Key Takeaways

• Narratives, sentiment, and hype can drive short-term interest but are insufficient for long-term growth, especially in bear markets. Projects relying solely on sector narratives or extrinsic rewards may struggle in the long-term as they tend to attract fleeting users.

• Projects should focus on providing real value to users through tangible benefits like strong use cases and sustainable yields. This user-centric approach keeps users engaged beyond initial hype and fosters loyalty. Ultimately, delivering meaningful value and continuous innovation ensures the longevity of individual projects and fosters a healthier, more resilient crypto market.

• In this report, we highlight three non-exhaustive ways of delivering “real value”: real demand, real revenue and profit, and real yields.

• Real demand is demonstrated by participants' willingness and ability to use and pay for products or services without relying on extrinsic rewards. Achieving a strong product-market fit creates intrinsic demand, enabling projects to generate enduring revenue.

• Real revenue refers to the tangible income generated by a project, often from protocol fees. When combined with healthy tokenomics and low operating expenses, projects can achieve operational profitability. 

• Real yields in the crypto economy are generated from tangible sources of revenue, and do not rely solely on inflationary token emissions. 

The Challenge of Sustaining Interest

Narratives, sentiment, and hype are important in driving short-term price action and retail interest. However, these factors by themselves are insufficient to sustain long-term price and activity growth. This becomes even more apparent in a sideways or bear market, when on-chain activities decline and capital inflows slow. Projects that rely solely on sector narratives or incentivize activity by providing extrinsic rewards, such as points or airdrop farming, will find the environment tougher to operate in. 

In such instances, projects that provide some form of intrinsic and tangible value tend to do better, as they are able to sustain a base level of activity regardless of market conditions.

The Current Situation

Numerous projects have done well in capturing attention by leveraging prevailing trends. This may have been achieved by capitalizing on popular narratives such as artificial intelligence, restaking, or infrastructure layers. However, some projects in this group have failed to maintain momentum and have experienced a decline over time as user interest wanes.

A similar trend is observed for projects that rely heavily or solely on extrinsic motivation mechanisms, such as points systems and promises of airdrops, to attract and retain users. While these strategies can generate initial interest and participation, they often fail to foster long-term commitment. Once the points program ends or the tokens are airdropped, users migrate, having no intrinsic reason to stay.

Overall, projects that rely solely on hype or extrinsic rewards tend to attract a fleeting user base. Additionally, without tangible innovation, these projects do not contribute significantly to the overall growth and maturation of the crypto ecosystem.

Focus on Providing Real Value

To achieve sustainable growth, projects must focus on providing real value to users. In this report, we loosely define “real value” as products or projects that provide tangible benefits. This could be in the form of offering a strong use case, providing sustainable yield, or other forms of tangible rewards. We go into more detail in the next section.

The objective of delivering real value is to keep users engaged beyond the initial phases of hype, so that they continue using the platform even without extrinsic rewards. Over time, such a user-centric approach fosters loyalty and encourages users to promote the platform to others, creating a growth flywheel.

Figure 1: Attract, engage, and delight users to create a growth flywheel

Effectively, by developing solutions that address genuine needs and offer intrinsic benefits, projects can build a loyal user base that remains engaged beyond temporary incentives. This approach not only ensures the longevity of individual projects but also fosters a healthier, more resilient crypto market. In the long run, the success of the crypto ecosystem will depend on the ability of projects to deliver meaningful value and drive continuous innovation.

Different Aspects of Real Value

As stated above, we loosely define “real value” as products or projects that provide tangible benefits. There are several ways to deliver value to market participants, but we have highlighted three broad areas:

• Real Demand: This refers to offering a product or service that fulfills a genuine need or use case sought after by users.

• Real Revenue/Earnings/Cash Flows: This pertains to achieving financial sustainability, typically by generating fees.

• Real Yield: This refers to providing yields to token holders that are generated from tangible sources of revenue.

1. Real Demand

Real demand is reflected in the willingness and ability of crypto participants to use and pay for specific products or services, even without the presence of extrinsic rewards (e.g., promise of airdrops, points farming, etc.). This is typically achieved through a strong product-market fit, which involves addressing a market gap or need, or offering a valuable feature and use case that resonates with many users.

Achieving a strong product-market fit creates intrinsic demand, enabling a project to generate enduring revenue. This, in turn, contributes to the project's longevity by providing the necessary resources and user traction for continued development and innovation, meeting the evolving needs of end users.

We have witnessed real demand in long-standing sectors that continue to experience growth in user traction and financial metrics. DeFi exemplifies this trend, establishing itself as a vital part of the crypto economy with projects delivering indispensable use cases:

• Decentralized Exchanges (“DEXes”) provide the infrastructure for users to perform on-chain swaps between tokens.

• Liquid Staking allows users to maintain liquidity while staking assets.

• Money Markets enable peer-to-peer lending and borrowing of assets.

• Bridges facilitate the transfer of assets between different chains.

• Stablecoins provide a stable store of value in the form of a crypto asset, which can be further utilized in payment services.

Beyond DeFi, we have also observed substantial user traction in emerging categories which have managed to capture strong market demand:

• Centralized Exchanges provide an integrated suite of tools, including on-ramping, spot and margin trading, earn products, and Web3 wallets.

• Telegram Trading Bots enhance the on-chain trading experience, capturing the strong demand for memecoin trading by making the process more accessible and seamless.

• Prediction Markets enable participants to trade shares or tokens based on the outcomes of future events, such as political elections, sports events, and pop culture happenings.

• Games capture real demand from a vast pool of gamers which extends beyond the crypto crowd, further introducing innovative in-game economics

• On-Chain Analytics Tools collect, organize, and transform raw blockchain data into actionable insights, with some offering additional features through paid subscriptions.

This list is not exhaustive and is provided solely to illustrate the continued user traction and growth they have displayed over time.

It is crucial to distinguish between projects with strong product-market fits which provide real lasting value, and those with unsustainable growth potential that rely on fleeting interest and artificial demand without addressing real problems.

2. Real Revenue and Profit

Real revenue refers to tangible income generated by a project, commonly sourced from protocol fees. When combined with healthy tokenomics, projects that consistently generate revenues covering operating expenses are able to achieve profitability and operate sustainably in the long run without raising external capital.

The profitability of a project can be calculated as follows:

Profit = Revenue - Operating Expenses - Token Emissions

Profit is derived by subtracting operating expenses and token emissions from the total revenue earned by the project. As we can observe, it is not solely about revenue; a project can only achieve profitability if its total revenue exceeds its costs, which include operating expenses and token emissions.

Figure 2: Top Ten protocols based on 30D profitability

Based on the last 30 days of data, the leading protocols in terms of profitability (within Token Terminal’s sample dataset) are Tron, Maker, and Uniswap. 

On the other end of the spectrum, while some projects may be able to generate substantial revenue, they may actually be operating at a net loss due to high token emissions or supply-side incentives. Needless to say, we do not think it is reasonable to demand instant profitability for all protocols, given that most protocols are barely a couple of years (or months) old. Referencing traditional early-stage startups, operating at a loss in initial phases to bootstrap growth is common and may work out in the long term. That said, investors should evaluate and determine if there is a viable path to profitability in the foreseeable future.

3. Real Yield

Real yields are generated from tangible sources of revenue and are not solely reliant on inflationary token emissions. This can be likened to dividends in traditional finance, where a company returns part of its earnings to shareholders. Similarly, in the crypto economy, “real yield” functions as a mechanism to distribute real earnings to its token holders or users. This usually comes in the form of staking rewards, token repricing, or buybacks and burns.

By delivering real yield, crypto projects align themselves with stakeholders by providing returns to token holders. Examples include DEXes that provide yield to liquidity providers derived from transaction fees, liquid staking and restaking protocols that distribute yields from staking rewards, and synthetic dollar and stablecoin protocols that generate yields from underlying assets (e.g., treasury bills).

Figure 3: An illustration of how DEXes may distribute real yield

On the other hand, there are also a handful of native tokens whose only utility is governance. While there is nothing fundamentally wrong with this, and these tokens are crucial for the functionality and decentralization of projects, they often do not provide direct financial returns to their holders. The absence of real yield means that their value is primarily tied to their utility and the success of the underlying project.

Finally, investors should also take note of tokens that derive their yield primarily through inflationary token emissions. Such tokens tend to attract mercenary capital and are unsustainable in nature. Tokens with high inflationary incentives experience a constant increase in token supply, resulting in an imbalance in supply-demand dynamics over time. Without a corresponding increase in token demand, token prices would fall. Instead, there should be a focus on yield distribution models that provide tangible returns without relying on inflationary tactics.

Closing Thoughts

As we continue to witness innovation in the crypto economy, it is essential to understand the fundamental business models that differentiate long-term sustainable projects from short-term hype. In this nascent and cyclical market, projects that provide real value by demonstrating strong product-market fit, consistent revenue/earnings growth, and real yield have a higher probability of withstanding the test of time.

In contrast, projects driven by fleeting trends or speculative interest may experience rapid initial growth but often lack the foundational elements needed for sustainability. Without a clear value proposition and a solid business model, they have a higher probability of faltering when market enthusiasm fades. 

To achieve long-term growth, we hope to see more projects prioritize delivering real value and tangible benefits to users.