Author: Mario Laul, Researcher at Placeholder Source: Placeholder Translation: Shan Ouba, Golden Finance

Decentralized public blockchain networks have been around for about 15 years, and the associated crypto assets are currently experiencing their fourth major market cycle. Over the years, and especially since the launch of Ethereum in 2015, a great deal of time and resources have been spent on theoretical research and developing applications on these networks. While impressive progress has been made in financial use cases, other types of applications have struggled, largely due to the complexity of providing a scalable and seamless user experience within the constraints imposed by decentralization and fragmentation between different ecosystems and standards. However, recent technological advances within and outside the blockchain industry have not only made a wider range of applications more feasible,

Blockchain’s early adoption was driven by a rather narrow definition of its core functionality: enabling the secure issuance and tracking of digital value without reliance on centralized intermediaries such as traditional financial or government institutions. Whether we’re talking about fungible tokens native to the blockchain (such as BTC and ETH), on-chain representations of off-chain assets (such as national currencies and traditional securities), or non-fungible tokens (NFTs) representing artwork, in-game items, or any other type of digital product or collectible, the blockchain keeps track of these assets and allows anyone with an internet connection to transact with them globally without having to touch centralized financial rails. Given the size and importance of the financial sector, especially in the context of growing digitization,

Within this narrow framework, there are currently five types of blockchain applications with meaningful product-market fit, beyond the underlying asset ledgers and the decentralized networks that maintain them: applications for issuing tokens, applications for storing private keys and transferring tokens (wallets), application tokens for trading (including decentralized exchanges, aka DEXs), applications for lending tokens, and applications that make tokens have a predictable value relative to traditional fiat currencies (stablecoins). As of this writing, Coingecko, a popular cryptocurrency market data aggregator, lists over 13,000 individual crypto assets with a total market cap of around $2.5 trillion and daily trading volume of over $10 billion. Nearly half of that value is concentrated in a single asset, BTC, with the vast majority of the other half spread among the top 500 assets. But the very long and growing tail of tokens, especially once NFTs are included in the mix, shows how much demand there is for blockchain as a digital asset ledger.

According to recent estimates, around 420 million people worldwide hold crypto tokens, though many of them may have never or rarely interacted with decentralized applications. Leading hardware wallet manufacturer Ledger reports around 1.5 million monthly active users for its Ledger Live software, while popular software wallet providers MetaMask and Phantom claim around 30 million and 3.2 million monthly active users, respectively. Combined with daily DEX volumes of around $5-10 billion, on-chain lending markets with a capital value locked in around $3-35 billion, and a stablecoin market cap of around $130 billion, these figures represent the current level of adoption for the five applications mentioned above—still low relative to traditional finance and fintech, but still significant. Granted, these figures should be viewed in the context of the recent surge in crypto asset prices, but as blockchains become increasingly legitimized through regulation (the approval of spot Bitcoin ETFs and tailored regulatory frameworks such as Europe’s MiCA are recent notable examples), they are also likely to continue to attract new capital and users, especially in the context of increasing integration with traditional financial assets and institutions.

But tokens, wallets, DEXs, lending, and stablecoins are just the tip of the iceberg when it comes to applications that can be built on top of general-purpose programmable blockchains. One way to measure blockchain adoption is to consider blockchain not only as an enhanced asset ledger, but also as a more general alternative to centralized databases and web application platforms, excluding these five applications from the analysis. It is worth noting that while the number of developers worldwide is approaching 30 million according to the latest Crypto Developer Report, the number of monthly active developers building on public blockchains is still less than 25,000 according to Electric Capital, with only about 7,000 of them full-time developers. These numbers suggest that blockchain is currently far from being able to compete with traditional software platforms when it comes to attracting developers. However, the number of developers with at least 2 years of cryptocurrency experience has increased for five consecutive years, the industry has multiple network-specific ecosystems with 1,000+ contributors each, and has attracted 90B+ in venture capital in the past 6-7 years. While the vast majority of funding is indeed going into building the underlying blockchain infrastructure and core decentralized finance (DeFi) services (the backbone of the emerging on-chain economy), there is also considerable interest in use cases for core applications where utility is non-financial, such as online identity, gaming, social networking, supply chains, IoT networks, and digital governance, etc. How successful have these types of applications been in the context of the most mature and widely used smart contract blockchains?

There are three main metrics that can be used as proxies for the level of interest in specific blockchains and applications: daily active addresses, daily transactions, and daily fees paid. An important caveat in interpreting these metrics is that they can all be artificially inflated with relative ease, and therefore represent the most generous estimates of organic adoption. According to on-chain data aggregator Artemis, six networks have performed well in all three metrics over the past 12 months (each network ranked in the top 6 for at least two): BNB Chain, Ethereum, NEAR Protocol, Polygon (PoS), Solana, and TRON Network. Four of these networks (BNB, Ethereum, Polygon, TRON) are using a version of the Ethereum Virtual Machine (EVM), thereby benefiting from the extensive tooling and network effects around Solidity, a programming language created specifically for the EVM. Both NEAR and Solana have their own native execution environments, both based largely on Rust, which, despite being more complex, offers various performance and security advantages over Solidity, as well as a thriving ecosystem outside of the blockchain industry.

On-chain activity on all six networks is heavily concentrated in the top 20 applications, beyond which daily active addresses (an inflated proxy for daily active users) drop into the thousands or even hundreds, depending on the network. As of March 2024, on a typical day, the top 20 applications account for 70-100% of activity across all three metrics, with the highest concentrations on Tron and NEAR and the lowest on Ethereum and Polygon. Across all networks, the top 20 is primarily comprised of applications related to tokenization, wallets, and core DeFi primitives (exchange, lending, stablecoins), with no or only a few applications (0-4 per network) falling outside of these three application categories. Excluding bridges that transfer value between different blockchains and marketplaces that trade NFTs (both of which should be included in the asset transfer and exchange category), the few remaining outliers are typically games or social applications. However, in five out of six cases, these applications account for a low share of overall network activity (less than 20% in the best case for Polygon, but less than 10% more often). The only exception is Near, but its usage is very concentrated, with only two apps (Kai-Ching and Sweat) accounting for about 75-80% of all on-chain activity, and less than 10 apps total with more than 1,000 daily active addresses. These apps represent a low share of overall network activity (less than 20% in Polygon's best case, but less than 10% typically). The only exception is Near, but its usage is very concentrated, with only two apps (Kai-Ching and Sweat) accounting for about 75-80% of all on-chain activity, and less than 10 apps total with more than 1,000 daily active addresses. These apps represent a low share of overall network activity (less than 20% in Polygon's best case, but less than 10% typically). The only exception is Near, but its usage is very concentrated, with only two apps (Kai-Ching and Sweat) accounting for about 75-80% of all on-chain activity, and less than 10 apps total with more than 1,000 daily active addresses.

All of this reflects the legacy of blockchain’s early days and further solidifies its core value proposition as a digital asset ledger. Common criticism of blockchains’ lack of applications is clearly unfounded, as their primary function is programmable financialization and secure settlement of tokenized value. Asset issuance, wallets, DEXs (or exchanges more broadly), lending protocols, and stablecoins have such a strong product-market fit simply because they are so closely aligned with this purpose. Given the relatively simple business logic and strong positive feedback loops of these five blockchains, it’s not surprising that the first generation of leading smart contract blockchains tend to be dominated by applications that serve this narrow financial use case.

But where does this place blockchain in terms of the more ambitious vision of blockchain as a general-purpose application platform? For years, the two biggest challenges facing the crypto industry have been (1) scaling blockchains (in terms of throughput and cost), and (2) enabling an effortless user experience without sacrificing the decentralization and security guarantees of the underlying infrastructure. In the context of scaling, a distinction is often made between more integrated and more modular. Solana is often used as an example of the former, while Ethereum and its growing ecosystem of general-purpose and application-specific layer 2 networks (rollups) demonstrate the latter. In fact, the two approaches are not mutually exclusive, and there is considerable overlap and cross-pollination between them. But the more important point is that depending on whether the application in question requires shared state and maximum composability with other applications, or does not care about seamless interoperability while gaining much from full sovereignty over its governance and economy, both are now proven options for scaling blockchains.

Significant progress is also being made in improving the end-user experience of blockchain applications. Specifically, thanks to technologies such as account abstraction, chain abstraction, proof aggregation, light client verification, and more, there are now ways to safely remove some of the major UX barriers that have plagued cryptocurrency for years: having to store private seed phrases, requiring network-specific tokens to pay transaction fees, limited account recovery options, and over-reliance on third-party data providers, especially when navigating between multiple independent blockchains. Combined with the growing decentralized data storage, verifiable off-chain computation, and other back-end services for enhancing the functionality of on-chain applications, the current and upcoming application development cycle will prove whether blockchain will play its primary role as global financial infrastructure, or serve blockchain as something more general. The latter has always been compelling in theory, given the large number of use cases outside of DeFi that would benefit from greater resilience and more user-centric control over data and transactions, such as online identity and reputation, publishing, gaming, physical infrastructure such as wireless and IoT networks (DePin), decentralized science (DeSci), and addressing the issue of authenticity in a world of increasingly AI-generated digital content. Now it is becoming feasible in practice.