How to Analyze A Blockchain Network

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In this article, we will explain how to approach the analysis of blockchain networks.

First, let's refresh our understanding of what a blockchain network is. The key characteristics of a blockchain network include:

  • Decentralization - Unlike traditional databases managed by central authorities, blockchain utilizes a decentralized network of nodes (computers). Each node on the network holds a copy of the entire ledger, and no single entity has control over the entire network, which enhances the security and reduces risks associated with centralized data control.
  • Transparency and Trust - Every transaction is recorded on a public ledger, accessible by anyone within the network. Moreover, transactions once recorded on the blockchain cannot be altered without the consensus of the network, fostering a new level of trust in transactions.
  • Cryptography - Blockchain networks use cryptographic techniques to secure the network and validate transactions. Those transations are bundled into blocks that are then cryptographically linked together, forming a "chain" of blocks, hence the name "blockchain".
  • Consensus mechanism - All nodes on the network have to agree on the valid state of the blockchain based on a consensus mechanism to prevent double-spending and ensure the integrity of the data.

The need for a blockchain network stems from its decentralized and often permissionless nature, which allows anyone to participate without the need for a permit. This openness encourages innovative ideas and business models, similar to the exploration of the newly discovered American continent in the 1600s. Participants are rewarded for their contribution to safeguarding the network, such as running nodes (e.g. Bitcoin miners, Ethereum stakers), creating a relatively fair economic system compared to the traditional web2 world, where most participants have no say on how centralized platforms function and receive no rewards for contributing data.

The most commonly used decentralized applications (dApps) in a blockchain network include:

  • DeFi (Decentralized Finance) - Where users can borrow or lend their crypto assets, trading crypto assets without the need for a broker or a bank, and facilitate fast cross-border payment through stablecoins particularly in countries with high inflation or capital controls.
  • Consumer applications - These applications aim to bring mass non-crypto native users onto the blockchain, with examples including art/digital collectibles, gaming and social dApps, where users can earn rewards through the appreciation of the assets they own (e.g. NFTs).
  • DePIN (Decentralized Physical Infrastructure) - Similar to airbnb model, these projects utilize each person's idle resources to build a global decentralized infrastructure that large organizations/corporations may not be able to achieve due to geographic/resource restrictions. You can find some examples of DePIN projects here.

What are the key factors to consider when analyzing a blockchain network?

1) Technological background:

  • Consensus mechanism & Network Safety - The most popular consensus mechanisms include Proof of Work (PoW) which Bitcoin uses and an attacker needs to control at least 51% of nodes to alter the blockchain, and Proof of Stake (PoS) which majority of other blockchains including Ethereum uses and an attacker needs to control over 1/3 of the nodes to alter the blockchain. The more diversified the nodes/validators are, the safer the network. Hence Bitcoin is the safest blockchain network in the world.
  • Speed - Measured in two dimensions 1) Time to finality - how long it takes to confirm a transaction to be irreversable 2) Transaction per second (TPS) - how many transactions can the blockchain process in one second. The faster the two factors, the higher perfomance a blockchain can achieve.
  • Transaction cost - The higher the transaction cost, the less likely users will use the blockchain for high volume transactions.
  • Programming languages - The most used and easiest to use language is Ethereum's Solidity, while newer blockchains are introducing more flexible and secure languages like Rust and MOVE, which require longer learning process for new developers.

The technology landscape in the blockchain space is consistently evolving as each project strives to enhance the safety, scalability, and performance of their networks. To stay up-to-date on the latest developments, it's important to monitor the roadmaps and technical progress of different blockchain networks.

2) After exploring the technological advantages/disadvantages of each blockchain, we will take a closer look at the on-chain data to gauge the economic activities on the blockchain.

  • Total Value Locked on-chain (TVL) - This measures the total wealth that has been locked within the network. Ethereum currently leads the ranking with over US$62bn TVL on its chain.
  • Total stablecoins value on-chain - This is equivalent to the M0 of an economy, measuring the total amount of stablecoines issued on a particular blockchain network. Again Ethereum tops the list with over US$79bn in stablecoins issued on its chain.
  • 24 Hour Transaction Volumes on all Decentralized Exchanges (DEX) - This metric reflects the level of activity in a blockchain's capital market. While Ethereum still dominates this metric, Solana chain has been catching up quickly, transaction volumes on Solana chain actually surpassed that of Ethereum for a few days in this quarter.

Economic Activities on Major Blockchain Networks

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Source: DeFiLlama

3) Besides economic data, we also take a look at "population" data to gauge how active the blockchain's ecosystem is.

  • 24 Hour Transactions onchain - This include all transactions that users have been conducted on the blockchain within 24 hours.
  • Daily Active Accounts - This measures how many unique wallet addresses have been interacting with dApps daily on the blockchain.
  • Total Ecosystem Active Developers - This tracks the number of developers who have been contributing to the blockchain itself or building dApps on the blockchain.
  • Social Media Followers - This measures the number of followers across various social media channels such as X, Telegram or Discord channels of a particular blockchain.

4) As each blockchain is like an independent economy, maintaining the prosperity of its ecosystem requires the introduction of new measures/policies to attract new users. A common approach to attract new builders is providing funding and ecosystem supports to new projects through the blockchain's foundation or venture arms. Therefore closely monitoring each blockchain's grant program is also an important factor in assessing its growth potential.

For example, the Solana ecosystem has taken a significant hit back following FTX collapse in November 2022. Many projects had to shut down or switch to other chains after losing funding supports from Solana. On the other hand, in April of this year, TON network (better known as the Telegram backed network and a home for gaming dApps) launched the Open League DeFi Grants Program to provide up to US$520,000 per team to expand its footprint in DeFi space. The program immediately attracted 14 DeFi projects to build on Ton blockchain in less than a month.

Monitoring these blockchain-specific grant programs and funding initiatives offers insights into the level of commitment, core contributors and strategic focus of a particular ecosystem. It showcases how the blockchain is actively working to attract and nurture new projects, developers, and users - all of which are crucial for the long-term growth and sustainability of the network.