From Wealth Effect to Organic Growth: Revealing the Secrets to the Success of High-Quality Cryptocurrency Projects

Although Avalanche experienced significant growth in the native DeFi projects in late 2021, it has not recovered from the consequences of the collapses of 3AC and Terra. While other blockchains successfully created specific consumer and DeFi sub-industries, Avalanche has not yet established a clear advantage or moat in the wider crypto ecosystem, which may explain its lack of substantial user adoption. Even if Avalanche attracts users through more token launches or incentives, it still needs to address the fundamental problem of boring applications to retain users in the long run.

Polygon

Compared to Avalanche, the cumulative market capitalization and user base of Polygon does not appear to have changed in sync. Instead, their changes have three distinct stages:

• Stage 1 : Growth – User activity lags behind market capitalization growth by about two months, and the correlation between the two variables reaches 0.96;
• Stage 2 : Deviation – After the token launch, the market value continues to grow, but user growth stagnates;
• Stage 3 : Maturity – User activity increases independently of market capitalization growth, indicating a more stable user base.

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Polygon has evolved from early DeFi projects, including adopting existing Ethereum-based projects such as Aave and SushiSwap, and has become a popular consumer application hub. With the growing interest from web2 entities such as Reddit and Starbucks, as well as relatively low gas fees, Polygon’s user base is now largely composed of consumer applications, accounting for 57% of the total address count. Multiple Polygon projects have achieved organic adoption without relying on traditional incentives such as tokens. These projects include the new games Benji Bananas, Ultimate Champions and The Dustland, as well as the impressive growth of the decentralized social graph Lens Protocol.

This organic growth trend demonstrates that the Polygon ecosystem is maturing. Developers and entrepreneurs are leveraging the platform’s unique capabilities to create novel consumer applications. These applications are not only attracting new users but also providing existing users with richer and more diverse experiences, thus forming a virtuous cycle of growth and innovation.

Arbitrum

Arbitrum was highly anticipated upon launch. Furthermore, many top projects on the network had native tokens even before ARB was launched, including GMX. Prior to the launch of ARB, Arbitrum experienced rapid growth, with a direct correlation between user activity and market cap (correlation coefficient of 0.95) and no lag period. Despite the potential for mining activity, Arbitrum found a place in DeFi and won widespread adoption for perpetual platforms such as GMX. Additionally, user adoption increased more than two-fold even after promised token incentives ended.

On the other hand, Optimism’s user activity was cyclical and correlated with each incentive event. The network attracted waves of users during the summer incentives and the Optimism Quests program, but users quickly dissipated after each event ended. Although Optimism’s user activity has recently increased, the average number of daily active addresses is still only one-fifth of that of Arbitrum.

Overall, Arbitrum’s growth can provide valuable lessons for other emerging networks to achieve sustainable success through organic user adoption and novel application creation. While incentives can attract users in the short term, their long-term effects can be worse if implemented improperly. The organic growth patterns of Polygon and Arbitrum should encourage emerging networks to focus on building high-quality, unique applications that provide value to users without the need for tokens. Once these networks have established a solid user base, they can begin to focus on bringing future growth and development and ultimately successfully launching tokens using their user base.

The above case study demonstrates the significant growth that can be achieved through the launch of a native token, with the growth rate of unique addresses roughly 1.5 to 3 times that of market capitalization. Recent examples such as the launch of Arbitrum’s token suggest that the time lag between capital flows and user reaction has significantly shortened, making token launches a more direct and immediate catalyst for growth. Nevertheless, sustained user retention depends on the uniqueness and quality of applications within each ecosystem. It is these distinctive factors that make a project successful and able to retain users over the long term.

Looking Ahead: Emerging Networks

Insights gained from observing the “wealth effect” in different ecosystems allow us to infer the potential impact of native token launches on emerging networks. These networks include Solana, Cosmos, Move-based blockchains such as Aptos and Sui, and zkEVM, which has yet to see large-scale token launches from its application protocols.

Solana

Currently, several top applications on Solana, such as Magic Eden, Jupiter, Wormhole, and Drift Protocol, do not have native tokens. While they have not announced plans to launch tokens explicitly, recent developments among competitors and newly launched incentive programs suggest that such launches are possible and common for successful application protocols.

By analyzing valuation metrics such as active addresses, TVL, and trading volume, and comparing them to similar projects in the wider crypto ecosystem, we can estimate the potential market capitalization of these applications. For example, by observing the ratio of NFT trading volume to valuation in other mid-tier markets, we can reasonably predict the valuation of projects such as Magic Eden and conduct similar analyses on other ecosystem projects. Based on a review of top non-token projects on Solana, we estimate that if they were to launch tokens, market capitalization could conservatively grow by $1-2.5 billion.

Through analysis of native projects on Solana such as Orca, Raydium, and STEPN, we identified a consistent growth pattern of Solana paying users, similar to Polygon. Specifically, user activity tends to grow at roughly twice the rate of market capitalization for every percentage point increase in Solana’s market value. This growth is consistent with our historical averages of 1.5-3 times the benchmark. Based on this trend, we estimate that with the launch of new projects, and considering ecosystem market capitalization growth of $1-2.5 billion, Solana’s daily active signers could increase by 210,000-290,000 unique addresses. Such user growth would bring Solana’s daily unique address count to levels comparable to Arbitrum and approaching those of Ethereum.

This prediction only considers the overall ecosystem market cap increase due to the launch of the native project token. It does not take into account SOL’s historical trend of growing significantly faster than the overall native token after the token launch. This trend is amplified in new building DEX pools paired with application protocol tokens, creating new sources of revenue and demand. Therefore, this prediction may be conservative, and the actual number of signers may further increase.

Like Polygon’s mature stage, Solana has attracted users without incentivizing token issuance. Unlike Avalanche, it has also successfully carved out a niche market in the consumer application field through innovative tools and facilitating further application development. The lower transaction costs of Solana and Polygon make them the preferred choice for consumer applications, which often require low per-transaction unit costs to operate effectively. Unlike financial applications, consumer applications often involve smaller transaction sizes and lower fees to encourage user adoption. Therefore, the Solana and Polygon ecosystems have good conditions to support the development of various cost-effective and user-friendly consumer applications.

The launch of new tokens is expected to drive further user growth and generate greater interest in native applications, potentially revitalizing Solana’s position in the wider crypto ecosystem. The success of Solana demonstrates that an ecosystem or application relies not only on token incentives but also on unique value propositions and user experiences. To continue to grow, developers must create applications that can provide long-term benefits to users and build strong brand images.

Cosmos

Recently, some new application chains in the Cosmos ecosystem have raised funds and may launch tokens in the future, including Berachain, Sei, and Neutron. Cosmos offers a novel blockchain architecture where applications can run independently in a larger network, achieving greater scalability, customization, and collaboration. This unique underlying blockchain infrastructure approach allows for more scalable and innovative use cases to flourish in the Cosmos ecosystem.

Over the past month, the entire ecosystem has had over 1 million monthly active users, with most users being on Evmos, Cosmos Hub, and Osmosis. Based on past application chain launch history, conservative predictions estimate that market capitalization will grow by 10-15%, and unique users will grow by 20-30% overall.

Aptos, Sui, and ZkEVMs

Aptos and Sui both launched native tokens when deployed on the mainnet, while zkSync and StarkNet did not launch native tokens and may hope to attract users through airdrops and mining. If this is the case, zkSync and StarkNet may be similar to the situation with Arbitrum and Optimism last year, where organic participation on these networks is difficult to accurately measure in the short term. Currently, the ecosystems of these networks are mainly composed of DEXs, and more diversified DeFi applications are yet to be deployed.

Based on past activity, we expect the ecosystems of these networks to continue to grow as more diverse DeFi applications are deployed. For example, by launching new perpetual contract markets, we can expect initial market capitalization to grow by $75-150 million and user bases to grow by 20-30%, depending on the ecosystem. However, these initial growths may be driven by potential airdrop interactions as users try to interact with as many applications as possible. To truly retain these users long-term and achieve growth, these applications must have unique value propositions or new use cases, similar to what Solana, Polygon, and Arbitrum have done.

Conclusion

While incentive mechanisms can drive initial growth, they must be consciously used to ensure projects have sustainable models for retaining users long-term. Networks like Polygon, Solana, and Arbitrum have laid a solid foundation for growth through their unique value propositions. They focus on building high-quality applications that provide value to users and can achieve organic growth and success. As more emerging networks launch without native tokens, they can take cues from these models and strive to create novel and valuable applications that do not rely on incentive mechanisms.

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