- Santiago Roel Santos argues cryptocurrencies lack positive network effects and challenges their valuation based on Metcalfe’s Law.
- Other experts highlight that negative user effects in crypto differ from typical consumer apps and credit network effects to layers like validators and liquidity providers.
- Debate exists about whether growing fees signal adverse network effects or improve liquidity and yields on high-performance blockchains.
- Per-user market cap comparisons show crypto assets are valued significantly higher per user than platforms like Facebook, raising questions about valuation models.
- Analysts suggest that key network effects in crypto emerge in stablecoins, exchanges, and infrastructure rather than direct user interactions with layer 1 blockchains.
Crypto investment CEO Santiago Roel Santos recently stated that cryptocurrencies do not have positive network effects and are priced for benefits they do not actually possess. In a Substack post, he criticized the use of Metcalfe’s Law, which estimates value based on network connections, saying it “doesn’t justify crypto’s valuation” but instead “exposes it.” Santos highlighted that increased blockchain usage often causes congestion-related issues such as higher fees and slower transactions, which he sees as adverse network effects.
However, some crypto analysts disagree with Santos’ interpretation. Jasper De Maere, desk strategist at crypto market maker Wintermute, told Cointelegraph that applying consumer app logic to layer 1 blockchains is incorrect. He noted that users typically do not interact directly with layer 1 blockchains (L1s), and real network effects occur in validator, security, and liquidity layers. De Maere explained that early Facebook faced internal congestion but still added users without worse service, contrasting with blockchain models.
Tomas Fanta, principal at investment firm Heartcore, disputed that growing fees worsen on high-performance blockchains, stating that fees become negligible as adoption rises, with liquidity and yields improving. Ben Harvey, researcher at crypto trading company Keyrock, mostly agreed with Santos that many L1 blockchains appear overvalued but noted scalability and AI integration as important differentiators.
Santos provided rough estimates comparing market capitalization per on-chain user. With a total crypto market cap excluding Bitcoin around $1.26 trillion and monthly active users estimated between 40 million and 70 million by venture capital firm Andreessen Horowitz, the implied valuation per user ranges from $18,000 to $31,500. In contrast, a16z also reported about 716 million global crypto owners, yielding a per-user estimate of roughly $1,760, although this overcounts because Bitcoin is not excluded.
For further context, Facebook’s 3.1 billion monthly active users and its parent company Meta’s $1.6 trillion market cap result in a per-user valuation of about $516. Meta also operates additional platforms and services included in that valuation.
Martin Kupka, former investor at Web3 firm RockawayX, indicated that significant network effects currently exist mainly in stablecoins, centralized exchanges (CEXs), and decentralized perpetual futures platforms. He said the utility as a medium of exchange and collateral increases trader numbers and liquidity depth.
De Maere added that Web3’s modular nature allows clearer observation of network effects across layers such as security, stablecoins, exchanges, and the application layer. He remarked that traditional per-user metrics may inaccurately suggest overvaluation compared to early Web2 platform valuations, which required adapted models.
More details can be found in the original post by Santiago Roel Santos here and the Andreessen Horowitz report available here.
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