Despite bear market, web3 adoption is actually growing.
But growth is not evenly distributed.
A review of adoption status of major blockchains + 3 related investment ideas to help you position for next cycle đ
Total crypto mkt cap is down 70% from a yr ago. Though dramatic, the same mkt ran up over 1000% in 2020-21. Excess & opportunism had to go bust at some point for industry to move forward.
Depressing price action masks actual growth in web3 economiesâ over past yr total txns across major smart contract blockchains dropped only 25% while active addresses INCREASED 15%.
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What it tells you is despite decline in speculative activitiesâ a big driver of on-chain txn growth in bull mktâ web3 adoption is in fact continuing to grow.
Daily txns per active address dropped from 15 a yr ago to 9. âTis only natural since speculative actionsâ e.g. button-clicking yield farming & play to earnâ largely disappeared. But 9 txns a day per address is hardly the definition of âdedâ.
The resilience of web3 is not evenly spread across blockchains. Some are weathering winter better than others. Some are seriously challenged but will likely pull through. Both could offer good investment opportunities going forward.
My top 3 L1/L2 investment themes once we gradually come out of bear mktâ
1) The turnaround hero
2) The ethereum scaling war champion
3) The grass-root survivor
1. The turnaround hero
Markets that run on stories of future growth potentialâ e.g. tech, cryptoâ tend to overshoot on both up & down sides when such narratives get too extreme.
Prime example in this cycle is Solanaâ investor darling of last yr but now beaten down not the least b/c of perceived connection w/ FTX.
SOL price has dropped the most (-93% y/y) among all chains. Crypto twitter was filled w/ Solana death predictions when FTX incident broke out.
Still, Solana has 2nd highest active address counts among all blockchain nationsâ next to BSC & higher than Ethereum.
And it generates almost half of daily txns of entire web3 economy.
Granted activities have come down more than most other chains over past yearâŠ
But given itâs still one of the largest & most diverse blockchain ecosystems, does it really deserve to have lower mkt cap than the likes of Cardano, Polkadot or even Litecoin?
Unless ofc price is 1) depressed by forced selling of liquidity-strapped institutions holding large sums of SOL, and 2) mkt is pricing in non-zero probability of irreparable demise of entire ecosystem.
Once factor 1 is over & *if* factor 2 turns out exaggeratedâ which is my baselineâ Solana could be the classic turnaround story.
Itâs not unusual for the most beaten-down tickers in a mkt to rebound the fastest after a lengthy bear mkt once situation turns around. Case in point: the down-trodden car maker & bank stocks led equity mkt recovery after 2008 crisis.
Another candidate in this category is Flowâ 2nd steepest token price drop YTD (-91%) among all chains, despite the fact that activity level has had triple-digit positive growth.
But itâs a sector-specific chain for NFTs. Narrative space is narrower compared to a general purpose platform.
2. The Ethereum scaling war champion
ETH L2s such as Arbitrum & Optimism saw large growth this yr starting from small base. These scaling solutions should continue to be a prime area of web3 infra growth in near term.
Right now Arbitrum is clearly leading in growth of users, txns & engagement after upgrade in Q3. But again, starting base was small.
Polygon is technically an ETH L2 but started much earlier & now has larger, more independent ecosystem. This yr it benefited from big mainstream project launches such as Reddit NFT which added 2 million+ new addresses in single day.
But despite positive user growth, txn numbers actually went down from a yr agoâ itâs the only chain where these two metrics go opposite ways on 12-mo time frame.
âTis likely b/c non-crypto-native users added from large web 2.5 projects arenât that active. Obv youâd want to see this trend to revert at some point– at end of day a âuserâ is only valuable if they actually do stuff to generate txn fees for the chain.
So far actual growth impact from web 2.5 projects is less than what they were made out to be. But weâre still extremely early.
In any growth industry rule of thumb is to bet on *THE* leader, which usually ends up commanding higher price premium (relative to their actual mkt share) than 2nd or 3rd place follower.
Right now Arbitrum is leading in growth metrics (but small). Polygon has more broad-based traction but activity is slower to pick up. Meanwhile more players e.g. StarkNet are entering L2 competition.
Too early to say who will be the definitive category leader. Itâs useful to regularly monitor these traction data, which you can get from @Artemis__xyz dashboard.
(BTW, like this so far? I help you get smarter about web3 & macro. Subscribe to my newsletter for updates.)
3. The grass-root surviver
Cosmos turned out more resilient than most this yr, not only surviving spillover from Terra which used to be largest chain in the eco, but managing to maintain stable activity level, as reflected in positive albeit modest growth of Cosmos Hub.
Reliance on organic growth prevented drastic activity slump as seen in some other platforms that grew by offering massive incentives (though arguably it prevented much of upside as well).
Built-in infra for cross-chain traffic will be a growing attraction for projects as inter-chain communication becomes more & more important in web3, while supporting infra is being built out for projects to run their own IBC-enabled chain easily.
Can the grass-root surviver become tomorrowâs top growth leader? I doubt it. But can it live through winter & become stronger? Most definitely.
Thoughts on other chains in the dataset not mentioned so farâ
Cardano: Didnât see a there there & continue not seeing. Open to change opinion if something worth seeing finally happens.
Near: On surface both txn & user count showed positive y/y growth. But when you look a step closer growth is mostly from a single project launch, which I covered before. Other than that not much else happening (yet).
Avalanche: Drop in txns & active users this yr is among the steepest across all chains, as EVM compatible C-chain faces stiff competition from ETH L2s while subnetsâ the platformâs primary product offering for modular scalingâ are having a slow start.
Right now most activity growth comes from Defi Kingdom subnet, which showed renewed sign of life since summer after several months of slump.
As result txn volumes have recovered despite having no user growth:
Future prospect largely rides on platformâs ability to attract quality projects to create subsets. Will that happen & to what extent remain to be seen.
BSC: The only chain where native token price dropped LESS than actual traction this yr. Whether thatâs bullish or bearish depends on your perspective.
On one hand you can say price is not correctly reflecting chainâs fundamentals. On other hand BNB token is ultimately not about BSC but is supported by worldâs largest centralized exchange which is doing better than ever.
If weâre only talking abt the chain itself, whatâs more concerning than drop in user count is steep decline in user engagement over past yr, which reflects a more speculative user base & less quality projects on BSC compared to others.
Iâm not holding my breath for next big web3 innovation to emerge from BSC to say the least.
To sum upâ
At end of day investment is about reward/riskâ you want to bet on things that offer high reward w/ moderate risk, or moderate reward w/ low risk.
When it comes to investing in L1/L2 infra, 3 scenarios give such favorable balance imo as we come out of bear mkt– hopefully– over next yr:
1/ the turnaround hero (high reward, mid risk)
2/ the Eth scaling war leader (high reward, mid risk)
3/ the grass-root survivor (mid reward, low risk)
My current top candidates for the 3 categories are Solana, Arbitrum/Polygon, Cosmos, respectively.
Usual disclaimer: Weâre in web3âs early days. Things are fluid & opinions subject to change. None are investment advice.