How to Comparatively Measure the Value of a Blockchain
Introducing the M/C Ratio
Measuring the value of blockchain is a difficult endeavor. The majority of platforms such as CoinGecko and CoinMarketCap, rank the value of a blockchain based on the market capitalization. The higher the market cap, the more valuable the project. The mindset of the cryptocurrency world is that the more money pumped into the token, the more value it holds. Similar to stocks, evaluation of a company is based on its future value, not current market share. Let’s take the infamous example of Tesla, a company which constantly needs to justify its evaluation. As of November 7th 2021, the company is now worth 1.2 trillion dollars, more than the 9 other largest automakers combined. This is a grossly large evaluation considering that Tesla cars only make up about .8% of global vehicle sales.
Naturally, we see the same trends in the cryptocurrency world where market caps of projects like Ethereum and Bitcoin are measured on their future potential. To the extreme end of overvaluations, there are blockchains like Cardano that have a market cap of about 70 billion dollars while currently not supporting smart contracts. We often hear statements like “Bitcoin is going to change finance and it will reach 100k+” but rarely hear, “Bitcoin is worth 50k because that is it’s current value proposition”. Unlike stocks, where the value of the share can be compared against the value it provides, cryptocurrencies have fewer additional analytical indicators. A few of these stock indicators can be seen on the chart below.
The main indicator I would like to speak about here is the P/E ratio of a stock. P/E is the share price divided by the earnings per percentage. It is a measure used to find the relative value of a company compared to its current stock price. Investopedia defines it in the following way, “P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.” The better the earnings of the company, the price should go up with it, balancing out the PE ratio. For example, a high P/E means a company is overvalued as its price-per-share is worth more than it’s earnings per share, or ESP. This ratio is invaluable for fundamental analysis of a stock and an equivalent must become mainstream for crypto or blockchain projects.
I introduce: The M/C ratio. The M/C ratio is a cryptocurrency’s market capitalization divided by the amount of smart contract calls seen in the last 30 days. M/C stands for market cap / contract calls. While smart contract calls are the most accurate measure of a blockchains usage, a future combination of smart contracts, wallets, trends, projects, community data can be strung together in the future to create a more accurate picture. Although many technical kinks do need to be figured out, I believe smart contract calls are the most accurate single measure of smart contract platforms, while transactions are sometimes meaningless and for blockchains with cheap gas fees, often spammy.
A challenge I encountered while starting this project is the difficulty in finding smart contract calls for various blockchains. The contract call data is from the month of September, 2021. Future versions of this data will be further filtered. The raw data is shown here.
I have used the Ethereum, Tezos, and Tron blockchains for this first version of the M/C ratio with a market cap taken at the end of September, 2021. Another important point is that Algorand’s data is for the month of August 2021.
The data is displayed below:
As you can see, Ethereum is the most overrated smart contract platform of the three shown with a M/C ratio of 3,363.2. Tezos is then the most averagely rated blockchain of the three with a M/C ratio of 877.2. Finally, Tron is the most underrated blockchain with a M/C ratio of 153. To clarify, when the M/C ratio is high, that means that there is more money than usage and thus, it’s overvalued. The higher the M/C ratio to the higher the unsubstantial hype.
There is a lot more data to be collected to receive an accurate picture, but this article should provide an interesting view into how Tezos and Tron measure up to Ethereum in terms of usage and hype. Additionally, while I didn’t include it in the chart, Algorand had 102,974 contract calls in August and a market cap of 10 billion dollars. Making its M/C ration roughly 99,865! It’s important to note that this does not necessarily mean that Algorand is radically overhyped, though it very well could. It could also very well mean that using this metric of smart contract calls is only applicable on certain blockchains and the M/C ratio should not be the sole factor in determining true value. If a blockchains sole purpose is smart contracts, I believe it is a good metric to determine if they are delivering on that. It’s also important to check where those calls are from, such as NFT platforms, DeFi, independent developers etc.
There are many more potential indicators to measure a blockchains usability versus hype that can be created. This is only one possible way to measure hype and it will be interesting to think about other value indicators that can be created in this space.
I hope you enjoyed this article and found it interesting! This is one of the most interesting topics I’ve worked on and I’m excited to learn more about value indicators in the web3 space. If you’d like to learn more and stay in the loop with Tezos Israel, follow us on Twitter at @TezosIsrael. If you have any questions, feel free to reach out to me on Twitter at @adshinder. See you on the next one!
