Title: The fallacy of daily active addresses
Author: Donovan Choy, Blockworks
Translated by: TechFlow
Better use of Blockchain metrics
Blockchains generate a wealth of public data. On Crypto Twitter, people constantly compare Blockchain A to Blockchain B, with investors, researchers, and key opinion leaders (KOLs) having many metrics to reference as they argue their positions. However, misusing these numbers often leads to a muddled understanding of the space.
In today's 0x Research article, we'll explore three metrics and the issues with them: active addresses, blockchain "profitability," and total value secured.
Active Addresses
An "active address" refers to how many active, paying users are on a given protocol.
"Facebook has 3 billion monthly active users" is a useful piece of information that tells us something about the social network. Since spam senders don't have enough profit incentive to flood Facebook, active addresses are a decent way to gauge the platform's real value to consumers.
But for Blockchains, where creating new wallets is trivial and the opportunities to profit from airdrops or protocol incentives are evident, the value of active addresses is less compelling.
For example, the chart below shows a clear case: Solana had the most daily active addresses in the past month, making Solana look very active.
Source: Token Terminal
Most Solana users are trading on decentralized exchanges (DEXes), so we need to look closely at activity on DEXes. When we dig into Solana's active addresses on its DEXes, we find that most addresses - around 3.4 million out of 4.4 million total - have lifetime transaction volumes of less than $10.
This suggests that due to Solana's low transaction fees, there may be a lot of spam or bot activity, rather than a large number of "quality" users.
Source: Blockworks Research
This is another example I mentioned earlier: Celo L1 (now L2) saw a spike in its daily active addresses sending stablecoins to 646,000 in September, surpassing TRON, catching the attention of Vitalik Buterin and CoinDesk.
Upon deeper analysis, Variant Fund's data analyst Jack Hackworth found that 77% of Celo addresses were transferring amounts less than two cents, primarily due to thousands of users receiving tiny amounts of funds through a universal basic income protocol called GoodDollar. In both cases, active addresses showed high usage, but upon closer inspection, the claim does not hold up.
For more on this, check out Dan Smith's research, which focuses on the misuse of daily active addresses.
Blockchain Profitability
Instead of focusing on active addresses to study Blockchain activity, it's better to look at network fee metrics. Fees reflect the total gas consumption on the protocol, without the "quality" user problem.
Fees are often used by analysts and investors to judge which Blockchains generate the most "revenue." We then view the token issuance paid to validators as the cost. The result is the Blockchain's "profitability."
This is how Token Terminal generates "financial statements" for crypto protocols. For example, the chart below shows that ETH L1 accumulated millions in losses over the past two months.
Source: Token Terminal
The only problem is that this calculation fails to account for a key factor: unlike PoW chains (like Bitcoin), users on PoS chains can easily earn token issuance rewards.
After all, if I can get a 5% ETH/SOL staking yield from platforms like Lido or Jito, why would I care if the network is "unprofitable"? So concluding that "Ethereum is unprofitable" by treating token issuance as a cost is problematic.
In the real world, inflation is harmful because when central banks print money, the increased money supply reaches different economic participants at different times, and those who receive the new money first benefit before "real" prices adjust. This is known as the Cantillon effect.
In a PoS Blockchain economy, this is not the case, as inflation (i.e., token issuance) is accrued simultaneously by everyone. So no one becomes richer or poorer as a result - everyone's wealth stays the same.
Instead, we can consider using a metric called Real Economic Value (REV). REV combines network fees and MEV tips paid to validators, but does not treat token issuance as a cost.
Based on this, we can see that Ethereum has actually been profitable over the past two months:
Source: Blockworks Research
REV can be said to be a better metric for assessing the real demand for the network, and a more comparable revenue metric to traditional finance (TradFi).
In summary, the traditional profit and loss accounting approach does not translate easily to Blockchains.
To learn more about this complex topic, check out the recent Bell Curve podcast I participated in with Jon Charbonneau.
Total Transaction Value (TTV), not Total Value Secured (TVS)
Oracles are the critical infrastructure for Blockchains to access off-chain data. Without Oracles like Chainlink, Blockchain economies cannot reliably reflect real-world prices.
The common way to compare Oracle provider market share is to use the "Total Value Secured" (TVS) metric, which aggregates all the TVL secured by Oracles. This is how defillama explicitly calculates it:
Source: defillama
The problem with TVS is that it obscures the actual activity secured by Oracles.
For example, Oracles supporting high-frequency trading products (like perpetual contract exchanges) constantly "pull" price updates from off-chain data sources at sub-second latencies.
This contrasts with the "push-based" Oracles used for lending protocols, which only need to update prices on-chain a few times a day, as they don't require frequent updates.
TVS focuses on the total value managed by Oracles, but ignores the performance intensity of Oracle providers.
In other words, it's like saying a fancy steak and a simple salad are equally valuable to a diner because they're both priced at $50 on the menu. But clearly, the work required to produce the steak is far greater than the salad, which is a factor worth considering.
An alternative metric is Total Transaction Value (TTV), which accounts for the periodic transaction volume using Oracle price updates.
TTV excludes low-frequency applications like lending, CDPs, and restaking, but as Ryan Connor explains, "only 2-9% of Oracle price updates come from these low-frequency protocols, which is a small fraction in the crypto space, where the volatility of the base metrics is high."
When evaluated by TTV, the market share landscape changes significantly.
To learn more, check out the Blockworks Research report on how TTV better reflects Oracle fundamentals.
