I’ve been thinking about something Tony Sheng wrote recently on smart contract protocols and red ocean theory.

With the drive in speculative markets around cryptocurrencies, we saw an ever growing list of projects become funded, make promises, and for the large part continue to remain in incubation.

My thinking is largely centred around Ethereum projects and decentralized applications, though I will reference other cryptocurrency networks where needed.

There have been a number of methods offered for quantifying cryptocurrency and token adoption, and it largely depends on the context or metric you’re looking to analyze.

Etherscan provides interesting proxy data for smart contract outputs. Currently there are 122,928 token contracts on the Ethereum network. This is not to be confused with 122k tokens available on the network.

Many of them have no utility or value. In that same page, Etherscan list almost 700 tokens that have value or are being traded.

This kind of analysis was what spurred on the creation of Trivial, which builds a relational view of activity on the Ethereum network.

basic attention token on trival

omisego on trival

State of the Dapps lists 1,924 dApps on Ethereum, with 9.44k daily active users across 2,800 smart contracts. Of those, only 964 are live.

state of the dapps

A common dismissal of the progress being made and the value being created on Ethereum is generally something like, “Ethereum and EOS Only Have 8 dApps Combined with 300+ Active Users”.

Which is no surprise considering the continuing barriers to adoption, some by design and others self-inflicted.

Clearblocks wrote earlier this year that ETH and BTC’s USD price correlate with Metcalfe’s Law, which is,

the value of a telecommunications network is is proportional to the square of the number of connected users of the system (n²)

suggesting “that cryptoassets that have reached critical mass behave like online social networks such as Facebook with their value defined by their usage (as measured by daily transactions or active addresses”.

Which again, is not the same as valuing the dApps themselves, but the network at large.

In 2018 we’ve seen smart contract protocols raise large amounts of capital without having the network to support that valuation.

Auger is now infamous for spiking at launch, the surfacing of assassination markets, and then coasting at 30-150 daily active users, leading to great speculation of how to properly value the market cap of the network.

Sheng touched on an important point by bringing up customer acquisition cost (CAC) and the implications within cryptocurrency development.

Protocols and dApps are raising large amounts of money to acquire scarce resources (developers, users) that are too scarce to support their efforts. So the Lifetime Value (LTV) of those resources is lower than the CAC, leading to a capital death spiral.

Because of the pressure to maintain some kind of ideal token valuation, those projects can’t slow down to drive CAC at a lower cost and simply work toward flame out in order to maintain investor relations.

Where does the LTV-CAC equilibrium come from? Rational valuations and raises for a start.

I’ve already started seeing a few companies waiting to get end users first before raising money. It’s a reposition back to a traditional startup growth model that feels intuitive yet slightly out of tune with the technology and cultural shifts that underlie cryptocurrency networks.

The killer dApp will find a sustainable equilibrium and will provide a model for others to replicate. Then mainstream adoption is no longer if or when, but happening.