How To Evaluate Web3 Projects & Find Gems Before The Herd

Web3 startups are a new kind of company — and need a new approach to evaluation.

Over the past couple years, we have witnessed an explosion of Web3 projects, most of which resemble the decentralization of existing Web2 service platforms. For example, Compound builds the Web3 version of Bank of America, Uniswap is the NYSE, Yearn Finance is the decentralized Blackrock, and so on.

In theory, over 9,000 existing Web3 projects promise to be open source, permissionless, and backed by the token economy. However, while many new Web3 projects bill themselves as decentralized networks, protocols, DAOs, and dapps, most are still businesses that actually own products, and can’t if they don’t start thinking of themselves as such. develop.

In the long term, projects can’t survive just by selling “ideology”, and terms like “protocol” and “DAO” don’t eliminate the need to develop or scale up products that people actually want to use. In fact, as far as the Web3 project is concerned, their product should be more than an order of magnitude better than similar centralized products in order to use the product with a cryptocurrency backend for the lack of user experience.

This kind of thinking still does not solve a problem, which is how to measure the success of the project.

Recently, Web3 projects are mainly judged by two indicators: price and market capitalization. Call it “speculative value” if you will. As we know from the history of crypto, this is not a significant proxy for long-term success.

Here are some really useful Web3-native growth metrics for three main categories: DeFi, Layer 1s/Layer 2s, and Play-to-Earn Gaming.

DeFi: Value growth through capital inflow and integration

Decentralized finance (DeFi) applications include decentralized exchanges such as Uniswap and lending platforms such as Compound. Most DeFi projects are developed by a centralized development team, which then seeks to distribute the management of its operations to a decentralized community of token holders.

There are three key metrics: TVL, number of active wallets, number of integrations

Locked Value – TVL

TVL has been the OG success indicator for DeFi applications since the beginning. It represents the overall value of cryptoassets deposited in DeFi protocols for trading, staking, lending, and more. While TVL is a measure of the success of lending protocols such as Aave and Compound, it is less useful for decentralized exchanges such as Uniswap, which measure growth primarily by transaction volume. One disadvantage of using TVL to measure long-term growth is that users and traders often jump from one DeFi application to another in search of higher yields, and some whales create the illusion of activity, making TVL not a very sticky one Use metrics. However, it is a good indicator of confidence. Locked assets have tangible value and bear the opportunity cost of other productive uses.

Active wallet

Where 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. In DeFi, the simulated measurements of DAU and MAU are daily active wallets and monthly active wallets.

Number of integrations with other apps

As DeFi applications are composable, or able to interact and build with other DeFi applications, another growth indicator is the number and quality of integrations used by applications in other wallets, exchanges, and DeFi products. Developer activity is key to project growth and market leadership in DeFi.

Layer 1s & Layer 2s：

Growth through developer activity

Layer 1 refers to the base-level blockchains of projects like Ethereum, Solana, Near, Avalanche, and Flow. The Layer 2 project refers to an extension layer that provides extensions to the existing Layer 1 like Polygon. The growth of these projects has mainly come from applications built on top of these protocols.

The key metrics are as follows:

Number of developers and apps

Since the Layer 1 and Layer 2 projects 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 is probably the most important growth indicator for L1/L2 projects.

One way to quantify the number of developers contributing to a project is to look at the number of active users in the developer environment and repositories like Github. The more traction a derivative application gains from users and investors, the greater the growth of the underlying project. For example, the Flow blockchain has grown from 50 applications in December 2020 to 650 applications by the end of 2021. Flow-based projects raised more than $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 metric. Third-party wallets such as Metamask (Ethereum), Blocto (Flow), and Phantom (Solana) often serve as the primary hub for user assets within the protocol’s ecosystem. 

Total number and size of transactions

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 how the network is used as a means of exchange, although this is not necessarily the goal of many projects. The dollar share of total trading volume can also be used to measure market share compared to competitors.

Play To Earn Gaming：

Growth through partnerships, player incentives

Play-to-earn (P2E) games are video games in which players earn rewards of real-world value. In conventional video games, in-game items are kept on a private data network and owned by the game creator, in P2E games, NFTs enable players to truly own the unique assets they buy and sell freely outside the gaming platform, which is What regular games can’t do. In addition, players have a say in the governance of the game itself.

Although we have not yet seen a sustainable model of encrypted games that can be used as a blueprint for success, there are currently three indicators commonly used to evaluate P2E projects:

Number of active players

The number of daily (or monthly) active users is a key measure of a game’s growth and popularity. While content richness is the key to success, games with rich content and few users are worthless. Equally important is the ability of the project to retain its number of active participants. For example, on Axie Infinity, which is built on the Ronin chain, the average daily user count over the past six months has dropped from 120,000 to about 20,000, while the in-game currency SLP revenue has declined.

Transaction volume of a single user

This metric refers to the average amount of funds transferred by a single player, and it reflects user engagement and the rationality of token design. Growth in average transaction volume 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 partnerships with guilds. Crypto Gaming Guilds are groups 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 start playing by lending game assets they may not be able to afford. They also help P2E games gain more daily active users through scholarships, online marketing and direct investment. 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.

Summary

As Web3 matures, we also need to understand customers, revenue drivers and real growth metrics. 

While the metrics mentioned in this newsletter may not be quite telling and often have different caveats and limitations, they do give a good indication of where a Web3 project is headed.

Understanding them will help guide business and product decisions as well as community incentives. I would like to see various new growth patterns emerge in Web3 and look forward to the progress of the project and the metrics that accompany them.