🎧 On-Chain Trend Detection: A Sleuth’s Handbook
Round Table Recap: January 25th, 2023
In this Twitter Space Recap, we hear from Patrick, a content creator who focuses on on-chain analytics for crypto.
He explains why he prioritizes fundamentals over traditional technical analysis, and the metrics he uses to gauge the adoption of a new chain, including total value locked, liquidity deposits, and transaction count.
Patrick also shares his insights on which protocols are generating real revenue, and the trends he's looking for in 2023, including continuous layer 2 adoption and the potential for AI cryptos to see a similar boom to the metaverse.
You can listen to the full audio here
Keep reading 🍿 👇️
• Guest: Patrick @Dynamo_Patrick
• Interviewer: Kadeem Clarke @Crypto_Clarke
• Additional: OtterOlie @otterolie
• Patrick produces content on Twitter and YouTube but focuses on on-chain analytics.
• He explains that most of the crypto content historically is based on TA, but people should also prioritize fundamentals.
• Instead of just price action, he aims to look at revenues, half metrics, liquidity deposited, transactions, active addresses, and more.
• He says it’s essential to get a level of real-time data that is impossible to get from your average business. Example: Most companies post financials quarterly, but with crypto, you can invest in something and find out how much revenue they’re bringing in straight away through on-chain data.
• Patrick was looking at the revenue reports for stocks where data is only produced every couple of months and compares that to crypto where daily data is on hand with protocols like GMX and gains network where you can see what they’re bringing in daily.
• Most of his content analyzes those sorts of trends and what new layers are emerging.
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What metrics do you use to gauge the adoption of a new chain?
• Patrick looks at total value locked, liquidity deposits in any defi protocol, lending protocol, and DEXs.
• He also looks at transaction count, daily active addresses, DEX volume (how much volume people are swinging on DEXs), and stablecoins being bridged to a chain (these are tokens that can be bridged to blue chip assets like BTC and ETH).
• Example: If people are bridging USDC to polygon, new money is going onto the chain and is a good show of confidence.
• Patrick explains that a stablecoin influx can signify that smart money is coming onto a chain.
• From a trader’s POV, Patrick mentions how you can look at treasuries going up where you track whether treasuries are in chains native tokens or not.
• Additional metrics he looks at are active developers who can help you understand how many contracts are being deployed on chain or how many GitHub commitments different projects have.
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Issues with commonly used metrics
• Patrick explains that TVL has issues with reflexivity. This means sometimes it can cause an influx of new money entering the ecosystem, while sometimes it can come from the price going up. The way you correct that is to look at TVL in terms of the native layer 1 gas token.
• Is it going up in terms of ETH or USD?
• Market cap over TVL. The problem with this is, for example, with chains with a low marketcap per TVL, this can often mean that TVL isn’t real, doesn’t have good long-term prospects, or the team isn’t as active, etc.
• The problem with looking at lending and DEXs is that so many people have clocked on to looking at this metric through the help of defi llama, meaning there’s less edge towards it.
Which protocols are generating real revenue?
• Defi-llama and token terminal are where you can find this info yourself.
• Gains network has very high revenue and earnings compared to their market cap and earnings.
• If you look at protocols by earnings = revenue collected – token incentives. Gains are in the top 10.
• In general, NFT marketplaces like OpenSea, GMX, DYDX (DYDX is consistently near the top even though their tokenomics are not great), and liquid staking so (protocols like lido who are ranked 2 or 3 most days for revenue.)
🎧️ Protocols earning real revenue in crypto:
Why do you think on-chain fundamental analysis will become more common than technical analysis less common over time?
• The main reason is that TA will always have its place as with traditional TA. With fundamentals, you have more of an edge.
• With long-term investments, it's vital that you can evaluate tokens as a stake in a business or loom at the utility token being used in a business.
• With fundamentals, the health of the actual business matters; it's not just about the price and what the market thinks of it.
• Patrick insists that ideally, you have some ability to look at both, but if you want to know the ins and outs of a business, then the fundamentals matter.
• 90% of the time, when people are burnt, it's because they don’t understand the fundamentals, i.e., tokenomics, so they bought a token with 95% of the supply locked. (this happened a lot on Solana) or they didn’t look at the fundamentals of a project and didn’t research (people didn’t use on-chain data such as a protocol having little to no active users.
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What trends are you looking for in 2023?
• Patrick says he's looking for continuous Layer 2 adoption.
• He mentions how the number of transactions being processed on ETH rollups instead of ETH mainnet is one of the most substantial growths he's seen.
• Also, AI cryptos may have a similar trend to the prior metaverse boom, and businesses may incorporate AI crypto in some way or another.
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