By Messari-Ally Zach
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key insight
In crypto, the “wealth effect” is the phenomenon in which an ecosystem’s popularity is driven by memes associated with new token launches;
Based on the historical correlation between Solana’s native ecosystem token market capitalization and user activity, Solana’s user base has the potential to grow by 30-80% after the native project launches its token;
While incentives through token launches can drive initial growth, better strategic planning is needed to ensure projects retain users over the long term.
The “wealth effect” refers to the phenomenon in which user growth is driven by the lure of wealth created by launching tokens from new ecosystems. When new native protocols in the ecosystem launch their tokens, they introduce a corresponding market cap. These market caps then flow into the Total Value Locked (TVL) and user wallets of decentralized exchanges via airdrops or other distribution methods. As TVL in USD proliferates and users gain more “wealth,” the valuation of the underlying ecosystem also rises. The growth of base layer token price attracts external users, thereby driving the utility and trading of ecosystem tokens, under the wealth effect, and finally driving the increase of user adoption in a meme way.
The historical relationship between user activity and native token performance helps determine which ecosystems and applications are successful in creating lasting value. For example, historically, ecosystems with a strong correlation between wealth creation and user adoption indicate a user base that is more mercenary or profit-motivated; whereas a weaker correlation indicates that users are attracted to some native apps rather than pure Wealth incentive.
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historical benchmark
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Avalanche
Overall, user activity on Avalanche moves in tandem with the market capitalization of the ecosystem. This relationship suggests that user behavior may be influenced by market sentiment rather than specific ecosystem characteristics. There is a strong positive correlation between cumulative market capitalization and the 14-day moving average of daily active addresses with a correlation coefficient of 0.91 and a lag of 20 days. In other words, user activity changes twice as fast as market capitalization. The volatility of user activity suggests that the platforms apps may lack a sufficiently strong value proposition to motivate users to return and build brand loyalty. Therefore, the user experience provided by these apps is likely to be insufficient for long-term user retention.
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Polygon
Compared to Avalanche, Polygons cumulative market cap and user base dont seem to be moving in tandem. Instead, they change in three distinct phases:
Phase 1: Growth - user activity lags market capitalization growth by about two months, and the correlation between the two variables reaches 0.96;
Phase 2: Deviation - after the token launch, the market cap continues to grow, but user growth stagnates;
Stage 3: Maturity - User activity increases independently of market capitalization growth, indicating a more stable user base.
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. Thanks to relatively low gas fees and growing interest from Web2 entities like Reddit and Starbucks, Polygons user base is now largely composed of consumer applications, accounting for 57% of the total number of addresses. Several Polygon projects have achieved organic adoption without relying on traditional incentives such as tokens. These projects include new games Benji Bananas, Ultimate Champions, and The Dustland, as well as the impressive growth of the decentralized social graph Lens Protocol.
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Arbitrum
Arbitrum garnered a lot of attention when it was launched. Additionally, many of the top projects on the network already had native tokens prior to the launch of ARB, including GMX. Prior to the launch of ARB, Arbitrum experienced rapid growth with a direct correlation between user activity and market capitalization (0.95 correlation coefficient) with a lag of 0 days. Despite potential mining activity, Arbitrum has found a niche in DeFi, earning mass adoption for perpetual platforms like GMX. Additionally, user adoption more than tripled even after the promised token incentive ended.
Optimisms user activity, on the other hand, is periodically correlated with each incentive campaign. The network attracted waves of users during the Summer Incentives and Optimism Quests programs, but users quickly dissipated after each event. Despite Optimism’s recent increase in user activity, its average number of daily active addresses is still only one-fifth of Arbitrum’s.
Overall, Arbitrums growth could provide valuable lessons for other emerging networks to achieve sustainable success through organic user adoption and the creation of novel applications. While incentives can attract users in the short term, they can be less effective in the long run if not implemented properly. Polygon and Arbitrums organic growth model should encourage emerging networks to focus on building high-quality, unique applications that provide value to users without the need for tokens. After building a solid user base, these networks can start working on bringing about future growth and development, and ultimately leverage their user base to successfully launch tokens.
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Looking Ahead: Emerging Networks
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Solana
Currently, several of Solanas top applications, such as Magic Eden, Jupiter, Wormhole, and Drift Protocol, do not have native tokens. While they have not explicitly announced plans to launch a token, recent moves by competitors and newly launched reward programs suggest that such a launch is possible, which is common for successful application protocols.
By analyzing benchmark valuation metrics such as active addresses, TVL, and transaction volume, and comparing them to similar projects in the broader crypto ecosystem, we can estimate the potential market capitalization of these applications. For example, by looking at the ratio between NFT volume and valuation in other mid-sized markets, we can reasonably predict the valuation of projects like Magic Eden and perform similar analysis for other ecosystem projects. After reviewing the top tokenless projects on Solana, we estimate that if they launched tokens, their market cap could grow conservatively by $1 billion to $2.5 billion.
Through our analysis of native projects on Solana, such as Orca, Raydium, and STEPN, we identified a consistent growth pattern of paying users for Solana, similar to Polygon. Specifically, for every percentage point increase in Solanas market capitalization, user activity tends to grow at roughly double the rate. This growth is in line with our historical average benchmark of 1.5-3x. Based on this trend, we estimate Solana could increase daily active signers by 210,000 to 290,000 unique addresses after the new project launches, taking into account a $1 billion to $2.5 billion increase in ecosystem market capitalization. Such user growth will bring Solanas daily unique address count to Arbitrum levels and approach Ethereum levels.
This forecast only takes into account the increase in overall ecosystem market capitalization due to the launch of native project tokens. It does not take into account the historical trend of SOL growing at a significantly higher rate than the overall native token after the token launch. This trend is amplified in newly built DEX pools paired with application protocol tokens, creating new sources of yield and demand. Therefore, this prediction may be conservative and the actual number of signers may increase further.
Solana attracted users without an incentivized token offering, much like Polygon did in its maturation phase. Unlike Avalanche, it has also managed to carve out a niche in consumer-based apps with innovative tools and facilitating further app development. The low transaction costs of Solana and Polygon make them the preferred choices for consumer applications that typically require a low unit cost per transaction to function effectively. Unlike financial apps, consumer apps tend to involve smaller transaction sizes and lower fees to drive user adoption. As such, the Solana and Polygon ecosystems are well-positioned to support the development of a wide variety of cost-effective, user-friendly consumer applications.
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Cosmos
There are several new application chains in the Cosmos ecosystem that have recently raised funds and may launch tokens in the future, including Berachain, Sei, and Neutron. Cosmos provides a novel blockchain architecture where applications can run independently within a larger network, allowing for greater scalability, customization, and collaboration. This unique approach to the underlying blockchain infrastructure allows for more scalable and innovative use cases to flourish within the Cosmos ecosystem.
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Aptos, Sui, and ZkEVMs
Aptos and Sui launched native tokens at the same time when the mainnet was deployed, while zkSync and StarkNet did not launch native tokens, and may hope to attract users through airdrop mining. If so, the approach of zkSync and StarkNet could be similar to what happened with Arbitrum and Optimism last year, making it difficult to accurately measure organic engagement on these networks in the short term. At present, the ecosystem of these networks is mainly composed of DEX, and there are more diverse DeFi applications yet to be deployed.
Summarize
Summarize
While incentives can drive initial growth, they must be used consciously to ensure the project has a sustainable model for long-term user retention. Networks such as Polygon, Solana, and Arbitrum provide a strong foundation for growth through their unique value propositions. They focus on building high-quality apps that deliver value to users and allow for organic growth and success. As more emerging networks launch without native tokens, they can borrow from these models and strive to create novel and valuable applications that do not depend on incentives.
