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January 26, 2023
‘why use a blockchain.’”3
If a cryptoasset has a high rate of supply issuance, as bitcoin did in its early days, then that can erode the asset’s value if its utility isn’t growing in line with expectations. The total planned supply of the asset is also integral to the cryptoasset’s individual units preserving value over time.
consider if the distribution is fair. Remember that a premine (where the assets are mined before the network is made widely available, as was the case with bytecoin) or an instamine (where many of the assets are mined at the start, as was the case with dash) are both bad signs because assets and power will accrue to a few, as opposed to being widely distributed
the most important aspect is that the issuance model fits the use case.
blockchain architecture as a stack of hardware, software, applications, and users.
Specific metrics can be investigated from each of these four layers that will reveal the ongoing growth of an operating cryptoasset, or lack thereof.
One of the most important, but often overlooked, indicators of a cryptoasset’s ongoing health is the support of the underlying security system. For proof-of-work based systems, such as Bitcoin, Ethereum,1 Litecoin, Monero, and many more, security is a function of the number of miners and their combined compute (or hashing) power.
The only way attackers can process invalid transactions is if they own over half of the compute power of the network,
The best way to prevent this attack from happening is to have so many computers supporting the blockchain in a globally decentralized topography that no single entity could hope to buy enough computers to take majority share.
more hash rate signifies more computers are being added to support the network, which signifies greater security. This typically only happens if the value of the cryptoasset and its associated transactions are increasing, because miners are profit-driven individuals.
As of March 2017, a 230 megahash per second (MH/s) mining machine could be purchased for $4,195,3 and it would take 70,000 of these machines to recreate Ethereum’s hash rate, totaling $294 million in value.
Using $660 million for Bitcoin and $294 million for Ethereum, while the network values for the two cryptocurrencies are respectively US$17.1 billion and $4.7 billion, we get a range of 3.9 cents to 6.3 cents of capital expenditure per dollar secured by the network.
it’s often not appropriate to directly compare the hash rate of different cryptoassets to judge relative security, because the type of machines providing the hash rate can vary among different blockchains,
Different hash functions are suitable for different kinds of chips, be they CPUs, GPUs, or ASICs, and these chips come in computers that vary in cost.
Therefore, $1,000 will purchase more hash rate for a Bitcoin computer than an Ethereum computer, and it is this dollar value that’s most important in deterring attackers from attempting to recreate the network.
A way to quantify the decentralization is the Herfindahl-Hirschman Index (HHI), which is a metric to measure competition and market concentration.
For the HHI, anything less than 1,500 qualifies as a competitive marketplace, anything between 1,500 to 2,500 is a moderately concentrated marketplace, and anything greater than 2,500 is a highly concentrated marketplace.
Figure 13.6 shows that both Bitcoin and Ethereum qualify as competitive marketplaces, while Litecoin is a moderately concentrated marketplace.
The centralization of miners in different blockchain networks varies over time depending on how much growth the cryptoasset experiences and the evolution of the compute infrastructure to support it. For example, Figure 13.7 is a graph of Bitcoin’s HHI index over time.
also important to know how geographically distributed the computers are
if the miners for a cryptoasset are all in a single country, then that cryptoasset could be at the mercy of that nation’s government.
People are often confused when they see Figure 13.8 as the United States and Germany have the most Bitcoin nodes, while China is lower in the list, which at face value seems to contradict the idea that most miners are in China. Not all nodes are made equal. A single node could have a large number of mining computers behind it,
the combination of geographic node distribution and hash rate concentration amongst the nodes
while a graph can be seen on contributions, sometimes more contributions can be a negative factor if it was associated with a major bug being found in the software and developers rushing to fix it.
CryptoCompare has sought to amalgamate developer activity and metrics to make it easier to compare the different cryptoassets.
Code Repository Points,12 which they explain as follows: “Code Repository points are awarded as follows: 1 for a star, 2 for a fork (somebody trying to create a copy or just play with the code), and 3 for each subscriber.”
However, what’s unfair about this metric is that bitcoin has been around for over eight years, while other cryptoassets have been around for a fraction of that time. Standardizing for the amount of time the cryptoassets have been under construction yields the graph in Figure 13.10.14
we take the total network value of a cryptoasset and divide it by the cumulative repository points, the idea being that a certain amount of work has gone into creating each cryptoasset, begging the question, “What is the dollar value per repository point?”
Another good site for monitoring overall developer activity is OpenHub.15 For example, OpenHub shows the number of lines of code that have been written for a project, as shown in Figure 13.12.
One of the best metrics we have found as a proxy for company support is the number of exchanges that support a cryptoasset.
the last exchanges to add a cryptoasset are the most regulated exchanges, such as Bitstamp, GDAX, and Gemini.
Another good proxy for the increased acceptance of a cryptoasset and its growing offering by highly regulated exchanges is the amount of fiat currency used to purchase it.
As cryptoassets grow in diversity, so too do their trading pairs with fiat currencies,
Data sourced from CryptoCompare
In the one-year period from March 2016 to March 2017, ether went from being traded 12 percent of the time with fiat currency to 50 percent of the time.
A number of metrics can assess the state and rate of mainstream adoption.
Number of users • Number of transactions propagated on the blockchain • Dollar value of those transactions • Valuation metric, which is the network value of a cryptoasset divided by its daily dollar transaction volume
It should be noted that many of these numbers are not easily accessible for the other cryptoassets because they are still in their very early days,
While the chart shows an exponential trend, there are a few drawbacks to this metric. For one, it only shows the growth of Blockchain.info’s wallet users, but many other wallet providers exist.
In the first quarter of 2017, Bitcoin was processing over $270 million per day, which translates to $188,000 per minute or $3,100 per second.24
How does this compare with other coins and with other psyment mechanisms like visa/mastercard and amex and paypal and square?
One valuation method we’re considering is to calibrate how much the market is willing to pay for the transactional utility of a blockchain.
divide the network value of a cryptoasset by its daily transaction volume. If the network value has outpaced the transactional volume of that asset, then this ratio will grow larger, which could imply the price of the asset has outpaced its utility.
For cryptoassets we put forth that the denominator of valuation should be transaction volumes, not earnings, as these are not companies with cash flows.
looking at Figure 13.21, it appears that bitcoin has a comfortable base when its network value is 50 times its daily transactional volume. Maintaining a price that keeps the ratio near 50 could indicate that the asset is being fairly priced, and wide swings beyond that range can signal bearish or bullish trends.
Can this same metric and level apply to other coins?
such a breakout accompanied by high trading volume is a buy signal as it signifies something notable has happened to push the market to value the asset more richly. Often, previous resistance lines will become support lines
Similarly, a prior line of support can become a point of resistance if the asset crashes through its prior support
If bitcoin prices enjoy an uptrend, but the currency’s upward movements take place amid weak volume, this could mean that the trend is running out of gas and could soon be over.
Similarly, a falling price with increasingly strong volume indicates capitulation as traders are rushing for the exits, whereas a falling price on low volume is of less concern.
the protocol layer must be directly monetized for the applications on it to work. Bitcoin is a good example. The protocol is Bitcoin itself, which is monetized via the native asset of bitcoin. All the applications like Coinbase, OpenBazaar, and Purse.io rely on Bitcoin, which drives up the value of bitcoin. In other words, within a blockchain ecosystem, for the applications to have any value, the protocol needs to store value, so the more that applications derive value from the protocol, the more the value of the protocol layer grows.
Debevoise & Plimpton LLP, produced a document called, “A Securities Law Framework for Blockchain Tokens.”
