Looking at price and market cap is too speculative! Coinlist executive tells you what are the useful Web3 indicators.

Coinlist, a token sales platform known for its rigorous standards, has come into contact with over a thousand blockchain projects in the past, but less than 30 projects have been able to issue tokens on its platform. Recently, their marketing director, Alex Topchishvili, published an article sharing the criteria for investing in Web3 projects.

This article is a summary of the key points. For more information, please refer to the original article.

Truly Useful Web3 Native Metrics

Among the over 9,000 Web3 projects today, most claim to be open-source and permissionless, even issuing their own tokens to cater to centralized operating models. However, Alex Topchishvili believes that many of these projects have devolved into a kind of ideology, where despite the use of terms like "protocol" or "DAO," people ultimately want to see continuous product expansion and development.

Furthermore, Alex Topchishvili believes that in this sea of projects, people often place too much emphasis on "market value" and "price," viewing these two data points merely as speculative value, unable to determine long-term success.

Here, we will introduce the Web3 native growth metrics identified by Alex Topchishvili, divided into three categories: DeFi, Layer1 and Layer2, and Play-to-Earn (P2E) games.

DeFi: Enhancing Overall Value through Capital Inflows and Integration

Most DeFi projects are developed by a centralized development team, with operational management rights distributed to a decentralized community of token holders. Key growth metrics include:

1. Total Value Locked (TVL): TVL has always been an important metric for measuring DeFi protocols, representing the overall value of encrypted assets stored in the protocol. However, its importance varies for different types of protocols. For lending protocols like Aave or Compound, it is indeed significant, but for decentralized exchanges like Uniswap that primarily measure growth through trading volume, its utility is less significant.

Additionally, it is common to see DeFi farmers or whales shifting assets in pursuit of high yields, making TVL unable to accurately reflect the protocol's level of utilization. Nevertheless, it remains a good confidence indicator, as locked assets have tangible value and incur opportunity costs for other productive uses.

2. Number of Active Wallets: In the DeFi space, users can engage in buying, selling, and staking simply by connecting their wallets. The importance of daily active wallets and monthly active wallets is akin to daily active users (DAU) and monthly active users (MAU) in traditional markets.

3. Integration Quantity: Due to the composability of DeFi apps, they can interact and build with other dapps. Therefore, the quantity and quality of dapps integrated with other wallets, exchanges, and DeFi products are important growth indicators. More developer activity drives project growth and promotes leadership in the market.

Layer1 and Layer2: Achieving Growth through Developer Action

Layer1 refers to fundamental blockchains like Ethereum, Solana, Near, Avalanche, and Flow, while Layer2 includes solutions like Polygon as a sidechain or scaling solutions built on Layer1. Their growth primarily comes from protocols built on top of them, with key indicators including:

1. Number of Developers and Apps: Both Layer1 and Layer2 are open-source, allowing anyone to build on them and integrate with them, making this metric crucial. Quantifying the number of developers can be done by examining the developer environment and the number of active users in Github repositories. The greater the attraction of dapps to users and investors, the faster the growth.

For instance, Flow increased from 50 dApps in December 2020 to around 650 dApps by the end of 2021. Projects based on Flow raised over $700 million last year, contributing significantly to transaction growth and user adoption.

2. Number of Active Wallets: Most Layer1 and Layer2 have their own crypto wallets, allowing users to connect and operate with dapps. This concept mirrors that of DeFi, where the number of daily active wallets and monthly active wallets is equally vital, relying on third-party wallets like Metamask for Ethereum, Blocto for Flow, and Phantom for Solana as the main hubs for user assets within the protocol ecosystem.

3. Total Number and Scale of Transactions: Total number of transactions, large transactions exceeding $100,000, and total transaction volume for specific protocols are good indicators of blockchain network usage, primarily driven by the demand for currency exchanges. The USD value of total transaction volume can be used for comparison with competitors to assess market share.

P2E Games: Achieving Growth through Partnerships and User Incentives

Play-to-Earn (P2E) games allow users to earn additional token rewards while playing, with in-game assets mostly managed by players in the form of NFTs that can be traded on external secondary markets, breaking free from traditional game limitations. Additionally, some tokens even come with governance functions, allowing players to participate in the game's development direction. Although current P2E games have yet to prove a sustainable token model, there are key reference metrics:

1. Number of Active Players: Daily or monthly active user counts are crucial metrics for measuring game growth and popularity. While rich game content is a key to success, a game with rich content but few users will become worthless; retaining an active participant base is essential.

For example, Axie Infinity built on the Ronin chain saw its average daily users drop from around 120,000 to about 20,000 in the past six months due to a decline in earnings from its in-game token SLP.

2. Monthly Transaction Volume per User: This metric refers to the average amount of funds transferred by each player, reflecting user engagement and token design rationality. The growth of this metric is key to revenue growth. When evaluating projects, it is best for the average transaction volume per user to remain stable and seek continuous growth.

3. Number and Quality of Game Guild Collaborations: In Web3 games, user referrals and guild collaborations can effectively increase user counts. Guilds like Yield Guild Games, Good Games Guild, and Merit Circle lend game assets to new players who may not afford them, helping P2E games gain more daily active users through scholarships, online marketing, and direct investments.

These guilds also evaluate the game's condition when choosing to invest in a game, considering factors like game quality, community strength, and the robustness of the game economy.

Conclusion

Looking at the metrics from the various sections above, Alex Topchishvili places greater emphasis on user growth and the ability to create stable cash flows. Each of these metrics carries different warnings and limitations, but they do indeed indicate the development direction of Web3 projects. Understanding them will help evaluate the current health of projects to make more informed investment decisions.