Introducing the Transaction Frequency Index(TFI) as a measure of chain health

While the creation of digital scarcity that was pioneered by Bitcoin gives cryptocurrencies cryptographically-secure value, putting a number to that value has proven rather difficult. Unlike its more mature equity counterparts, the cryptocurrency market has historically lacked a comprehensive valuation framework. Since traditional cash flow models are ill-suited for the task of valuing peer-to-peer networks, early efforts to create a valuation framework have focused on repurposing the equation of exchange for cryptocurrency markets. Leading thinkers such as Chris Burniske have proposed MV = PQ as a crypto substitute to the DCF model used to calculate the fair value of equities (for more on the equation of exchange, read Burniske’s seminal essay on the matter.) During the recent bear market, it has become clear that cryptocurrency prices are divorced from blockchain fundamentals, driven largely by sentiment. However, tracking the metrics relevant to chain health and activity allows traders and investors to map out the projects more likely to survive into the next bull market.

Introducing Transaction Frequency Index (TFI)

An active blockchain is a healthy blockchain. While there are many metrics, such as transaction volume and daily active addresses used to monitor blockchain activity, we propose the Transaction Frequency Index as a measure of chain health. The TFI metric gives the average number of transactions sent by each active wallet per day. It is calculated by dividing daily transaction count by the number of active addresses. In order to smoothen the curve, a 7-day moving average of each metric is used.

When comparing TFI values across blockchains, it is important to keep in mind that the nature of the chain will determine the number of daily transactions. While cryptocurrencies such as Bitcoin and Litecoin can only be sent and received, EOS has a richer set of transactions such as vote, stake/unstake and buy RAM. Thus, comparing TFI values between Bitcoin and Litecoin can reveal the relative health of each chain while a Bitcoin vs EOS comparison makes little sense.

Cryptocurrencies: Bitcoin vs Litecoin

Traditionally, money has been defined as any asset which serves as a store of value, medium of exchange and unit of account. As cryptocurrencies made inroads into mainstream consciousness, a debate ensued as to which of the functions of money they would fulfill first. Bitcoin core developers advocated for a ‘digital gold’ that would operate as a non-sovereign store of value while altcoins such as Bitcoin Cash and Litecoin emphasized the role of cryptocurrencies as payment systems. An increasing TFI is an indication that the network is being used more as a medium of exchange as the average user sends more transactions per day.

A rising TFI coupled with a stable # of active address since March signifies that the health of the BTC chain is stronger than the current price would suggest

It is interesting to note that although the number of active address on the Bitcoin blockchain is down nearly 50% from the heyday of the bull market, it is still up 14% from April lows at which time the price of a single Bitcoin stood at around $6,800 — a 100% premium on today’s prices. Additionally, the TFI for Bitcoin has seen a steady increase and is now even higher than it was at the tail-end of 2017. Despite the price of BTC continuing to drop, the number of active address has remained stable since around March while the average number of daily transactions carried out by each active wallet continues to rise as per the TFI.

Litecoin fundamentals paint a pessimistic picture

The Litecoin chart tells a different story. Active wallets are on a downward spiral, while the TFI is lower than Bitcoin. It’s is crucial to note that Litecoin wallets are engaging in fewer transactions per day despite Litecoin’s characterizing itself as a payment system cryptocurrency.

Utility tokens live on

Despite hitting YTD lows, Ethereum recently peaked in terms of TFI

The number of active addresses on the Ethereum chain is down around 67% since bull market highs, reflecting the bearish sentiment in the Ethereum market. However, the TFI for Ethereum recently peaked at 2.5, indicating that those active users brave enough to weather out the crypto winter are becoming more active on the chain.

Utility tokens were conceived of as a way to apportion scarce resources on a blockchain and allow token holders to interact with the network. However, the 2018 crypto winter has seen what was once the darling of cryptocurrency markets come in for heavy criticism as most utility token projects overpromised and underdelivered. Indeed, most utility token ICOs have been exposed for being a convenient mechanism to skirt securities regulations. In the half a year since the EOS mainnet launch, EOS tokens have proven to be a notable exception. EOS tokens allow holders to participate in the running of the network in a variety of ways. Aside from sending and receiving EOS tokens, transactions on the EOS blockchain include, but are not limited to:

  1. Stake/unstake transaction
    Interacting with EOS dApps requires CPU and NET, which are allocated to users based on the number of tokens they have staked.
  2. Buy RAM transaction
    RAM is a quick read/write access to a storage device. It’s required to store data on the blockchain and must be purchased. RAM is purchased in exchange for EOS tokens at a price set by the unique Bancor algorithm. (More on CPU, NET and RAM — the resources of the EOS economy)
  3. Voting
    Token holders have the opportunity to vote in the top 21 Block Producers responsible for processing transactions and producing blocks under the delegated Proof of Stake system.

EOS has a drastically larger TFI than Ethereum due to the various types of transactions which are possible on the EOS chain. After finding a local minimum at 63 at the end of November, the EOS TFI has soared above 250 during the first two weeks of December.

During July, the first full month following its launch, EOS numbered an average of 14,000 daily active accounts, a mere 4.5% of the number of active accounts on Ethereum. The month of November, however, saw 57,000 daily active wallets on EOS compared to 243,000 on Ethereum. In just 4 months, EOS active accounts went from 4.5% to 24% of total active wallets on Ethereum.

As cryptocurrency markets mature, token prices will come to be driven more by underlying fundamentals and less by sentiment. Metrics such as the TFI help traders gauge the chain health of a blockchain before entering a position.

Data from Coinmetrics.io