UPDATE: A heated debate is igniting in the cryptocurrency world as experts clash over the validity of network effects in layer-1 (L1) blockchains. This urgent discussion comes as investors question the true value of these digital assets, a development that could significantly impact market dynamics.
Santiago Roel Santos, founder and CEO of Inversion Capital, boldly claims that cryptocurrencies lack genuine network effects, suggesting that they are currently overvalued. He argues that many effects are negative, leading to congestion, higher fees, and a poor user experience. “Facebook didn’t get worse when it added 10 million users,” Santos asserted, challenging the traditional valuation models that apply to tech giants.
This controversy is heating up as other analysts counter Santos’ viewpoint. Jasper De Maere, a desk strategist at crypto market maker Wintermute, argues that labeling L1s as overvalued due to perceived negative network effects is misguided. He emphasizes that users are not meant to interact directly with these infrastructures, saying, “the real network effects for an L1 exist at the validator, security, and liquidity layer,” where real compounding occurs.
Tomas Fanta, principal at Heartcore, also disputes Santos’ claims about rising fees as usage increases, stating that in high-performance blockchains, “the fees change from meaningless to meaningless,” implying that liquidity and yields actually improve with greater adoption.
Ben Harvey, a digital asset researcher at Keyrock, shares a mixed perspective, agreeing with Santos on some points of overvaluation but noting that not all L1s are created equal. He highlights scalability and AI integration as key factors influencing their value.
Santos provides some startling estimates, suggesting that based on a total crypto market cap excluding Bitcoin, the approximately 716 million crypto users could indicate a per-user value of nearly $1,760. However, due to Bitcoin being included, this number could be an overcount.
Former investor Martin Kupka highlights that current network effects are more pronounced in stablecoins and centralized exchanges, where deeper liquidity enhances trading efficiency. He notes, “the more useful it is as a medium of exchange, the more traders a CEX has, leading to better execution.”
Wintermute’s De Maere expands on the modular nature of Web3, stating that this makes the underlying network effects clearer compared to Web2. He explains that effects emerge across L1s as security and validator concentration, and in exchanges where user aggregation occurs.
As this debate unfolds, the implications for the crypto market are significant. Investors are advised to monitor expert opinions closely, as the outcome of this discourse could influence investment strategies and market valuations in the rapidly evolving crypto landscape.
Stay tuned for more developments on this critical issue.
