockchain 'profitability', and total value secured.

Active addresses

'Active addresses' refer to how many active, paying users there are on a particular protocol.

'Facebook has three billion monthly active users' is useful information that tells us something about this social network. Since spammers do not have enough profit opportunities to flood Facebook, active addresses are a good way to assess the platform's real value to consumers.

However, for blockchains, the value of active addresses is diminished because it is very easy to create new wallets, and the opportunities to profit through airdrops or protocol incentives are evident.

For example, the following figure illustrates a clear situation: Solana had the most daily active addresses over the past month, making it appear very active.

Source: TokenTerminal

Most Solana users trade on decentralized exchanges (DEX), so we need to carefully monitor activity on DEX. When we delve into the active addresses on Solana's DEX, we find that most addresses—about 3.4 million out of a total of 4.4 million—had lifetime transaction volumes of less than $10.

This suggests that due to Solana's low transaction fees, there may be a lot of spam or bot activity rather than a large number of 'quality' users.

Source: Blockworks Research

This is another example I mentioned earlier: Celo L1 (now L2) saw a surge in daily active addresses sending stablecoins to 646,000 in September. This number exceeded Tron and attracted the attention of Vitalik Buterin and CoinDesk.

After in-depth analysis, Variant Fund's data analyst Jack Hackworth found that 77% of Celo addresses transferred amounts of less than two cents, primarily because thousands of users received small amounts of funds through a universal basic income protocol called GoodDollar. In both cases, active addresses showed high usage, but upon closer examination, this claim does not hold.

To learn more about this issue, you can refer to Dan Smith's research, which focuses on the misuse of daily active addresses.

Blockchain profitability

Instead of focusing on active addresses to study blockchain activity, it is better to look at network fee metrics. Fees reflect the total gas consumption of using the protocol without considering the 'quality' user issue.

Fees are typically used by analysts and investors to determine which blockchains generate the most 'revenue'. Then, we consider the token issuance paid to validators as a cost. The result is the blockchain's 'profitability'.

This is how Token Terminal generates 'financial statements' for crypto protocols. For example, the chart below shows that Ethereum L1 accumulated millions of dollars in losses over the past two months.

Source: Token Terminal

The only issue is that this calculation does not take into account a key factor: unlike PoW chains (like Bitcoin), users on PoS chains can also easily obtain token issuance rewards.

After all, if I can earn 5% staking yield on ETH/SOL from liquidity staking platforms like Lido or Jito, why should I care whether the network is 'unprofitable'? Thus, treating token issuance as a cost and concluding that 'Ethereum is unprofitable' is problematic.

In the real world, inflation is harmful because when central banks print a lot of money, the increased money supply reaches different participants in the economy at different times, benefiting those who receive the new money first before 'real' price adjustments occur. This is known as the Cantillon effect.

In PoS blockchain economies, the situation is different, as inflation (i.e., token issuance) is received by everyone simultaneously. Therefore, no one becomes richer or poorer as a result—everyone's wealth remains the same.

Alternatively, we can consider using Real Economic Value (REV) as an alternative metric. REV combines network fees and MEV tips given to validators but does not treat token issuance as a cost.

Based on this, we can see that Ethereum has actually been profitable over the past two months:

Source: Blockworks Research

REV can be said to be a better metric for assessing the true demand of the network and is more comparable to income metrics in traditional finance (TradFi).

In summary, traditional profit and loss accounting methods are not easily applicable to blockchain.

To learn more about this complex topic, you can listen to the recent Bell Curve podcast featuring Jon Charbonneau.

Total Transaction Value (TTV), not Total Value Secured (TVS)

Oracles are key infrastructure for blockchains to obtain off-chain data. Without Oracles like Chainlink, the blockchain economy cannot reliably reflect real-world prices.

A common way to compare Oracle provider market shares is to use the Total Value Secured (TVS) metric, which aggregates all TVL secured by Oracles. DefiLlama calculates it this way:

Source: DefiLlama

The problem with TVS is that it obscures the actual activity secured by Oracles.

For example, Oracles supporting high-frequency trading products (like perpetual contract exchanges) constantly 'pull' price updates from off-chain data sources with sub-second delays.

This contrasts with 'push' Oracles used for lending protocols, where prices only need to be updated a few times on-chain each day as frequent updates are not required.

TVS focuses on the total value managed by Oracles, but ignores the performance intensity of Oracle providers.

In other words, this is like saying a gourmet steak and a salad are both priced at $50 on the menu, so they hold the same value for diners. But clearly, the work required to make a steak is far more than that for a simple salad, which is a factor worth considering.

An alternative metric is Total Transaction Value (TTV), which takes into account the periodic trading volume using Oracle updates for pricing.

TTV excludes applications with low transaction frequency, such as lending, CDPs, and re-staking, but as Ryan Connor explained, 'only 2-9% of Oracle price updates come from these low-frequency protocols, which is a small percentage in the cryptocurrency space due to the high volatility of fundamental metrics.'

When evaluating Oracles using TTV, market share changes significantly.

To learn more, refer to Blockworks Research's report on how TTV better reflects the fundamentals of Oracles.

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