How to spot a fake user

Blockchain projects are going to start throwing a lot of stats at you over the next 12 months as the race to win consumers attention heats up. Some of them will look impressive and position these businesses as clear market leaders. But before you’re swayed by big stats, we’re going to share the secret sauce for building a thriving ecosystem and how to spot a fake.

Given the evolving momentum of blockchain technology, we need to acknowledge the elephant in the room. For years now, we’ve largely ignored the dismal number of real users adopting DApps and networks because the narrative has been centred on “building infrastructure”. Building infrastructure without users is pointless because we need to understand how they will use it to know how the infrastructure should function. The two need to move in tandem. If your network isn’t growing adoption, you will have no data to base the evolution of your infrastructure.

As we move further down the road, users, adoption and network usage will start to become more critical. For most blockchains, where their network value is linked to utility value, they will have to answer the hard questions. Who’s using it? For what? And how? The answers to these questions will start to show the truly valuable networks. Because of this, it’s essential to understand that not all “users” and “usage” is the same. Each protocol will have a variety of different ways to exploit the numbers. This will distort the publics’ ability to understand which ones are creating value.

Users are going to win the game

Everyone dreams of mass adoption, but the reality is that blockchain is still very much in the first phase of research and development, with a limited number of legitimate decentralised applications available to the average consumer.

For any utility network, active users in the network need to be the primary goal; although, if your asset is a store-of-value, like BTC, then higher numbers of hodlers are good for the network, so this is less applicable.

Active users are a vital ingredient to the decentralised economy because they create transactions via DApps. DApps then pay some form of network fees — this is important as it provides the economic incentive to keep the network running, provide infrastructure, secure the chain and to further the development of the network. Without users, generating value in DApps these fees are worthless, and therefore so is the network.

The network effect for a successful blockchain economy:

1. A good, healthy rate of quality DApps being built
2. A growing stream of users actively engaging with the DApps and producing transactions
3. A solid group of infrastructure providers, miners or stakers to maintain the networks

While all these elements work harmoniously together, real success will come to those with the most users on their network. Everyone knows it — so this is where the mind games begin.

What’s real and what’s not

It’s important to understand that not all transactions are created equal, not all “user counts” are equal and not all DApps are equal. So, when you’re looking at the numbers, keep a few things in mind.

1. It’s often free or very cheap to create unlimited ‘accounts’ on the blockchain, so a high number of addresses is not necessarily a sign of a valuable network. Yes, more addresses should mean more users, but it’s not always the case. Look out for the % of addresses that are active within a fixed period of time, or holding a certain percentage of the network’s assets. Another great way to tell is if the web impressions or app downloads of popular DApps correlate to the number of addresses.
2. Not all networks charge fees, or have virtually ‘free’ fee structures; this means they can generate large numbers of cheap transactions without incurring a cost. Alternatively, the primary asset holders can own and manage most of the mining or staking; that way, they get most of the reward back to re-invest in more free transactions. A high number of transactions doesn’t always equal value for the network.
3. Not all DApps are creating sustainable value. If the top DApps on a network are either exchanges or derivatives of gambling and betting, then this is a signal that most of the activity is actually speculation. While some speculation is essential in creating future value in any asset, there needs to be a balance of other DApps providing something useful (beyond speculation) which are also bringing usage to the network.

So keep an eye out for networks that are growing real users, with DApps that are doing things beyond trading or gambling coins, and you will be able to spot the networks that will create the most value in the future (and the ones which might be a bit overvalued right now).