Debate erupts over crypto’s network effects as investors question L1 value

Santiago Roel Santos, laminitis and CEO of crypto concern institution Inversion Capital, said cryptocurrencies are not taxable to affirmative web effects, but different experts disagree.

In a caller Substack post, Santos wrote that “crypto is priced for web effects it doesn’t have.” He besides pointed to the network effect valuation system, Metcalfe’s Law, saying that it “doesn’t warrant crypto’s valuation” and alternatively “exposes it.”

Santos claimed that galore of crypto’s web effects are adverse, owed to congestion, specified arsenic higher fees, a worse idiosyncratic experience, and slower transactions. “Facebook didn’t get worse erstwhile it added 10 cardinal users,“ helium said.

Other experts propulsion back

Some analysts hold that crypto whitethorn beryllium overvalued, but others accidental Santos is applying the incorrect framework.

Santos admitted that caller blockchains improved transaction throughput, but helium claimed that this leads to little friction, not compounding value. Still, helium said that liquidity, developers and users tin determination portion codification tin beryllium forked, and worth seizure is weak.

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Jasper De Maere, table strategist astatine starring crypto marketplace shaper Wintermute, told Cointelegraph that deeming furniture 1 blockchains overvalued owed to antagonistic web effects is “applying consumer-app logic to infrastructure,” expanding connected the Facebook example.

“Facebook’s back-end besides had congestion and outages aboriginal on; those antagonistic effects were simply internalized and abstracted.“

De Maere said that “users are not expected to interact with L1s directly,” making monthly progressive users and idiosyncratic stickiness irrelevant. According to him, “the existent web effects for an L1 beryllium astatine the validator, information and liquidity layer, not the end-user layer, and that’s wherever compounding really happens.”

Tomas Fanta, main astatine the crypto concern steadfast Heartcore, said helium disagrees with Santiago that fees worsen arsenic usage grows. He said that connected high-performance blockchains, “the fees alteration from meaningless to meaningless,” and that liquidity improves and yields summation arsenic adoption increases.

Ben Harvey, integer plus researcher astatine crypto trading institution Keyrock, told Cointelegraph that helium mostly agrees with Santos’ assertion that L1 blockchains are overvalued. Still, helium does not deliberation this applies to each L1s equally, with protocol scalability and artificial quality integration being cardinal factors.

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Analysts statement crypto valuation logic

Santos pointed to immoderate unsmooth mathematical estimates of the worth an onchain idiosyncratic holds for a blockchain. Considering the existent full crypto marketplace headdress excluding Bitcoin (BTC), of $1.26 trillion, this would terms the 40–70 cardinal monthly progressive users estimated by task superior institution Andreessen Horowitz past period astatine $18,000 to $31,500 each.

The aforesaid study estimates that 716 cardinal radical ain crypto. This would effect successful a per-user worth estimation of astir $1,760, but it is an overcount due to the fact that Bitcoin is not excluded. With Santos’ estimated 400 cardinal users, the worth would beryllium $3,150 per user.

With Facebook’s 3.1 billion monthly progressive users and Meta’s marketplace headdress of $1.6 trillion, we get a per-user valuation of $516. Furthermore, Meta besides runs different platforms and services successful summation to Facebook that are priced in.

Market headdress per idiosyncratic comparison. Source: Santiago Roel Santos

Martin Kupka, a erstwhile capitalist astatine Web3 concern steadfast RockawayX, told Cointelegraph that crypto “network effects contiguous are successful stablecoins, centralized exchanges and perpetual aboriginal decentralized exchanges.” He explained that “the much utile it is arsenic a mean of speech and collateral, the much traders a CEX oregon perpetual venue has, the deeper the liquidity and amended the execution.”

Wintermute’s De Maere said that “Web3 is modular and that makes the underlying web effects acold easier to see” compared to Web2. He explained that those effects mostly look crossed L1 arsenic information and validator concentration, successful stablecoins arsenic liquidity, and successful decentralized and centralized exchanges, arsenic good arsenic successful the exertion furniture wherever users aggregate.

“Because these layers are separable alternatively than bundled, you tin intelligibly observe wherever compounding happens,” De Maere said. “That’s why, based connected accepted metrics similar ARPU […] they tin look overvalued,” helium added. The existent authorities of crypto valuation resembles erstwhile “we were struggling to worth Web2 platforms […] and created circumstantial models to bash so,” helium said.

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