Approaching Web3 industry metrics
There are some metrics that are pretty standard on every Web3 dashboard that we review in this section. However, this is just a basic layer, and each player in the industry will add additional metrics relevant to them.
To extract information from the Ethereum blockchain, we need to establish a connection to the blockchain through a node that holds a copy of it. There are multiple ways to connect to the blockchain, which we will explore in more detail in Chapter 2. For the following metrics, we will make use of Infura. For a step by step guide to connect to Infura, refer to the Appendix 1.
Block height
This refers to the current block on the blockchain. The Genesis block is commonly referred to as block 0 and subsequent blocks are numbered accordingly. To check the block height, use the following code snippet:
web3.eth.blockNumber
The block number can be used as the ID of the block. Tracking it can be useful to determine the number of confirmations a transaction has, which is equivalent to the number of additional blocks that were mined or added after the block of interest. The deeper a transaction is in the chain, the safer and more irreversible it becomes.
Time
When discussing time in the context of blockchain, two concepts need to be taken into account. The first is the time between blocks, which varies depending on the blockchain. In Ethereum, after the recent protocol change, there are 12-second slots. Each validator is given a slot to propose a block during that time, and if all validators are online, there will be no empty slots, resulting in a new block being added every 12 seconds. The second concept is the timestamp for when a block was added to the blockchain, which is typically stored in Unix timestamp format. The Unix timestamp is a way of tracking the time elapsed as a running total of seconds from January 1, 1970, in UTC.
To extract the block timestamps, use the following code snippet:
web3.eth.get_block(latest).timestamp
Tokenomics
Tokenomics refers to the characteristics of the internal economy of token projects on the blockchain, including supply, demand, and inflation. This involves determining how many digital assets will be issued, whether there is a cap on the total offer, the use cases of the token, and the burning schema to control the number of assets in circulation.
The token white paper typically contains the official explanation for basic tokenomics questions.
Bitcoin tokenomics
The Bitcoin supply is capped at 21 million Bitcoins, and this amount cannot be exceeded. New Bitcoin enters circulation through mining, and miners are rewarded each time they successfully add a block to the chain.
Each block is mined approximately every 10 minutes, so all 21 million Bitcoins will be in circulation by 2140.
The number of Bitcoins rewarded is halved every time 210,000 blocks are mined, resulting in a halving approximately every four years. Once all 21 million Bitcoins have been mined, miners will no longer receive block rewards and will rely solely on transaction fees for revenue.
Tokens, and therefore their tokenomics, play a fundamental role in the functioning and sustainability of DeFi platforms. One of the industries most impacted by this technology is the financial industry, which has given birth to a new concept known as Decentralized Finance, or DeFi. DeFi consists of peer-to-peer financial solutions built on public blockchains. These initiatives offer services that are similar to those offered by banks and other financial institutions, such as earning interest on deposits, lending, and trading assets, without the intervention of banks or other centralized financial institutions. This is achieved through a set of smart contracts (or protocols) that are open to anyone with an address to participate.
One concrete example of DeFi is Aave, a lending and borrowing platform that allows users to lend and borrow various cryptocurrencies without intermediaries such as banks. For instance, if Jane wants to borrow 10 ETH, she can go to Aave, create a borrowing request, and wait for the smart contract to match her request with available lenders who are willing to lend ETH. The borrowed ETH is lent with an interest rate percentage that reflects supply and demand levels. The money lent comes from a liquidity pool where lenders deposit their cryptocurrencies to earn interest on them. With Aave’s decentralized platform, borrowers and lenders can transact directly with each other without needing to go through a traditional financial institution.
We will dive deep into DeFi in Chapter 5.
Total Value Locked (TVL)
TVL refers to the total value of assets currently locked in a specific DeFi protocol. It measures the health of a certain protocol by the amount of money users secure in it. The TVL will increase when users deposit more assets in the protocol, and vice versa, it will decrease when the users withdraw it. It is calculated by summing the value of the assets locked in the protocol and multiplying them by the current price.
Different DeFi protocols may have specific ways of measuring their TVL, and accurately calculating it requires an understanding of how each protocol works. A website that specializes in measuring TVL is DefiLlama (available at https://defillama.com/).
TVL also helps traders determine whether a certain token is undervalued or not by dividing that number by the market cap (or total supply in circulation) of the token issued by said protocol.
This metric helps compare DeFi protocols with each other.
Total market cap
Market capitalization represents the size of the market for a certain token and is closely related to traditional financial concepts. It is calculated by multiplying the number of coins or tokens issued by their current market price. The circulating supply is the sum of tokens currently held by public holders. To get this number, we calculate the tokens in all addresses that are not the minting and burning addresses and subtract the value held by addresses that we know are controlled by the protocol or are allocated to the development team or some investors, and so on.
The max supply or total supply of tokens is the total number of tokens that will be issued by a certain smart contract. Multiplying the max supply by the current price will result in a fully diluted market cap. There are two ways to get the total supply, with state data and transactional data.
In Chapter 2, we will learn how to access state data as tokens as smart contracts have a function that can be queried with Web3.py. To do this, we will need the Application Binary Interface (ABI) of the smart contract and a connection to a node, such as Infura. Example code for this can be found in Chapter01/Relevant metrics II.ipynb.
Another way to access the transactions database and calculate the total supply is by summing all the minting events of a smart contract and subtracting the burning events with SQL. We will learn how to do this in Chapter 5.
The market cap value is dynamic, as it can change as the market price and the supply of tokens fluctuate. A token market cap is widely used in the cryptocurrency industry as a benchmark for the performance of different tokens.
In Chapter01/Relevant metrics II.ipynb, we analyze the Wrapped BTC (WBTC) token, which is one of those cases where the TVL and total market cap coincide, as the token is pegged 1:1 with the collateral.
One of the biggest challenges data scientists will face is agreeing on common definitions and finding trustworthy data sources. We may have a good grasp of mathematical formulas to calculate complex financial indicators, but without reliable data and community consensus on standards, our ability to communicate our findings will be constrained. In the next section, we will explore these challenges and discuss ways to overcome them.
