What are On-Chain Metrics?

On-chain metrics are any measurable data points that can be tracked directly on a blockchain. As the name suggests, on-chain metrics don’t require us to look at off-chain data or secondary sources such as media coverage or user surveys. Instead, they are accessible directly from the source -- in this case, that means directly from a blockchain.

On-chain metrics give you insight into how your token economy is performing at any given moment. They help you track whether the system is functioning as intended and if there are places for improvement. Additionally, by monitoring these numbers over time, you can detect whether there are any red flags signalling potential issues with the tokenomics model.

This article lists some of the primary types of on-chain metrics and explains how you can use them to gauge the relative health of a token.

(Note: Is you want to learn more about the on-chain metrics software featured in this article, check out our post on nansen.ai).

Why are on-chain metrics useful?

On-chain metrics are useful because they can give you insights into the health of a blockchain or token. For example, if you see that there are a lot of transactions being made on a blockchain, that might be a good sign. On the other hand, if you see that there are very few transactions being made, that might be a bad sign. Below is a list of the 3 most popular on-chain metrics:

• Transaction volume: This is the number of transactions that have been made on a blockchain. 
• Transaction value: This is the total value of all the transactions that have been made on a blockchain. 
• Number of active addresses: This is the number of addresses that have made at least one transaction in the past 24 hours.  

How to Analyze On-chain Metrics

The best way to analyze on-chain data is to use a blockchain explorer, like etherscan.com or an on-chain metric software, like nansen.ai or glassnode.com.  A blockchain explorer is a tool that allows you to view all the transactions on a blockchain. This way, you can see how much money is being sent from one address to another, and you can also see the history of a particular address. 

On-chain data software is a type of software that allows you to visualize and analyze data from a blockchain. In this article we will use a software called nansen.ai to find and analyze on-chain metrics. Nansen is a startup that uses machine learning to analyze blockchain data. Their aim is to make it easier for people to understand what is happening on the blockchain, and to help people make better decisions when investing in cryptocurrencies.

(Note: Check out our post on how to analyze cryptocurrencies for more information).

On-chain Metrics Used by Brainyield for Analysis

The primary on-chain data tool we use here at Brainyield is called nansen.ai. In our token analysis articles we examine 7 key on-chain metrics to determine the relative bullishness or bearishness of a token or blockchain at any given time. Below is a list of the 7 metrics we consider when analyzing a project:

1. Tokens Held by Smart Money with # of Wallets
2. 7d Inflow/Outflow from Top Exchanges
3. Token Balances: Exchanges vs Dex Traders
4. Tokens on Exchanges (Last 60 days)
5. 7d/30d Negative Balance Change from Top Balances
6. Seniority Distribution
7. Unique Addresses for Token

Our methodology involves assigning a bullish or bearish rating to each on-chain metric depending on the data it presents at a given time. For example, if the data is bullish we assign it a score of 1.00, if the data is bearish we assign it a score of 0.00, and if the data is neutral we assign it a score of 0.5. We then add the scores of each of the 7 metrics together and produce a rating for the token which ranges from 0.00 to 7.00. Below is the rating scale:

• 0.00 to 3.00 = Bearish
• 3.50 = Neutral
• 4.00  to 7.00 = Bullish 

Now, let's rate a token called "Drops Ownership Token" ($DOP) and find out what each on-chain metric means and how to analyze them.

On-chain Metric #1: Tokens Held by Smart Money with # of Wallets

This metric measures the amount of tokens held by "smart money," and the number of smart money wallets currently holding the token. Smart money is defined as large investors who buy and sell cryptocurrency based on comprehensive analysis of blockchain data. These investors are usually considered to be more sophisticated and experienced than other market participants, and their trades are often seen as a leading indicator of future market direction.

Ideally, when you analyze this metric, you'll want to see both the number of tokens and the number of smart money wallets holding them up-trending over time. If the  the price of the token has been going sideways or slightly up, then this could be an indication that smart money investors have been accumulating the token and expect its price to rise in the future. This is considered bullish. 

For example, below we can see the smart money token balance for $DOP has been up-trending for the last 6 months. This piece of on-chain data can be interpreted as being generally bullish. We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #2: 7d Inflow/Outflow from Top Exchanges

Inflow is defined as the value of cryptocurrency that is brought into an exchange from an external source. This is in contrast to outflow, which is the value of cryptocurrency that is sent out of an exchange to an external destination. In other words, inflow is coins going into an exchange, while outflow is coins going out of an exchange. Using simple logic we can deduce that inflow is bearish because the majority of investors send their coins to an exchange in order to sell them. By the same token outflow can be considered generally bullish because most investors take their coins out of an exchange in order to hold them for the long-term.

Ideally, when you analyze this metric, you'll want to see more outflow than inflow. This could be considered an indication that investors have been buying and holding the token, and not looking to sell it at the current time. This is considered bullish.

For example, if we look at the inflow/outflow data for $DOP for the last 7 days we can see there is way more outflow than inflow, which we can interpret as bullish. We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #3: Token Balances: Exchanges vs Dex Traders

This metric measures the amount of the token's supply held by exchanges relative to individual investors (Dex Traders). Exchanges usually don't care about a token's price because they make money off  its trading fees. In contrast, individual investors do care about the price of a token (they usually want it to go up). So, we can deduce that dex traders holding more of a token's supply than exchanges is more bullish than the opposite scenario.

Ideally, when you analyze this metric, you'll want to see the supply of tokens held by dex traders rising in relation to exchanges. This could be an indication that investors have been accumulating the token and expect its price to rise in the future. This is considered bullish.

For example, if we look at the exchanges vs dex traders data for $DOP we can see that dex traders have been increasing their share of the token's total supply relative to exchanges for the last 3 months, which we can interpret as being bullish for $DOP's future price. We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #4: Tokens on Exchanges (Last 60 days)

This metric is similar to metric #2, because it measures the amount of inflow/outflow from top exchanges. However, this metric shows you more long-term data trends, sixty days instead of seven. An on-chain analysis rule of thumb is that the longer the data set is, the more valuable the potential insight.

Ideally, when you analyze this metric you'll want to see down-trending lines on the graph, which signify there has been more outflow than inflow over the last 60 days. This could be an indication that investors have been accumulating the token and expect its price to rise in the future. This is considered bullish.

For example, if we look at the inflow/outflow data trend for $DOP over the last 60 days we can see there is a slight downwards bias (more outflow). We can interpret this data as being generally bullish. We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #5: 7d/30d Negative Balance Change from Top Balances

This metric measures the amount of coins a specific entity holds. Entities can be individual or collective investors (i.e. hedge funds), which have a bias in regards to the coin's future price (if they hold/own it its because they want the price to go up). However, some entities that hold the coin can can also be direction neutral. For example, exchanges or staking contracts don't care which way the price goes, not the way individual or collective investors do.

For example, the table below is a list of the top balances for $DOP. We have crossed out non-directional bias entities and focused only on individual or collective investors. We sorted the table based on negative balance changes for the last 30 days. We want to see if $DOP's top investors are selling all their tokens or if they are keeping significant portions of their stack, and perhaps just taking some partial profits. As you can see there are not many sellers over the last 30 days and those who did sell kept significant portions of their stacks. We can interpret this piece of on-chain data as being generally bullish. We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #6: Seniority Distribution

This metric is a graphical representation of how many coins are held by addresses that have been active for different lengths of time. Using simple logic we can deduce that if the majority of coins are being held by long-term holders (people who have owned the coin for years), then there is a significant group of investors who are long-term bullish on that project, and these investors may represent a price floor for the coin, depending on their collective cost basis.

For example, below we can see the seniority distribution for $DOP.  Notice the majority of tokens are held by long-term investors (1year+). We can interpret this piece of on-chain data as being generally bullish.  We would assign this on-chain metric a score of 1.00 in our rating scale.

On-chain Metric #7: Unique Addresses for Token

This metric measures the number of unique addresses (wallets) that have sent or received a transaction for the token in a given period (the longer the better). This metric is a useful measure of adoption. The number of unique addresses grows with the number of tokens sent, which can be interpreted as bullish because it means more and more people are using the project.

Ideally, when you analyze this metric you'll want to see the number of unique addresses rising over time. This could be an indication that investors and users are adopting the projects technology. This is considered bullish.

For example, in the graph below we can see $DOP's unique address count has been steadily rising for over a year, which we can interpret as generally bullish. We would assign this on-chain metric a score of 1.00 in our rating scale.

So, if we add all of the on-chain metric scores for $DOP we get a rating of 7.00. That's a perfect score! We can conclude that at the time of writing $DOP's on-chain data is painting a very bullish picture of it's future. Today, $DOP is worth $0.38 per token and has a market capitalization of $3M. If you're reading this in 2023 or 2024, go and check what happened with $DOP's price! Were we right or wrong about it? Let us know!

Conclusion

On-chain metrics are powerful analysis tools that can be used to track and understand the behavior of cryptocurrency markets. For example, by tracking the number of transactions, the value of transactions, and the number of unique addresses used, on-chain metrics can provide valuable insights into the health and activity of cryptocurrency tokens.