We have been looking at Web3 data all wrong.
The methodology, or lack thereof, created an industry with a high degree of speculation over the past few years.
- Every protocol measures its own economic activity in its own way. It’s nearly impossible for anyone to compare apples to apples across different networks.
- The market cap of any protocol is entirely based on token economics, leading back to volatile token prices up or down.
- The only way to assess decentralized finance (DeFi) is through total value locked (TVL), which is easily inflated and focuses only on liquidity.
Web3 supporters pointed to the fundamental value blockchain was building for the future economy. The naysayers pointed to the hype and froth, without understanding the utility or the why. Both were right. Fundamental value was being built. But venture dollars and retail investors poured in, fueling frenzied growth based on token economics.
And here we are today — an industry that feels like it is in shambles and feels like it is scary, dangerous and devoid of value.
The reason why it feels like that is because we have all been groping in the dark. We have been looking at Web3 all wrong. We looked at price — which is a skewed measuring stick — to define production value. That was the problem. To date, there is not a universal, standardized way of representing the value of blockchain based on fundamentals and utility.
The metrics used to determine the relative health of a token, or indeed, an entire industry, have painted a distorted picture. A coin’s market capitalization, its trading volume and social media traction can also be easily manipulated to convey a false picture of a project’s utility and viability, artificially inflating token prices and misleading investors. That story wasn’t unique.
Wash trading — where traders buy and sell back the same asset to themselves to create the illusion of market demand and to pump up prices — is also endemic. On top-tier exchanges, studies suggest that nearly half of all trades are conducted by the same entity, and on lower, less regulated ones, that number is raised to 80%.
If the industry is going to survive the current crypto winter and restore investor confidence, it needs to fundamentally rethink how value is measured.
A new yardstick
The world is becoming more digital.
Whether it’s facilitating frictionless flows of money across international borders or allowing people more opportunities to save, earn and self-govern, crypto has, in its short history, already shown its tremendous potential in the global digital economy. If even more goods and services will be transacted and owned digitally in the future, the industry will need a better yardstick for measuring economic activity. We need a universal benchmark that measures value based on data, independent from hype and jumping on the bandwagon.
Imagine using Apple’s stock volume and price today as the primary or only way to assess the company’s health. Those metrics would provide only a very limited picture. This is why sophisticated investors also consult other measures, such as P/E ratio, EBITDA, EPS and many more, for a standardized way to compare Apple against other publicly traded companies. Those metrics are not perfect, but they set a baseline. This doesn’t currently exist for Web3. In Web3, every protocol and every data metrics provider has its own approach, resulting in big variances on the same things and room for distortion.
Simply put, the current tools and methodology are insufficient to properly value and understand a digital economy.
This is our opportunity.
Road to recovery
When it comes to recovery from Crypto Winter, all roads lead to the need for better metrics.
The first time that became crystal clear to me was during an interview I did with OECD Policy Analyst Iota Nassr for a Forkast Word on the Block podcast just over a year ago when crypto prices were near their all-time highs. We spoke about developments in DeFi and growing concerns about its lack of regulatory guardrails. But there was no clear way to see through the raw feed of data. And TVL was not going to cut it.
We can all demand stronger enforcement to penalize bad actors to hold the industry accountable, but it’s not possible unless we have better ways to view and analyze the data that allow us to make more informed decisions.
So what now?
First, we organize, index and standardize the way we measure not just one chain, or even a handful. We have to do the same for all. In this way, we’ll be able to measure the truest value of the digital economy. When Randy Wasinger, founder of CryptoSlam, and I began to discuss what would really unlock the next phase of digital growth, it triggered a vision for us. Randy and his team at CryptoSlam, who have been mapping out NFT data on multiple chains for the past few years, and Forkast could do this together — build the intelligence tools that the digital economy needs to measure the truest value of digital assets in the market. After all, NFTs are not just collectibles — they are data wrappers that power ownership and transactions for any kind of digital asset. They will be even more important if a digital economy is inevitable.
Then came the blunt realization that we had to build this sooner rather than later. FTX, arguably the loudest proponent for regulation, turned out to be one of the industry’s poorest adherents. Its swift fall from grace — bringing billions of investor dollars down with it — means it is a responsibility for the industry to retrench and create a level and fair playing field for participants.
It is becoming clear that more disciplined data intelligence will allow us to restore the industry to equilibrium. One that is not necessarily based on price but utility and fundamental value. These principles will be applied to what we are building and the tools we will need to evaluate the digital economy to underpin the methodology behind every index and product we create.
What does it take to help the industry recover and move into the next phase of growth in the digital economy? What does it take for consumers and investors to feel safe enough to participate?
These are questions that will drive us to the answers that will lead to recovery.
And it starts with measuring what truly matters.