Crypto Network Effects Valuation: Experts Debate Blockchain Value

Background on Crypto Network Effects Valuation

The debate over crypto network effects valuation has intensified among industry leaders and analysts. Santiago Roel Santos, founder and CEO of Inversion Capital, argued in a recent Substack post that cryptocurrencies lack the positive network effects that justify their high valuations. Santos referenced Metcalfe’s Law, a standard valuation metric for networks, suggesting it “doesn’t justify crypto’s valuation” and instead “exposes it” (Cointelegraph).

According to Santos, many cryptocurrency network effects are adverse, with increased users leading to higher transaction fees, degraded performance, and slower processing times. He contrasted this with traditional networks like Facebook, saying, “Facebook didn’t get worse when it added 10 million users,” to illustrate his point.

Market Reactions and Differing Views

Not all experts accept Santos’ assessment. Jasper De Maere, a desk strategist at crypto market maker Wintermute, commented that applying consumer application logic to infrastructure such as layer 1 (L1) blockchains misses the real source of network effects. “Users are not supposed to interact with L1s directly,” De Maere stated, emphasizing that true compounding happens among validators, security providers, and liquidity participants.

Tomas Fanta, principal at Heartcore, challenged the notion that transaction fees necessarily increase with usage, particularly on high-performance blockchains. Fanta indicated that, on such blockchains, “fees change from meaningless to meaningless,” arguing that as adoption rises, liquidity and yield opportunities can actually improve.

The question of overvaluation remains, with Ben Harvey, a digital asset researcher at Keyrock, largely agreeing with Santos that some L1 blockchains could be overpriced, but noting that protocol scalability and artificial intelligence integration are important differentiators.

Quantifying Network Effects and User Value

Santos examined the estimated value of blockchain users using data from Andreessen Horowitz and Cointelegraph. With a combined crypto market capitalization (excluding Bitcoin) of $1.26 trillion and 40 to 70 million monthly active users, the estimated value per user ranges from $18,000 to $31,500. With a maximum 716 million total crypto owners, the user value drops closer to $1,760, though this count may be inflated by Bitcoin’s inclusion. For a more conservative estimate of 400 million users, the value per user stands at approximately $3,150.

A comparison with Facebook demonstrates the difference: Facebook’s 3.1 billion monthly active users and Meta’s $1.6 trillion market capitalization yield a valuation of about $516 per user, noting that Meta’s business spans several platforms and services.

Martin Kupka, formerly of RockawayX, noted that real network effects in the crypto sector currently manifest in stablecoins and both centralized and decentralized exchanges, rather than L1 blockchains themselves. He cited growing utility as a medium of exchange and collateral, as well as increased trader activity, resulting in deeper liquidity and better market execution.

What’s Next for Crypto Network Effects Valuation?

De Maere emphasized that Web3’s modular structure makes its network effects more visible than Web2’s bundled models. He pointed to compounding effects at the security and validator level, liquidity in stablecoins, and user aggregation on exchange platforms. These layers, he said, “are separable rather than bundled, [so] you can clearly observe where compounding happens.” However, he acknowledged that current standard user valuation models may not capture the intricacies of blockchain networks—the issue is reminiscent of early Web2 valuation challenges, which eventually led to the development of sector-specific metrics.

As debate continues, consensus points towards a need for new valuation models that account for the unique structure and user dynamics of cryptocurrencies and blockchains.

For more insights on blockchain infrastructure and adoption, visit Vizi.com’s cryptocurrency news section.

Sources

Reporting via Cointelegraph