How to evaluate the value of Web3 projects? These indicators play a key role

Over the past decade, we have witnessed an explosion of Web3 projectsbuilding versions of decentralized Web2 platforms and services. Compound is building the Web3 version of Bank of America, Uniswap is the NYSE, Yearn Finance is the decentralized Blackrock, and so on.

In theory,the 9,000+ Web3 projects that exist today promise to be open source, permissionless, and backed by a token economy. However, while many new Web3 projects market themselves as decentralized networks, protocols, DAOs, and dapps, in reality most enterprise products cannot grow without starting to think this way.

Ideology can't be sold long-term, and assigning terms like "protocol" and "DAO" doesn't remove the need to develop and scale products that people actually want to use. In fact, in the case of the Web3 project, their product should be an order of magnitude better than their centralized counterparts to compensate for the significant UX friction of using a product with a cryptographic backend.

But that still leaves the question of how to measure success. Until recently, Web3 projects were primarily judged by two metrics: price and market cap — “speculative value,” if you will. As we know from history, this is not a great proxy for long-term success.

Here are some really usefulWeb3-native growth metrics for three main categories: DeFi, Layer 1/Layer 2, and Play-to-Earn Gaming.

DeFi: Realize value growth through capital inflow and integration

Decentralized finance(DeFi) applications include decentralized exchanges like Uniswap and lending platforms like Compound. Most DeFi projects are developed by a centralized development team, which then seeks to delegate the management of their operations to a decentralized community of token holders. Key growth indicators:

Total Value Locked - TVL has been an OG success metric for DeFi applicationssince the beginning . It represents the overall value of encrypted assets stored in DeFi protocols, and is used for transactions, pledges, and loans. While TVL is an important metric for lending protocols like Aave and Compound, it's less useful for decentralized exchanges like Uniswap, which measure growth primarily by transaction volume. One downside of using TVL to measure long-term growth is that users and traders often jump from one DeFi app to another in search of higher yields, and some giant whales can create the illusion of activity, making TVL not a verysticky Use indicators. However, it's a good indicator of confidence. Locked assets have tangible value and bear the opportunity cost of other productive uses.

Active Wallets — While traditional markets measure Daily Active Users (DAU) and Monthly Active Users (MAU), in DeFi, users simply connect their wallets and start buying, selling, and staking. The simulated measurements of DAU and MAU in DeFi are Daily Active Wallets and Monthly Active Wallets.

Number of Integrations — Since DeFi apps are composable, or able to interact and build with other DeFi apps, another indicator of growth is the number and quality of integrations an app uses across other wallets, exchanges, and DeFi products. Developer activity is key to project growth and market leadership in DeFi.

Layer 1 andLayer 2: Growth through developer activity

Layer 1refers to the base-level blockchains that define projects such as Ethereum, Solana, Near, Avalanche, and Flow. (Layer 2 projects, such asPolygon, sit ontop of existing Layer 1 to provide extensions). The growth of these projects comes mainly from applications built on top of these protocols. Key indicators:

Number of developers and applications — Given that Layer 1 and Layer 2projects are open source, anyone can build on top of them and integrate with them. The number of developers and the number of applications built on a given protocol are probablythe most important growth indicators for L1/L2 projects. A good way to quantify the number of developers contributing to a project is to look at the number of active users in developer environments and repositories like Github. The more traction a spin-off application gains from users and investors, the greater the growth of the underlying project. For example, the Flow blockchain grew from 50 applications in December 2020 to 650 applications by the end of 2021. Flow-based projects raised over $700 million in funding last year and contributed to transaction growth and user adoption of the Flow blockchain.

Number of active wallets - Most L1/L2 projects have their own crypto wallets that allow users to buy, sell, trade, stake, and interact with decentralized applications (dapps) built on top of their infrastructure. As is the case with DeFi, the number of daily active wallets (DAW) and monthly active wallets (MAW) is a key growth indicator. Third-party wallets such as Metamask (Ethereum), Blocto (Flow), and Phantom (Solana) often serve as the main hub for user assets within the protocol's ecosystem.

Transaction volume and size - The number of transactions, the number of large transactions (over$100,000), and the volume of transactions on a given protocol are good indicators of the network's use as a means of exchange (although this is not necessarily the goal of many projects at the end). The dollar share of total transaction volume can also be used to measure market share compared to competitors.

Play To Earn Games: Growth Through Partnerships, Player Incentives

Play-to-earn (P2E) games are video games in which players earn rewards of real-world value. Unlike regular video games, where in-game items are kept on a private data network and owned by the game creator, NFTs enable players to own the unique assets they purchase. Additionally, once players own an in-game asset NFT, they can freely sell it outside of the platform on which it was created, which is not possible with regular games. Players also have a say in the governance of the game itself. While we have yet to see a sustainable model of crypto gaming that can be used as a blueprint for success, here are three useful metrics for evaluating P2E projects:

Active Players - The number of daily (or monthly) active users is a key metric for measuring a game's growth and popularity. While content richness is the key to success, a game with a lot of content but few users will be worthless. Equally important is the project's ability to retain its active participant numbers. For example, on Axie Infinity, which is built on the Ronin chain, the average daily user count has dropped from 120,000 to about 20,000 over the past six months, while revenue from the in-game currency SLP has declined.

Transaction volume per user - This metric refers to the average amount of funds transferred by each player, which reflects user engagement and token design soundness. Growth in average transactions per user is also key to revenue growth. When evaluating projects, look for stability and growth in the average transaction volume per user.

Quantity (and quality) of guild cooperation - In Web3 games, growth and distribution are often achieved through player referrals and cooperation with guilds. A crypto gaming guild is a group of gamers who play games together, share data and in-game assets, and support other gamers. Guilds such as Yield Guild Games, Ancient8, Good Games Guild, and Merit Circle allow new players to get started playing games by lending game assets they might not otherwise be able to afford. They also help P2E games get more daily active users through scholarships, online marketing, and direct investments. Guilds choose which games to support by looking at three factors: the quality of the game, the strength of the community, and the robustness of the game's economy.

in conclusion

AsWeb3 matures, so will the need to understand customers, revenue drivers, and real growth metrics. While the metrics mentioned in this article are not self-explanatory, and often come with different caveats and limitations, they do give a good indication of where Web3 projects are headed. Knowing them will help guide business and product decisions, as well as community incentives. I look forward to various new growth models emerging in Web3, and to the progress of the projects and the metrics that accompany them.