Network Success != Token Success
Diving into the metrics behind how a network succeeds and why a token succeeds
Many people view blockchain technology from a perception that for a specific network to succeed, the network needs to be able to attract real users, or solve a real problem. This is largely accurate - but if the network succeeds, does that ultimately mean the token succeeds too?
There is not a positive correlation between an arbitrary figure like TPS and token value; users:price is not a linear curve.
What makes a network succeed? I think it is quite simple actually and can be divided into 4 subdivisions - TPS, bots, TVL, fees.
The higher TPS (assuming it is fulfilling a valid economic incentive; anything but transaction spam) the more successful.
Many people will argue bots should be removed from the conversation. I fully disagree.
Bots are designed scripts to generate profit. If there is an economic incentive on the network for a script to fulfill (such as MEV), bots will send transactions. This is beneficial for the network because it keeps figures in check and prevents prices and oracles from showing completely different figures then other chains. If none of the chain is properly arbitraged, the chain becomes unusable for the average person who wants to lend or swap assets.
Bot spam. I want to preface that spam is not millions of transactions being sent to fulfill economic incentives: ORE on Solana congested the chain, but it is not spam because those transactions were sent to fulfill an economic task. On the other hand, if millions of transactions are being sent to purposely congest the network with no economic incentive (I.E simply burning fees), that is spam. If spam is possible, there is a fundamental economic problem with the network and the incentives of validators picking up the transactions. I do not think that transaction spam should be included in metrics (rather subtracted from TPS and bot count) because these transactions are being sent with an ulterior motivation that differs from fulfilling on-chain economic incentives.
TVL metrics are important to consider because the more value a chain possesses, the more people trust the chain to continue working as it should. This is more important then people realize - as soon as people lose trust in a chain, the chain is essentially dead.
Fees are a measure of usage. Blockspace is a limited asset, the more people are willing to pay to have their transaction included in a block, the more successful of a network.
On the other hand, the metrics that drive token price are tokenomics and narrative. Tokenomic flywheel effects can be advanced by users, and narratives can be developed through increased usage, but they are both entirely separate ideas from TPS.
Flywheel effects are critical because they allow the upside of token inflation to exist and have the downside mitigated.
Token inflation in my opinion is a critical aspect of a functioning chain, as it’s the easiest way to pay validators to protect your chain. However, inflation can kill a token’s price if not used properly. Sinks (such as EIP-1559) can create long-lasting chains that provide value to tokenholders through the inflation being offset.
Sinks are needed parallel to a real usecase. For ETH, it’s a gas token. For many rollups that settle on Ethereum and use ETH as their gas token, something needs to be spun up besides a governance token. Governance isn’t truly as valuable as the market is currently pricing it, and if a lot of these protocols don’t do something to add utility, the tokens will slowly bleed valuation as the number of buyers willing to buy the massive unlocks dwindle.
Narrative is a simple concept, yet poorly utilized by most launches. The easiest way to attract people who will use your network and push it to the masses is through giving them an incentive to do just that. If protocols want successful tokens, it’s high-time to stop being stingy with initial airdrops and give people large allocations.
This won’t matter in the long-run, but creates nice flywheels that incentivize people to come use the network.
That’s the hardest point: acquiring users, which can be solved through giving users substantial token allocation.
If the network is any good, they will stay.