chaindicator
What is it?
A data-driven tool to determine which blockchains are relatively undervalued based on a set of indicators of activity and adoption.
Approach
The Chaindicator takes a multi-faceted approach that looks at a set of indicators of adoption and activity. It looks at the relative performance of blockchains on these metrics. We average those out and weigh them. Lastly, we divide the market cap of each respective blockchain by the resulting Chaindicator. This way we get clarity on a blockchain-level how the market is currently valuing its traction/activity (x billion per Chaindicator activity point). This allows us to compare blockchains, and get a clear indication of relative under- and overvaluation.
What do we measure and how?
To quantify traction and activity of a blockchain protocol, we have identified three relevant categories of metrics: User Activity, Developer Activity and Financial Activity. A higher score for a specific activity category means a higher level of adoption & activity of that blockchain.
Here is an overview of the current underlying metrics for the three Chaindicator activity categories (subject to change).
| Activity category | Metric |
|---|---|
| User Activity | • Average # of Daily Unique Active Addresses • Average # of Daily Transactions |
| Developer Activity | • Average # of Weekly Unique Active Developers (Core Protocol) • Average # of Weekly Unique Active Developers (Sub-ecosystem) • Average # of Weekly Commits (Core Protocol) • Average # of Weekly Commits (Sub-ecosystem) |
| Financial Activity | • Total Value Locked (TVL) • Stablecoins On-chain • Average Daily DEX Volume |
For every metric, each blockchain’s number is expressed as a percentage of the blockchain with the highest number. To get to the score for each of the three activity categories, we take the average of these percentages.
Finally, a weighted average of the three activity category scores results in the Chaindicator Score. We currently use the following weights (subject to change): User Activity (40%), Developer Activity (30%) and Financial Activity (30%).
Which blockchains do we include?
We only look at blockchains that are relatively fair to compare. For example, as the Layer 1 (L1s) protocols handle basic functions such as transaction processing and block validation, comparing those with Layer 2 protocols that aim to improve scalability or speed would not make much sense.
The maturity of the blockchains is an important factor as well. With the Chaindicator we are not looking for the next 100x gem, but aim to determine which of the more established blockchains seems to be a long-term opportunity. All chains we analyze meet the following selection criteria:
TVL of at least $100M
Market Cap of at least $200M
Mainnet live for at least one year
Trading volume of at least $20M per day
At least 20 dApps live with: (a) >200 monthly unique active addresses, or (b) >$100k TVL
Note that we do not include Bitcoin, Ethereum & Solana in the Chaindicator. We believe these 3 are of a different order and should be considered of a different category, which makes it unjustifiable for us to compare them. Read more about our thoughts on this here.
The thesis behind the Chaindicator
The adoption of disruptive technologies - like blockchain technology - typically follows an S-shaped curve. It begins with a slow start, then rapid growth, and eventually plateauing as the market becomes saturated.
During the rapid growth phase of adoption, the value of the technology increases at an exponential rate, and Metcalfe's law applies. Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users. In other words, the more users a network has, the more valuable it becomes to each user. This is because each new user brings additional connections to the network, increasing the value for everyone.
When applying this to blockchains (L1s) in crypto, we are convinced that the extent to which people use, are engaged with and/or working on these protocols:
adds greatly to the solidity of such a protocol
is a good proxy for future market cap
increases the chance that protocols will become truly invaluable in the future
Also worth mentioning here is the Fat Protocol Theory looking at 'Fat Protocols' as mentioned in Monegro’s blog article in 2016. That theory suggests that the majority of value in a blockchain network will be captured by the lowest layer, the protocol layer. This theory has been influential in the design of different blockchain protocols, including Bitcoin, Ethereum, and many others.
We are aware that there currently is no consensus on this matter among experts. However, this theory seems to be applicable to Layer 1 blockchains, which are the foundational layer of blockchain infrastructure.
How to interpret and use the Chaindicator?
If you agree with our thesis that adoption and activity are a proxy for future value, and you agree with the way we measure this, you might want to use your the Chaindicator to build and optimize your crypto portfolio. In that case it is good to remember:
We only take a small set of the existing blockchains into account.
A low score for a blockchain does not mean that the blockchain is a bad investment. It just states that based on the activity data other blockchains have relatively better scores.
All crypto investment decisions should be thoroughly researched. Treat the Chaindicator as one of your research resources, not the only one.
most recent changes and updates
At Chainalytics Labs, we continuously refine our models to stay aligned with evolving market conditions. Recent updates to our portfolio strategies reflect our commitment to adapting to these changes. A short overview of the changes;
We added Aptos (APT), MultiversX (EGLD), SUI (SUI), and The Open Network (TON) as these chains have emerged as key players in the blockchain landscape, with sufficient data available and meeting our selection criteria.
We removed Algorand (ALGO) due to issues with data availability. And to maintain the integrity of the model and ensure meaningful comparisons, we decided to remove both Cosmos (HUB) and Polkadot (DOT).
We removed the Social category due to inconsistent use of X (Twitter), bot activity concerns, and the reduced value of Watchlister numbers compared to other metrics.
Q: If I invest based on the Chaindicator and the top 3 changes next month, should I then sell the old coins and buy the new one that entered the top 3?
In most cases that’s not needed. The thesis behind the Chaindicator is focused on long-term adoption. This means that there is no need to take action based on short-term changes. The Chaindicator is a buy-focused product. It helps you decide WHICH projects to potentially invest in. It doesn’t tell you when to sell. If however your personal strategy is to sometimes get out of the market for a while and sell your coins, you’re free to do that.
Use the Crypto Market Phase Indicator to help you decide WHEN to sell your coins. For Bitcoin specifically use the Bitcoin Cycle Top Indicator.