With a growing interest in decentralized applications, the popularity of the second-largest cryptocurrency, Ethereum, has surged over the past years. The surging interest has been followed by elevated scalability constraints and heightened transaction fees, leading to investors looking for an Ethereum-killer among other more scalable smart contract blockchains such as Solana, Cardano, Avalanche, and Polkadot. The value of these alternatives has increased considerably over the past years upon the anticipation that they can challenge Ethereum as the main smart contract blockchain.
As we see it, the value of smart contract blockchains originates from its base of users and applications utilizing the network. To express the value of a crypto network, Metcalfe's law can be applied. The law states that the value of a network is proportional to the square of the number of users in the system. For instance, the value of an Instagram account increases proportionally with the number of relatives also having an Instagram account.
However, one might argue that the network effect of smart contract blockchains is twofold, as the chicken or the egg paradox is present. For a smart contract blockchain to gain traction among users, the applications on the network need to be appealing. On the other hand, nobody wants to develop applications if there are no users on the network, creating the chicken or the egg paradox. This ultimately makes it challenging for newly developed blockchains to achieve a critical mass of users and applications to foster a network effect, whereas it is almost exclusively up to Instagram’s users to form its network value.
To express network effect, the great matter with cryptocurrencies is the fact that the public nature of blockchains makes the activity on the networks publicly available. This is truly interesting because the interpretation of the value of the network then becomes a public good. In this post, we take a quantitative view of the five largest smart contract blockchains being Ethereum, Solana, Cardano, Avalanche, and Polkadot, in which we compare five on-chain metrics divided by the market capitalization of the cryptocurrency:
- Price to sales
- Price to value locked
- Price to USDT and USDC supply
- Price per developer
- Price to NFT sales volume
Since the metrics are derived from market capitalization, it is most desirable to have as small a metric as possible. This means that the given number is high compared to the market capitalization. It is important to notice that this quantitative approach does not by default consider Layer 2 solutions on Ethereum nor Parachains on Polkadot, which are both beneficial for the networks.