The P&L of a Decentralized Application

Apr 19, 2023 • 12 Min Read


The top 50 most valuable protocols all have circulating market caps of at least one billion. Why do these tokens, many of which have unproven business models, trade at such high valuations? One of the core assumptions behind these valuations is that the protocol will someday mature to have product-market fit, justifying its current market value.

For protocols that operate decentralized applications (dApps), assessing profitability is one of the few ways investors can begin to evaluate tokens based on tangible metrics instead of relying on user metrics and topline fee growth. A project with a profitable P&L demonstrates that it is delivering tangible value to its users above its costs, and is moving closer to achieving product market fit. While dApps that continue to rely on unprofitable incentives require a different level of scrutiny from tokenholders.

Most decentralized applications are in the early growth phase, where they must attract users and suppliers to their network through costly token incentives. They may have high user numbers and market caps, but their product market fit is likely distorted by ongoing native token incentives. Users on the network may only be there because they are paid to be, or because the product they use is subsidized th...

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