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Metcalfe's Law "Bankruptcy": Why Has Cryptocurrency Been Overvalued?
Original Article Title: Crypto Is Priced for Network Effects It Doesn't Have
Original Article Author: Santiago Roel Santos, Founder of Inversion
Original Article Translation: AididiaoJP, Foresight News
The Dilemma of Cryptocurrency Network Effects
My previous view on "cryptocurrency trading prices far exceeding its fundamentals" has sparked discussions. The strongest opposition is not about usage or fees but stems from ideological differences:
· "Cryptocurrency is not a business"
· "Blockchain follows Metcalfe's Law"
· "The core value lies in network effects"
As a witness to the rise of Facebook, Twitter, and Instagram, I am well aware that early internet products also faced valuation challenges. However, a pattern gradually emerged: as more users joined the social circle, the product's value experienced exponential growth. User retention strengthened, engagement deepened, and the flywheel effect became clearly visible in the experience.
This is the true manifestation of network effects.
If one advocates for "evaluating the value of cryptocurrency from a network rather than a corporate perspective," then let us delve deeper.
Upon closer examination, a glaring issue emerges: Metcalfe's Law not only fails to support the current valuation but also exposes its vulnerability.
The Misunderstood "Network Effect"
In the cryptocurrency field, the so-called "network effect" is mostly a negative effect:
· User growth leads to degraded experience
· Soaring transaction fees
· Worsening network congestion
A deeper issue lies in:
· Open-source nature causing developer attrition
· Liquidity being profit-driven
· User Cross-Chain Migration with Incentive
· Institution Platform Switch Based on Short-Term Gain
A successful network has never operated this way; the experience did not degrade when Facebook added tens of millions of users.
But the New Blockchain Has Solved the Throughput Issue
This has indeed alleviated congestion but hasn’t addressed the fundamental issue of network effects. Increasing throughput merely eliminates friction and does not create compounded value.
The fundamental contradiction still exists:
· Liquidity may drain
· Developers may migrate
· Users may depart
· Code can fork
· Weak value-capture ability
Scaling improves availability, not inevitability.
The Truth Revealed by Fees
If an L1 blockchain truly has network effects, it should capture most of the value as iOS, Android, Facebook, or Visa do. The reality is:
· L1 holds 90% of the total market value
· Fee share plummeted from 60% to 12%
· DeFi contributes 73% of fees
· But accounts for less than 10% of the valuation
The market still prices based on the "Fat Protocol Theory," but the data points to the opposite conclusion: L1 is overvalued, applications are undervalued, and the ultimate value will aggregate towards the user layer.
User Valuation Comparison
Using a common metric, the per-user market value:
Meta (Facebook)
· 3.1 billion monthly active users
· $1.5 trillion market cap
· Per-user value $400-500
Cryptocurrency (Excluding Bitcoin)
· $1 Trillion Market Cap
· 400 Million General Users → $2,500 per Person
· 100 Million Active Users → $9,000 per Person
· 40 Million On-chain Users → $23,000 per Person
Valuation Levels Reached:
· Optimistic Premium of 5x
· Conservative Premium of 20x
· On-chain Activity-based Premium of 50x
Meanwhile, Meta is considered the most efficient monetization engine in consumer technology.
Analysis of Development Stage
The argument of "Facebook was also like this in its early days" is worth debating. While Facebook also lacked revenue in its early days, its product had already built:
· Daily Usage Habits
· Social Connections
· Identity Verification
· Community Membership
· Value Growth from User Expansion
In contrast, the core product of cryptocurrency remains speculative, leading to:
· Rapid User Adoption
· Faster Churn
· Lack of Stickiness
· Lack of Habit Formation
· No Improvement with Scale
Unless cryptocurrency becomes "Invisible Infrastructure," a bottom-layer service imperceptible to users, network effects are challenging to self-reinforce.
This is not a maturity issue but a product essence issue.
Metcalf Law Misuse
The law's description of value≈n² is indeed appealing, but its assumptions are biased:
· Deep interaction between users (actually rare)
· Network stickiness (actually lacking)
· Value concentration (actually dispersed)
· Existence of conversion costs (actually very low)
· Building defensive moats through scale (not yet evident)
Most cryptocurrencies do not meet these prerequisites.
Insights on Key Variable k Value
In the V=k·n² model, the k value represents:
· Monetization efficiency
· Level of trust
· Depth of engagement
· Retention capability
· Conversion costs
· Ecosystem maturity
The k value for Facebook and Tencent ranges from 10⁻⁹ to 10⁻⁷, being minute due to the massive network scale.
Estimated k values for cryptocurrencies (based on a $1 trillion market cap):
· 400 million users → k≈10⁻⁶
· 100 million users → k≈10⁻⁵
· 40 million users → k≈10⁻⁴
This implies that the market assumes each crypto user's value far exceeds that of a Facebook user, despite their disadvantages in retention rate, monetization ability, and stickiness. This is not early optimism but rather overdrawn future prospects.
Current State of Real Network Effects
Cryptocurrencies actually possess:
Bilateral network effects (users ↔ developers ↔ liquidity)
Platform effects (standards, tools, composability)
These effects indeed exist but are fragile: easily forked, slow to scale, far from reaching the n² flywheel effect of Facebook, WeChat, or Visa.
Rational Perspective on Future Outlook
The vision of the “Internet being built on a cryptographic network” is indeed appealing, but it needs to be clarified:
1. This future may be realized but has not yet arrived,
2. The existing economic models have not reflected it.
The current value distribution presents:
· Cost flowing to the application layer rather than L1
· Users controlled by exchanges and wallets
· MEV capturing surplus value
· Forks weakening barriers to entry
· L1 struggling to solidify created value
Value capture is undergoing a transition from the base layer→application layer→user aggregation layer, which is favorable to users but should not warrant a premature premium.
Characteristics of a Mature Network Effect
A healthy network should exhibit:
· Stable liquidity
· Developer ecosystem concentration
· Increased base layer fee capture
· Continued retention of institutional users
· Retention rate growth across cycles
· Composability to fend off forks
Currently, Ethereum is showing initial signs, Solana is gaining momentum, with most public chains still far apart.
Conclusion: Valuation Judgment Based on Network Effect Logic
If crypto users:
· Have lower stickiness
· Monetization is more difficult
· Have higher churn rates
Then their unit value should be lower than Facebook users, not 5-50 times higher. The current valuation has overestimated the nascent network effects, and market pricing seems to imply a strong effect already exists, when in fact, it is not the case, at least not yet.
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The X Chat will be available for download on the App Store this Friday. The media has already covered the feature list, including self-destructing messages, screenshot prevention, 481-person group chats, Grok integration, and registration without a phone number, positioning it as the "Western WeChat." However, there are three questions that have hardly been addressed in any reports.
There is a sentence on X's official help page that is still hanging there: "If malicious insiders or X itself cause encrypted conversations to be exposed through legal processes, both the sender and receiver will be completely unaware."
No. The difference lies in where the keys are stored.
In Signal's end-to-end encryption, the keys never leave your device. X, the court, or any external party does not hold your keys. Signal's servers have nothing to decrypt your messages; even if they were subpoenaed, they could only provide registration timestamps and last connection times, as evidenced by past subpoena records.
X Chat uses the Juicebox protocol. This solution divides the key into three parts, each stored on three servers operated by X. When recovering the key with a PIN code, the system retrieves these three shards from X's servers and recombines them. No matter how complex the PIN code is, X is the actual custodian of the key, not the user.
This is the technical background of the "help page sentence": because the key is on X's servers, X has the ability to respond to legal processes without the user's knowledge. Signal does not have this capability, not because of policy, but because it simply does not have the key.
The following illustration compares the security mechanisms of Signal, WhatsApp, Telegram, and X Chat along six dimensions. X Chat is the only one of the four where the platform holds the key and the only one without Forward Secrecy.
The significance of Forward Secrecy is that even if a key is compromised at a certain point in time, historical messages cannot be decrypted because each message has a unique key. Signal's Double Ratchet protocol automatically updates the key after each message, a mechanism lacking in X Chat.
After analyzing the X Chat architecture in June 2025, Johns Hopkins University cryptology professor Matthew Green commented, "If we judge XChat as an end-to-end encryption scheme, this seems like a pretty game-over type of vulnerability." He later added, "I would not trust this any more than I trust current unencrypted DMs."
From a September 2025 TechCrunch report to being live in April 2026, this architecture saw no changes.
In a February 9, 2026 tweet, Musk pledged to undergo rigorous security tests of X Chat before its launch on X Chat and to open source all the code.
As of the April 17 launch date, no independent third-party audit has been completed, there is no official code repository on GitHub, the App Store's privacy label reveals X Chat collects five or more categories of data including location, contact info, and search history, directly contradicting the marketing claim of "No Ads, No Trackers."
Not continuous monitoring, but a clear access point.
For every message on X Chat, users can long-press and select "Ask Grok." When this button is clicked, the message is delivered to Grok in plaintext, transitioning from encrypted to unencrypted at this stage.
This design is not a vulnerability but a feature. However, X Chat's privacy policy does not state whether this plaintext data will be used for Grok's model training or if Grok will store this conversation content. By actively clicking "Ask Grok," users are voluntarily removing the encryption protection of that message.
There is also a structural issue: How quickly will this button shift from an "optional feature" to a "default habit"? The higher the quality of Grok's replies, the more frequently users will rely on it, leading to an increase in the proportion of messages flowing out of encryption protection. The actual encryption strength of X Chat, in the long run, depends not only on the design of the Juicebox protocol but also on the frequency of user clicks on "Ask Grok."
X Chat's initial release only supports iOS, with the Android version simply stating "coming soon" without a timeline.
In the global smartphone market, Android holds about 73%, while iOS holds about 27% (IDC/Statista, 2025). Of WhatsApp's 3.14 billion monthly active users, 73% are on Android (according to Demand Sage). In India, WhatsApp covers 854 million users, with over 95% Android penetration. In Brazil, there are 148 million users, with 81% on Android, and in Indonesia, there are 112 million users, with 87% on Android.
WhatsApp's dominance in the global communication market is built on Android. Signal, with a monthly active user base of around 85 million, also relies mainly on privacy-conscious users in Android-dominant countries.
X Chat circumvented this battlefield, with two possible interpretations. One is technical debt; X Chat is built with Rust, and achieving cross-platform support is not easy, so prioritizing iOS may be an engineering constraint. The other is a strategic choice; with iOS holding a market share of nearly 55% in the U.S., X's core user base being in the U.S., prioritizing iOS means focusing on their core user base rather than engaging in direct competition with Android-dominated emerging markets and WhatsApp.
These two interpretations are not mutually exclusive, leading to the same result: X Chat's debut saw it willingly forfeit 73% of the global smartphone user base.
This matter has been described by some: X Chat, along with X Money and Grok, forms a trifecta creating a closed-loop data system parallel to the existing infrastructure, similar in concept to the WeChat ecosystem. This assessment is not new, but with X Chat's launch, it's worth revisiting the schematic.
X Chat generates communication metadata, including information on who is talking to whom, for how long, and how frequently. This data flows into X's identity system. Part of the message content goes through the Ask Grok feature and enters Grok's processing chain. Financial transactions are handled by X Money: external public testing was completed in March, opening to the public in April, enabling fiat peer-to-peer transfers via Visa Direct. A senior Fireblocks executive confirmed plans for cryptocurrency payments to go live by the end of the year, holding money transmitter licenses in over 40 U.S. states currently.
Every WeChat feature operates within China's regulatory framework. Musk's system operates within Western regulatory frameworks, but he also serves as the head of the Department of Government Efficiency (DOGE). This is not a WeChat replica; it is a reenactment of the same logic under different political conditions.
The difference is that WeChat has never explicitly claimed to be "end-to-end encrypted" on its main interface, whereas X Chat does. "End-to-end encryption" in user perception means that no one, not even the platform, can see your messages. X Chat's architectural design does not meet this user expectation, but it uses this term.
X Chat consolidates the three data lines of "who this person is, who they are talking to, and where their money comes from and goes to" in one company's hands.
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TAO is Elon Musk, who invested in OpenAI, and Subnet is Sam Altman
The era of "mass coin distribution" on public chains comes to an end
Soaring 50 times, with an FDV exceeding 10 billion USD, why RaveDAO?
1 billion DOTs were minted out of thin air, but the hacker only made 230,000 dollars
After the blockade of the Strait of Hormuz, when will the war end?
Before using Musk's "Western WeChat" X Chat, you need to understand these three questions
The X Chat will be available for download on the App Store this Friday. The media has already covered the feature list, including self-destructing messages, screenshot prevention, 481-person group chats, Grok integration, and registration without a phone number, positioning it as the "Western WeChat." However, there are three questions that have hardly been addressed in any reports.
There is a sentence on X's official help page that is still hanging there: "If malicious insiders or X itself cause encrypted conversations to be exposed through legal processes, both the sender and receiver will be completely unaware."
No. The difference lies in where the keys are stored.
In Signal's end-to-end encryption, the keys never leave your device. X, the court, or any external party does not hold your keys. Signal's servers have nothing to decrypt your messages; even if they were subpoenaed, they could only provide registration timestamps and last connection times, as evidenced by past subpoena records.
X Chat uses the Juicebox protocol. This solution divides the key into three parts, each stored on three servers operated by X. When recovering the key with a PIN code, the system retrieves these three shards from X's servers and recombines them. No matter how complex the PIN code is, X is the actual custodian of the key, not the user.
This is the technical background of the "help page sentence": because the key is on X's servers, X has the ability to respond to legal processes without the user's knowledge. Signal does not have this capability, not because of policy, but because it simply does not have the key.
The following illustration compares the security mechanisms of Signal, WhatsApp, Telegram, and X Chat along six dimensions. X Chat is the only one of the four where the platform holds the key and the only one without Forward Secrecy.
The significance of Forward Secrecy is that even if a key is compromised at a certain point in time, historical messages cannot be decrypted because each message has a unique key. Signal's Double Ratchet protocol automatically updates the key after each message, a mechanism lacking in X Chat.
After analyzing the X Chat architecture in June 2025, Johns Hopkins University cryptology professor Matthew Green commented, "If we judge XChat as an end-to-end encryption scheme, this seems like a pretty game-over type of vulnerability." He later added, "I would not trust this any more than I trust current unencrypted DMs."
From a September 2025 TechCrunch report to being live in April 2026, this architecture saw no changes.
In a February 9, 2026 tweet, Musk pledged to undergo rigorous security tests of X Chat before its launch on X Chat and to open source all the code.
As of the April 17 launch date, no independent third-party audit has been completed, there is no official code repository on GitHub, the App Store's privacy label reveals X Chat collects five or more categories of data including location, contact info, and search history, directly contradicting the marketing claim of "No Ads, No Trackers."
Not continuous monitoring, but a clear access point.
For every message on X Chat, users can long-press and select "Ask Grok." When this button is clicked, the message is delivered to Grok in plaintext, transitioning from encrypted to unencrypted at this stage.
This design is not a vulnerability but a feature. However, X Chat's privacy policy does not state whether this plaintext data will be used for Grok's model training or if Grok will store this conversation content. By actively clicking "Ask Grok," users are voluntarily removing the encryption protection of that message.
There is also a structural issue: How quickly will this button shift from an "optional feature" to a "default habit"? The higher the quality of Grok's replies, the more frequently users will rely on it, leading to an increase in the proportion of messages flowing out of encryption protection. The actual encryption strength of X Chat, in the long run, depends not only on the design of the Juicebox protocol but also on the frequency of user clicks on "Ask Grok."
X Chat's initial release only supports iOS, with the Android version simply stating "coming soon" without a timeline.
In the global smartphone market, Android holds about 73%, while iOS holds about 27% (IDC/Statista, 2025). Of WhatsApp's 3.14 billion monthly active users, 73% are on Android (according to Demand Sage). In India, WhatsApp covers 854 million users, with over 95% Android penetration. In Brazil, there are 148 million users, with 81% on Android, and in Indonesia, there are 112 million users, with 87% on Android.
WhatsApp's dominance in the global communication market is built on Android. Signal, with a monthly active user base of around 85 million, also relies mainly on privacy-conscious users in Android-dominant countries.
X Chat circumvented this battlefield, with two possible interpretations. One is technical debt; X Chat is built with Rust, and achieving cross-platform support is not easy, so prioritizing iOS may be an engineering constraint. The other is a strategic choice; with iOS holding a market share of nearly 55% in the U.S., X's core user base being in the U.S., prioritizing iOS means focusing on their core user base rather than engaging in direct competition with Android-dominated emerging markets and WhatsApp.
These two interpretations are not mutually exclusive, leading to the same result: X Chat's debut saw it willingly forfeit 73% of the global smartphone user base.
This matter has been described by some: X Chat, along with X Money and Grok, forms a trifecta creating a closed-loop data system parallel to the existing infrastructure, similar in concept to the WeChat ecosystem. This assessment is not new, but with X Chat's launch, it's worth revisiting the schematic.
X Chat generates communication metadata, including information on who is talking to whom, for how long, and how frequently. This data flows into X's identity system. Part of the message content goes through the Ask Grok feature and enters Grok's processing chain. Financial transactions are handled by X Money: external public testing was completed in March, opening to the public in April, enabling fiat peer-to-peer transfers via Visa Direct. A senior Fireblocks executive confirmed plans for cryptocurrency payments to go live by the end of the year, holding money transmitter licenses in over 40 U.S. states currently.
Every WeChat feature operates within China's regulatory framework. Musk's system operates within Western regulatory frameworks, but he also serves as the head of the Department of Government Efficiency (DOGE). This is not a WeChat replica; it is a reenactment of the same logic under different political conditions.
The difference is that WeChat has never explicitly claimed to be "end-to-end encrypted" on its main interface, whereas X Chat does. "End-to-end encryption" in user perception means that no one, not even the platform, can see your messages. X Chat's architectural design does not meet this user expectation, but it uses this term.
X Chat consolidates the three data lines of "who this person is, who they are talking to, and where their money comes from and goes to" in one company's hands.
The help page sentence has never been just technical instructions.
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