Debate Erupts Over Crypto’s Network Effects As Investors Question...

Santiago Roel Santos argues that crypto lacks true network effects and is overpriced as a result, but other experts counter that L1 network effects are present.

Santiago Roel Santos, founder and CEO of crypto investment company Inversion Capital, said cryptocurrencies are not subject to positive network effects, but other experts disagree.

In a recent Substack post, Santos wrote that “crypto is priced for network effects it doesn’t have.” He also pointed to the network effect valuation system, Metcalfe’s Law, saying that it “doesn’t justify crypto’s valuation” and instead “exposes it.”

Santos claimed that many of crypto’s network effects are adverse, due to congestion, such as higher fees, a worse user experience, and slower transactions. “Facebook didn’t get worse when it added 10 million users,“ he said.

Some analysts agree that crypto may be overvalued, but others say Santos is applying the wrong framework.

Santos admitted that new blockchains improved transaction throughput, but he claimed that this leads to lower friction, not compounding value. Still, he said that liquidity, developers and users can move while code can be forked, and value capture is weak.

Related: DeFi is already 30% of the way to mass adoption: Chainlink founder

Jasper De Maere, desk strategist at leading crypto market maker Wintermute, told Cointelegraph that deeming layer 1 blockchains overvalued due to negative network effects is “applying consumer-app logic to infrastructure,” expanding on the Facebook example.

De Maere said that “users are not supposed to interact with L1s directly,” making monthly active users and user stickiness irrelevant. According to him, “the real network effects for an L1 exist at the validator, security and liquidity layer, not the end-user layer, and that’s where compounding actually happens.”

Tomas Fanta, principal at the crypto investment firm Heartcore, said he disagrees with Santiago that fees worsen as usage grows. He said that on high-performance blockchains, “the fees change from meaningless to meaningless,” and that liquidity improves and yields increase as adoption increases.

Source: CoinTelegraph