Opinion: Why Transactions Per Day is the Wrong Metric for Comparing Crypto AssetsBy Kyle Torpey
There are a variety of metrics people use to compare cryptocurrencies, but it’s extremely difficult to find a useful data point in these early days of this technology.
Apart from market cap, which has its own problems, transactions per day (or blockchain activity per day) is perhaps the most popular statistic for comparing cryptocurrencies. However, there are a number of issues with this particular metric, especially as these system continue to become more complex and have additional layers built on top of them.
More Transactions May Actually Be a Bad Thing
While transactions per day may seem like a useful metric for tracking blockchain activity at first, the reality is the that opposite may be true. A high number of transactions per day may be a negative sign when it comes to the scalability of a particular crypto asset network.
At this point in Bitcoin’s history, it is generally accepted by developers that the system will not be able to scale solely on the base layer, which is why additional layers are in development on top of the base Bitcoin network. These additional networks, such as the Lightning Network and Blockstream’s Liquid sidechain, are able to increase throughput in the system as a whole while also preserving decentralization. By moving some types of transactions to secondary layers, the costs associated with operating a full node on the network can be limited, which means more people are able to run nodes.
After all, if these systems aren’t decentralized, there’s really no point to them. The entire value proposition is based on the idea that no one party is in control.
In the future, even the USD-denominated daily transaction volume of Bitcoin is likely to be underestimated due to the fact that Lightning Network activity is not included in these numbers. When you add things like batching and other ways of combining many transactions into one on-chain transaction to the equation, it’s clear that the transactions per day metric does not tell the whole story.
Systems that do not try to limit the number of on-chain interactions by users will inevitably be faced with problems related to centralization or high transaction costs (if they become widely adopted). This is because on-chain transactions take up space in blocks. As blocks become bigger, the cost of operating a full node increases. If block space is limited, then the cost of transacting on the blockchain will increase. There’s no way around this reality.
All blockchain interactions are not equal
It’s also important to remember that all blockchains are not equal when it comes to things like the cost of making an on-chain transaction or the level of security offered by a particular network. The willingness for users to pay higher fees on a particular cryptocurrency network may say more about the real-world utility of that network than the simple transactions per day metric.
If you look at the above data from Blocktivity earlier this week, you probably won’t recognize many of the coins listed in the top ten of 7-day average blockchain activity. This is because the cost of interacting with many of these blockchains is practically zero due to the tradeoffs made in terms of security and centralization (as compared to Bitcoin). For example, the costs of operating a Steem node became too high even for the largest company built on top of the Steemit platform. If companies are having troubling coming up with the resources to operate a full node, how is the average user supposed to verify anything?
As a thought experiment, if someone started their own “cryptocurrency” on their own home server and processed all of the transactions themselves, would it really make sense to compare such a system to Bitcoin’s? Sure, the system could process many more transactions per day than Bitcoin, but the centralized nature of that coin would mean it offers no benefit over the traditional financial system and could also be vastly more volatile than existing fiat currencies.