NetworkPenetration-ameasureofrealgrowth

User growth. DAU. Retention. Market share.

We’re all familiar with these metrics, and rely heavily on them for our analyses. But they don’t always tell the whole story. In this article we’re going to talk about another metric you can add to your analytical arsenal - network penetration.

Network Penetration measures the share of total wallets on a network that have interacted with a given protocol. It’s a good proxy to understand the total share of on-chain attention a protocol has received within its network.

It’s a way to see how much of a protocol's total addressable market it has managed to capture, and how successful it has been relative to its potential.

How do we measure it? It’s simple. We work out the ratio by measuring the number of wallets that interacted with a protocol versus the total amount of wallets on the network.

There are a few key ways to use network penetration to help decision making and gain practical insights. Network penetration can help us to:

1. Evaluate protocol maturity
2. Make better product decisions
3. Measure real growth
4. Stage 1 - Jan’19 to Jun’20 - Uniswap is in its early stage and finding its market. Network penetration hovers between 1-5% for a year.
5. Stage 2 - Jun'20 to Oct’20 - Although Uniswap has already steadily outpaced the growth of the network since summer 2019 (Network penetration went up 5x in 1 year), it sees explosive growth during DeFi summer, outpacing the network’s growth by another 5x.
6. Stage 3 - Oct’20 to Jun’21 - Uniswap becomes the go-to DEX and outpaces Ethereum’s growth by another 2x to reach 53% network penetration.
7. Stage 4 - Jun'21 to present - Slow but steady decline, despite seeing a new ATH of 54.7% in early ‘22. Uniswap is now an established blue chip project.
8. Low network penetrationLow network penetrationLow network penetration = the protocol should focus on gaining attention within the network. Growth, marketing, and competitive strategy are the order of the day.
9. High network penetrationHigh network penetrationHigh network penetration = the protocol is increasingly dependent on the growth of the network itself. This is usually outside the protocol’s control - unless it is itself a major driver of new wallets to the network. At this stage, high network penetration can be a signal to shift strategy toward a focus on increasing engagement, retention and the LTV of users.
10. Organic growth: protocol growth driven by network growth
11. Real protocol growth: the protocol adds more users than the network and gains more user visibility within the network
12. Protocol growth > Network Growth: good! The protocol is gaining attention within the network and/or onboarding new users to the network.
13. Protocol growth = Network growth: neutral/good. The essential part of the protocol growth is organic and the protocol is benefitting from the network’s overall success.
14. Protocol growth < Network growth: bad! The protocol is not onboarding new users as fast as the network, its share of network attention is decreasing.
15. Arbitrum grew its unique addresses 4.5x, so Uniswap itself also grew users 2.3x
16. The network expanded to new use cases beyond Uniswap’s like NFTs, Derivatives, Options and more - attracting users who might not be in Uni's target market
17. DEX aggregators launched on the network (1inch’s network penetration grew from 3% to 10% in a year), drawing users, but not necessarily volume, away from Uniswap

As usual, putting things back into context helps to add nuance to an unreasonably pessimistic interpretation that came from focusing on one metric in isolation.

It’s also important to note that the target network penetration shouldn’t be 100%, or even anywhere close necessarily. The most important thing is to find a benchmark or baseline that makes sense for your analysis.

If you’re launching a new lending protocol on Ethereum, you could choose to compare yourself to Aave’s current network penetration. You could also choose to target 100% penetration within the users that already interacted with Aave (and that are still active on the network). If you’re launching a payment protocol aiming to replace all transactions on earth, well, maybe you should consider a target closer to 100% of active users!

Unless we filter them out, a lot of inactive wallets or hodler wallets will also skew the data. And the more diverse a network’s user base becomes, the less likely any specific protocol can serve all or even most of them.

With those caveats, network penetration remains a useful user metric. Try using it in conjunction with others such as return rate, daily active user trends and other usage-based KPIs to measure the performance of a protocol.

It’s straightforward, tracks dynamics between protocol and network, and enables us to easily spot phases of “organic” vs “real” growth.

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This article was contributed by Dune Wizard @frank_maseo@frank_maseo@frank_maseo. Check out his Dune work, and give him a follow on Twitter!