As part of a16z’s State of the Crypto Industry 2024 report, our team spent a lot of time trying to assess the crypto industry. As the industry matures and more applications come online, we want to understand how many users are actually using cryptocurrencies.
This is a delicate issue because the most obvious and easily quantifiable usage metric – active addresses – can easily be manipulated. So below we share our thoughts.
In traditional software, the concept of "user" is well understood. Of course, there are many ways to evaluate user quality—in fact, the entire growth analysis industry is dedicated to this—but at the most basic level, users can be summarized as “daily active users” (DAU), “monthly active users”, and “monthly active users”. User" (MAU), etc.
In the crypto industry, things are trickier. This is because on the blockchain, user identities are anonymous. It is easy for one person to create and control so-called sybils on the blockchain - a set of different identities called "public addresses". (There are many perfectly legitimate reasons to do this, such as for privacy, security, or other purposes.) So it's hard to know how many addresses a person can use. (The reverse is also true, as multiple people can use a single address through multi-signature wallets, omnibus accounts, and various account abstraction protocols.)
Until recently, the most popular blockchains had very limited capacity, which resulted in high transaction fees. This creates a natural barrier to launching and using hundreds or thousands of addresses, as doing so would cost a lot of money. But recently, crypto infrastructure has become more scalable — through Layer2 Rollups and the new high-throughput Layer1 — which has reduced transaction costs to near zero on many blockchains.
But for traditional web applications, isn’t the cost of creating multiple identities close to zero? In most cases, this is true. For example, it is very easy for a person to create and use multiple email addresses. But the key difference is that in cryptocurrencies, there are strong incentives for this behavior.
The crypto industry has long rewarded early adopters of protocols with tokens. Today, new protocols typically launch their circulating token supply through an “airdrop”—a bounty event that provides token incentives to a predefined set of addresses. These address lists are typically derived retroactively from historical on-chain transaction records. Some people may try to game the system by creating many different identities and using them to conduct transactions. In the industry, this strategy is often called "airdrop."
Given these behaviors, it's clear that the 220 million monthly unique active addresses we measured in September 2024 does not directly translate to 220 million individuals or users. (Note that addresses active on multiple EVM chains will only contribute once to the total of 220 million.)
So how many active users are there? 10 million? 50 million? 100 million? This is the question we want to answer. Here's more information about our approach.
Method 1: Filter active addresses
One approach we take is to filter out addresses suspected of being controlled by bots or witches. Using on-chain analytics and forensics, we explored multiple methods to achieve this:
Filter out addresses that receive funds from dispersion contract sources – a smart contract whose sole purpose is to receive funds and automatically distribute them to many different addresses. While there may be some false positives, this activity implies that the targeted addresses all received funds from a single source and are therefore related to each other in some way.
Filter out addresses with balances close to zero at both the beginning and end of a given period. For example, if you are looking for real monthly active users in September 2024 - you could try to eliminate addresses with balances close to zero on both September 1st and September 30th. This standard means that these addresses are temporary in nature. While bots and witches may seek to "clear" their balances after taking action, real human users often want to keep some balance in their wallets to cover future transaction fees.
Distribution of addresses with one, two, three, four, five or more transactions during the analysis period. Addresses with only one or two transactions during the period are at best a low-quality user and at worst a bot or witch. This method works best when aggregated over longer periods of time.
Filter out addresses that have performed a large number of transactions in a short period of time. A human using a wallet or app interface can only reasonably process a certain number of transactions in a given time period, whereas a bot can transact at a much higher frequency.
Optimistically include addresses tied to identity protocols that require some setup costs. For example, addresses with ENS names, Farcaster IDs, and other linked social identities are likely to be real human users.
These are just some of the patterns on the chain that may indicate bot-like behavior. This is by no means an exhaustive list and we welcome your suggestions based on the above.
Method 2: Infer based on wallet users
Another way to estimate monthly active users is to look at off-chain data sources. The most obvious place to start is with wallet users.
In February 2024, popular crypto wallet MetaMask reported 30 million monthly active users. They define monthly active users as "people who have loaded a page in the MetaMask extension or opened the mobile app at least once during any consecutive 30-day period."
Assuming we want to estimate the number of trading users, the next step is to determine what percentage of MetaMask users actually make transactions. In 2019, MetaMask reported that about 30% of active users confirmed on-chain transactions on a given day. (This is the latest available estimate.) If we apply this ratio to MAU, we find that there are approximately 9 million monthly users transacting through the MetaMask wallet product.
Next, we need to understand MetaMask’s total wallet market share across all blockchains. While these exact numbers are not easy to come by, we can make some educated guesses based on what we know. For example, we have a good estimate of MetaMask’s market share in mobile wallets based on data from mobile analytics firm Sensor Tower. (Due to commercial services agreements, we cannot reveal specific numbers here.)
Once we have MetaMask's estimated market share, we can simply extrapolate an estimate of the total number of cryptocurrency users based on the 9 million monthly active users we derived earlier. We can then compare it to the results from method one to see if it's at least in the same range.
We can further refine our estimates by analyzing data from other wallets and infrastructure providers who are willing to share their proprietary metrics with us, and then cross-check with the numbers derived above.
Other considerations
It is important to consider that some people use multiple addresses and wallets for transactions. This is unlikely to increase the number of digits significantly (because unlike robots and witches, there is a certain upper limit to the number of wallets one can reasonably use), but based on some reasonable assumptions, further deduplication may be worthwhile.
On the other hand, there are situations where a single address can be associated with multiple human users. An exchange integrated account is one example. By the way, this is all going to get more complicated with the proliferation of account abstraction protocols and smart contract wallets. We did not consider these factors in our analysis.
Final estimate: actual monthly transaction users are 30 to 60 million
Based on our analysis using a variety of methods described above, we estimate that there are currently between 30 million and 60 million real crypto users per month. Obviously, that's a wide range, but it's the best estimate we have based on the available data.
Note that this represents only 14-27% of the 220 million monthly active addresses we measured in September. This also represents only 5-10% of the 617 million global cryptocurrency holders reported by Crypto.com in June. (Global cryptocurrency holders are people who own cryptocurrency but don’t necessarily transact on-chain.) This disparity points to the need to convert existing, mostly passive, cryptocurrency holders into active use The opportunities for investors are huge. Dormant cryptocurrency holders may reemerge as on-chain users as major infrastructure improvements enable new, compelling applications and consumer experiences.
Estimating the number of active crypto users is difficult, but by using some of the methods detailed in this article, you can start to come up with a reasonable estimate.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: (Foresight News)
Original article by Maren Matsuoka and Eddy Lazzarin, a16z
Compiled by: Golden Finance
