Perhaps the single best and most reliable form of adoption that any cryptocurrency investor can study is on-chain analytics, which, as the name might imply, basically involves analyzing the activity that’s occurring on the blockchains themselves.
The thing to understand about public blockchains is that there is an abundance – there is a mountain of data that anyone, as long as they’ve got an internet connection, can access 100% for free, to view and observe precisely what is going on on the blockchain itself. You can use websites called block explorers, and you can think of them almost like the Googles or the search engines of blockchains and cryptocurrencies on them. You can do this for any or most specific cryptocurrencies. For something like Bitcoin, you can use a block explorer called blockchain.info, and for Ethereum, you can use a website like etherscan.io.
Just find whichever block explorer matches with your chosen cryptocurrency, and on these block explorers, you can access data points like the daily number of transactions that are occurring, the number of addresses that are being created, the network hash rate, and the amount of gas (fees) that’s being consumed on smart contract platforms like Ethereum. This all represents a costly signal of real adoption occurring right now in the crypto space.
As a crypto investor, this is your bread and butter – this is something that you should be studying and monitoring more than anything else because that is how you measure success. If you have long-term steady growth of all of these factors, if you have long-term steady growth of the number of transactions that are occurring on regular basis, the amount of gas that’s being consumed, the number of addresses that are being created (which is somewhat like the number of users in the network) – going back to the success rate of network effects and Metcalfe’s law, then you’ll understand why protocols are becoming much, much, much more valuable with all of these metrics that are continuing to increase.
As a cryptocurrency investor, when assessing or judging a project, have a look at these metrics. Have a look at what’s occurring on-chain and see whether the growth of addresses, transactions, and users is steady, flatlining, decreasing, or increasing. Is it increasing in spite of price corrections? Whenever the price is going down and the number of users is going up, that should be insanely bullish because it represents real usage that is growing in negative climate.
So as a cryptocurrency investor, when assessing or judging any project, take a look at some of these metrics yourself. Are the numbers just flatlining, steady, decreasing, or is it actually increasing? If so, that is a bullish sign, and what you really want to look out for if you want to look for something super bullish.
That is where the real 1000x returns can be made because a very fast rate of adoption represents genuine growth and going closer to critical crossover point.
But regardless, not just now but continually, continue to observe the on-chain analytics of every single project that you’re either considering investing in or have already invested.
Fake VS Real Adoption: How to Spot the Difference
Remember when I said how the number of addresses that are being created are somewhat like the number of users in the network? Well one user can have many addresses, and bots can use addresses. For exmaple so called „mixers“ are used to send cryptocurrency through many one time used addresses to mask the source of where it came from or where it is going.
So the idea of just tracking adoption through usage is not black and white. There’s an awful lot of hype around blockchain and cryptocurrencies, and there’s actually a tremendous amount of incentives for groups/projects to try and exaggerate the amount of supposed adoption that’s occurring on their platforms in order to entice long-term investors like ourselves who are searching for investing in coins that have adoption.
Even though there’s no absolute foolproof way of differentiating between genuine and fake adoption, I think the best signal that you can look for is costliness, because costliness represents real skin in the game, and it means that if you want to try and create a facade of real adoption, it becomes incredibly expensive to do so on a large scale.
For this reason on-chain analytics work really great with traditional proof-of-work based protocols like Bitcoin, Litecoin, Monero, or whatever else because whenever someone wants to send a transaction, they have to pay a miner fee. They have to pay amount of money determined by the competitive market in order for that transaction to go through and help with securing the network. So in those kind of cases, that’s great, and you can generally be fairly confident that you’re seeing genuine adoption there because if you were to try and fake hundreds of thousands of transactions, you can imagine just how expensive that would get.
And this is kind of the problem with observing and assessing some of the cryptocurrencies out there because they have a different way of funding the network security. If you were to take a cryptocurrency like EOS, for example, they have free transactions in the sense that you don’t pay a miner’s fee to send a bit of EOS to someone else. Instead, you need to stake some EOS tokens to reserve piece of the netwok capacity for yourself. The way their network is secured or the way that’s funded is through inflation of the currency itself, which is fine. I’m not going to go on critiquing about that, but the point is that it means that it’s quite easy to fabricate adoption because it’s free to make transactions. You could just do that a whole bunch of times, even though you’re not really using it for any particular reason, just to make the adoption figures look much higher than it really is, which is spamming the network.
Solana has a transaction fee of $0.00025 per transaction, which means that for $1 you can make 4000 transactions! There is no real costliness in that, that’s why majority of transactions on Solana are spam transactions. Someone is spending $50 daily to have blockchain with most transactions, who that may be we it’s up to you to guess.
So when observing any cryptocurrency out there and assessing its merits, regardless of the consensus mechanism or how the whole protocol is constructed, just think about this idea of costliness. Ask yourself when observing the number of transactions on a given day on that protocol, for instance, does the user have skin in the game? Does it actually cost money to send an individual transaction?
In which case, that could represent genuine usage, or is it actually very easy on this particular protocol to fabricate and to make it look like there’s much more adoption occurring than there really is? Because as a long-term value investor, you want to be investing in genuine adoption, don’t get caught.