Key Points

· Narratives, emotions, and hype can attract short-term user interest, but are insufficient for long-term growth, especially in a bear market. Projects that rely solely on industry narratives or extrinsic rewards tend to attract short-lived users and may struggle in the long run.

· Projects should focus on providing real value to users through tangible benefits such as successful use cases and sustainable returns. This user-centric approach can keep users engaged and foster loyalty after the initial hype. Ultimately, providing meaningful value and continuous innovation ensures the long-term development of individual projects and creates a healthier and more resilient cryptocurrency market.

· In this report, we focus on three ways to achieve "real value" (not exhaustive): real demand, real income and profits, and real yield.

· Real demand refers to the willingness and ability of participants to use and pay for a product or service without relying on extrinsic rewards. Strong product-market fit creates intrinsic demand, allowing projects to generate sustained returns.

· Real revenue refers to tangible revenue generated by a project, typically from protocol fees. When combined with healthy token economics and low operating expenses, a project can achieve operational profitability.

· Real returns in the crypto economy come from tangible revenue streams and are not entirely dependent on inflationary token issuance.

Challenges in Sustaining Interest

Narrative, sentiment, and hype are critical in driving short-term price action and attracting retail interest. However, these factors alone are not sufficient to sustain long-term growth in price and activity. This is more pronounced in sideways or bear markets, when on-chain activity decreases and capital inflows slow. Projects that rely solely on industry narratives or incentivize activity by offering extrinsic rewards, such as points or airdrops, face a more difficult operating environment.

Projects that offer some kind of intrinsic tangible value tend to perform better in this context, as they are able to maintain a baseline level of activity regardless of market conditions.

Current Situation

Many projects have managed to capture user attention by leveraging popular narratives such as AI, re-staking, or infrastructure layers. However, some of these projects have failed to maintain momentum, and user interest has waned over time, leading to a decline.

A similar trend is seen with projects that rely heavily or exclusively on extrinsic incentives, such as points systems and airdrop promises, to attract and retain users. While these strategies can spark initial user interest and engagement, they often fail to foster long-term commitment. Once a points program ends or tokens are airdropped, users churn away, lacking an intrinsic reason to retain them.

Overall, projects that rely solely on hype or extrinsic rewards tend to attract only a transient user base. And, without tangible innovation, these projects will fail to make significant contributions to the overall growth and maturity of the cryptocurrency ecosystem.

Focus on Providing Real Value

To achieve sustainable growth, projects must focus on providing real value to users. In this report, we broadly define “real value” as a product or project that provides tangible benefits, which can be a successful use case, a sustainable rate of return, or other forms of tangible rewards. We’ll cover this in more detail in the next section.

The purpose of providing real value is to keep users engaged after the initial hype, so that they will continue to use the platform even without extrinsic rewards. Over time, this user-centric approach can foster loyalty and encourage users to promote the platform to others, creating a growth flywheel.

Figure 1: Attracting, engaging, and delighting users creates a growth flywheel

Source: Hubspot

In fact, by developing solutions that meet real needs and provide intrinsic benefits, projects can cultivate a loyal user base that will remain engaged after short-lived incentives. This approach not only ensures the long-term success of individual projects, but also helps create a healthier and more resilient cryptocurrency market. In the long run, the success of the cryptocurrency ecosystem will depend on the ability of projects to provide meaningful value and drive continuous innovation.

Understand the various aspects of real value

As mentioned above, we generally define "real value" as products or projects that can provide tangible benefits. There are many ways to create value for market participants, but we focus on three main areas:

· Real need: refers to providing a product or service that can meet a real user need or use case.

· Actual Revenue/Income/Cash Flow: Refers to financial sustainability, generally achieved through the generation of expenses.

· Actual Yield: Refers to the provision of income to token holders generated by a tangible revenue source.

Actual Demand

Actual demand is the willingness and ability of cryptocurrency participants to use and pay for a particular product or service without providing extrinsic incentives (such as airdrop commitments and point mining, etc.). This is usually achieved through strong product-market fit, including filling a market gap or need, or providing valuable features and use cases that resonate with a large number of users.

Strong product-market fit can create intrinsic demand, allowing the project to generate sustained income. This, in turn, provides the necessary resources and user appeal for the project's continued development to meet the evolving needs of end users.

We are witnessing real demand from established industries that continue to grow in user traction and financial metrics. Decentralized Finance (DeFi) is a prime example of this trend, becoming an essential part of the cryptoeconomy by providing indispensable use case projects:

· Decentralized Exchanges (DEX) provide users with the infrastructure to exchange tokens on-chain.

· Liquidity Staking allows users to stake assets while still maintaining liquidity.

· Money Market enables peer-to-peer (C2C) asset lending.

· Cross-chain Bridges facilitate the transfer of assets between different chains.

· Stablecoins provide a stable store of value in the form of crypto assets, which can be further used to pay for services.

In addition to decentralized finance, we also observed that emerging categories have successfully captured strong market demand and attracted a large number of users:

· Centralized trading platforms provide a comprehensive set of integrated tools, including fiat currency deposits, spot and leveraged trading, financial products, and Web3 wallets.

· Telegram trading robots optimize the on-chain trading experience and capture the strong demand for memecoin trading by making the transaction process more convenient and smooth.

· Prediction markets allow participants to trade shares or tokens based on the outcomes of future events, such as political elections, sporting events, and pop culture happenings.

· Games capture real needs of gamers beyond the crypto community, further introducing innovative in-game economics.

· On-chain analytics tools collect, organize, and transform raw blockchain data into actionable insights, some of which offer additional functionality via paid subscriptions.

This list is not exhaustive, but is meant to illustrate the durability they have demonstrated in terms of user traction and growth over time.

It is critical to distinguish between projects with strong product-market fit that provide real, ongoing value, and projects that lack sustainable growth potential that rely on short-term interest and artificial demand and do not solve real problems.

Real Revenue and Profit

Real revenue refers to the tangible revenue generated by the project, usually from protocol fees. When combined with healthy token economics, a project can be profitable if it consistently generates enough revenue to cover its operating costs and can operate sustainably in the long term without relying on external capital.

The profitability of a project can be calculated as follows:

Profit = Revenue - Operating Expenses - Token Issuance

Profit is calculated by subtracting operating expenses and token issuance from the project's total revenue. As observed, it's not just about revenue, a project can only be profitable if its total revenue exceeds its costs, including operating expenses and token issuance.

Figure 2: Top 10 protocols based on 30-day profitability

Source: Token Terminal. Data as of August 6, 2024

Based on the last 30 days of data, the leading protocols in profitability (within Token Terminal’s sample dataset) are Tron, Maker, and Uniswap.

On the other hand, while some projects may be able to generate significant revenue, they may actually be operating at a net loss due to high token issuance or supply-side incentives. Needless to say, we believe it is unreasonable to require all protocols to be immediately profitable, as most have only been around for a few years (or months). Referring to traditional early-stage startups, it is common to use losses to promote growth in the early stages, and it may work out in the long run. Nevertheless, investors should still evaluate and determine whether there is a viable path to profitability in the foreseeable future.

Real Yield

Real yield comes from a tangible source of income and is not entirely dependent on inflationary token issuance. This is similar to dividends in traditional finance, where companies return part of their earnings to shareholders. Similarly, in the cryptocurrency economic system, "real yield" is a mechanism for distributing real returns to token holders or users. This is usually reflected in the form of staking rewards, token repricing, or buybacks and burns.

Crypto projects achieve consensus with stakeholders by providing real yields to provide rewards to token holders. For example, there are decentralized exchanges that provide yield to liquidity providers through trading fees, liquidity staking and re-staking protocols that distribute yield through staking rewards, and synthetic dollar and stablecoin protocols that generate yield through underlying assets (such as treasuries).

Figure 3: Schematic diagram of decentralized exchange platform distribution of real yield

Source: Binance Research

On the other hand, there are some native tokens whose only function is governance. While this is not fundamentally problematic and these tokens are critical to the functionality and decentralization of the project, they generally do not provide direct financial returns to their holders. The lack of real yield means that the value of these tokens is mainly closely tied to their utility and the success of the associated project.

Finally, investors should also be aware of tokens that primarily earn their yield through inflationary token issuance. Such tokens tend to attract mercenary capital and are inherently unsustainable. Tokens with high inflationary incentives experience a continuous increase in token supply, resulting in an imbalance between supply and demand over time. If the demand for the token does not increase accordingly, the token price will fall. Instead, we should focus on yield distribution models that can provide tangible returns without relying on inflationary means.

Conclusion

As we continue to witness innovation in the crypto economy, it is critical to understand the fundamental business models that differentiate long-term sustainable projects from short-term hype. In this emerging cyclical market, projects that provide real value by demonstrating strong product-market fit, consistent revenue/earnings growth, and real yields are more likely to stand the test of time.

In contrast, projects driven by fleeting trends or speculative interest may experience rapid growth initially but often lack the foundational elements required for sustainability. Without a clear value proposition and a solid business model, they will be left without a foothold when market enthusiasm fades.

To achieve long-term growth, we expect to see more projects that prioritize delivering real value and tangible benefits to users.