The most overlooked factors when building on or investing in blockchains
Oct 4, 2023
When you're going to invest or launch a product in web3, the blockchains your portfolio or product lives on is paramount.
Even if you're investing in a cross-chain project, events that affect any of the host ecosystems can help or hinder your performance to a surprising degree.
In our recent Blockworks webinar, one of the topics discussed in detail was how to effectively analyze host blockchains, and the most commonly overlooked bits of data, statistics, or context that can derail your efforts if you miss them.
The conversation was hosted by Blockworks' Graham Perry, with Flipside CFO Mike Featherstone, 21co's Tom Wan, and Tribe Capital's Boris Revsin.
More of a qualitative factor, you'll need to make some informed projections about the long-term sustainability of an ecosystem without relying entirely on quantitative performance metrics. There are, however, a few questions you can ask to help assess:
Is the core development team active and innovative?
Tech moves quickly, especially in web3. Whether this is a Layer-1, Layer-2, appchain, or other stack, will it be left behind in the future, or is it pushing forward on the frontier of the tech?
Is the ecosystem designed sustainably, with a consistently-attainable, relatively predictable source of true value?
The ecosystem may be thriving, with popular and profitable projects at every turn. DeFi volumes in the billions, developer funding at a max, and innovative applications for several industry niches launching regularly on the chain - all of these describe Terra just before its collapse.
Are developers and users incentivized properly?
Talk to developers in the ecosystem. Look at the data to find contract deployments, user activity, and long-term growth trends (steady and upward is often preferable to a quick and recent surge, no matter how large).
Grants and other funding can be a powerful incentive for developers, but they should also be supported with technical guidance, marketing, and user activation. Users should have clear onboarding/educational pathways, and the other apps being developed should provide users obvious value.
Ecosystem design doesn't just affect sustainability, but security. The larger and more profitable an ecosystem is, the more incentive there is to attack it. One exploit can completely destroy trust in an ecosystem.
Often, bridges are the target of malicious activity. Bottlenecks with fewer points of failure, they're typically easier to exploit. And, since value transacts between contracts/chains on bridges, activity (and therefore volume/value) are heightened.
If a bridge is attacked, users are vulnerable and even unaffected users may be unable to access their funds for a period of time, during which market sentiment can turn sour and value be wiped away before there's an opportunity to cash out.
Often underweighted in decision-making is a blockchains marketing and broader market strategy — a chain may have the best tech available, but if it's poorly understood at either the developer or end user level, it will not attract the scale it should.
This is one of the more fixable problems an ecosystem can have, but if market-fit is poor, it's worth asking the foundation/labs team how big of a priority their marketing and market strategy are.
If they're prioritizing foundational tech and infrastructure first, that can be healthy, but it's good to factor into your decision. It may simply not be the right time to launch in that ecosystem. But if they're operating with a "build it and they will come" mentality (unfortunately somewhat common in web3), it may be time to find another option.
In web3, growth can come extremely quickly. If a chain is not prepared to handle outsized traction from users, it may not be compatible with the goals you have for your project or portfolio.
TPS is just the start. When looking at the data, you'll want to explore historical downtime, max/average traffic ratios, fee generation, and more.
Looking at trends with a large time scale can help you differentiate between two types of developers and users: core and mercenary.
Core are the devs and users that never leave the ecosystem, regardless of market turns. They tend to be brand evangelists, loyal to their ecosystem, and are a large source of future conversions.
Mercenaries follow the money - activity, airdrops, hype, volume. Mercenary devs can leave half-finished projects (often rugs) during market lows, and mercenary users inflate data during market highs, making an ecosystem seem more attractive than it is. Neither contribute true value to an ecosystem, and can cloud your assessment of the current and potential scale of an ecosystem.
As with all decisions, carefully consider your appetite for risk. Some of the red flags in previous sections can be symptomatic of new ecosystems with high growth potential. That they also come with high risk may be acceptable for your scenario, whether you're looking for outsized returns or outsized developer grants.
All ecosystems contain inherent risk in each category, existing somewhere on a spectrum. The more mature an ecosystem is, the less risk you'll generally incur (look for stable, long-term growth trends and consistent/well-retained developers and users).
The data that comprise your decision-making frameworks are going to need to be custom-tailored to your goals, so there will never be one right path to a decision.
But even with the right frameworks, before you can make informed decisions, you'll need to make sure your data is accurate, up-to-date, and comprehensive.
That's what we specialize in at Flipside. We work directly with chain foundations to curate the industry's highest-quality data, covering 26 chains and protocols with the utmost precision.
You can access our unrivaled, human-readable data free for 14 days here, and make smart and measurable decisions with confidence.
(Nothing in this article is intended as financial advice.)