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Using the DAU/MAU Ratio in Crypto Investing

Using the DAU/MAU Ratio in Crypto Investing

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Key Takeaways

  • Facebook initially introduced the DAU/MAU ratio to measure user engagement, or “stickiness” of a platform or app.
  • Because repeat users are typically more valuable than new users – and less costly to obtain — a high DAU/MAU can be a good indicator of adoption and growth.
  • Investors can combine DAU/MAU with other metrics, such as TVL or transaction volume, to identify “sticky” projects with excellent growth potential.

Before they buy a token, intelligent crypto investors look at the numbers. (See our guide to 3 most important metrics for crypto investors.)

One of the most important numbers is the number of users of a crypto project, which is like the customers of a traditional company. We typically measure this number using either Daily Active Users (DAU) or Monthly Active Users (MAU).

But there is another metric, which is the ratio of daily active users (DAU) to monthly active users (MAU), expressed simply as DAU/MAU.

This ratio can be used to measure user engagement, by showing how many of those who use the platform in a month are also using it daily.

In this guide, we’ll show you examples of the DAU/MAU ratio and how you might add this ratio to your investment analysis.

Understanding the DAU/MAU Ratio

In crypto and blockchain projects, DAU refers to the number of unique users interacting with a platform within 24 hours. On the other hand, MAU counts that unique figure over a month.

The DAU/MAU ratio is calculated by dividing the DAU by the MAU, providing a percentage that reflects user engagement, consumer retention, and the impact of newly added features. (Higher = better.)

An ideal DAU/MAU ratio in the 10-20% range indicates healthy user engagement and retention, suggesting that users visit the platform six to nine times a month.

A DAU/MAU ratio below 10% is often considered poor, as users use the platform less than three times monthly. It can indicate a need for more lasting value for users.

The DAU/MAU ratio helps businesses identify early instances of customer churn. As daily active users begin to trend separately from monthly active users, users are visiting less frequently, which is a warning flag.

Using DAU/MAU Ratio in Crypto Investing

User retention is just as important as customer acquisition – especially in crypto, where users can be finicky, chasing short-term rewards.

As crypto projects learn to retain users better, they also improve their revenue, boost stability and longevity, and gain a competitive edge in the market.

In the same way that the DAU/MAU ratio can indicate churn, it can also serve as an early indicator of a project’s traction and potential for growth. (In other words, promising investments.)

Analyzing DAU/MAU Ratio

Here are two insights we can glean from the table above:

  • 1. Layer-1 protocols may have a lower DAU/MAU ratio because people are simply buying and holding, not using it every day.
  • Though we would expect a higher DAU/MAU ratio to correlate with a higher market capitalization, this doesn’t seem to be the case in this scenario. Bitcoin, for example, has a DAU of 505K, much less than Polygon’s 1.13M. That said, bitcoin’s market capitalization is also 141x Polygon’s. This is likely because bitcoin is used as a store of value rather than a transactional currency.
  • 2. Layer-2 protocols with a higher DAU/MAU ratio have a higher market capitalization.
  • For L2s that are used frequently, on the other hand, a higher DAU/MAU ratio can indicate a higher-value investment. This is especially true for Arbitrum, Polygon, and Ronin. Because they’re used primarily to speed transaction processing, it would stand to reason that more users would create a higher market capitalization in this use case.
  • Incorporating DAU/MAU Ratio into Investment Strategies

    Like any intelligent investor, we examine different metrics and ask, “How can we incorporate these into our investment strategies to improve our results?”

    Some ways to use the DAU/MAU ratio with other metrics include:

    • Total Value Locked (TVL): TVL represents the total capital held by a project’s smart contracts. A high TVL and a favorable DAU/MAU ratio mean a project has strong user engagement and significant financial backing.
    • Transaction Volume: High transaction volumes with a favorable DAU/MAU ratio indicate a vibrant and active project with a solid, engaged user base.
    • Market Capitalization: While market capitalization alone offers minimal insight into a project’s long-term growth when combined with the DAU/MAU ratio, investors can better understand whether the user engagement levels justify the project’s valuation.

    When using the DAU/MAU ratio with other metrics, it’s essential to recognize that the tool has limitations. Seasonality, project lifecycles, and the composition of different types of users are considerations that don’t immediately appear at first glance.

    Two Useful DAU/MAU Examples

    Let’s examine two key examples of the impact of the DAU/MAU ratio on investing. These case studies highlight the importance of context when analyzing crypto projects.

    Ronin

    Ronin is an EVM blockchain crafted to create player-owned economies within digital worlds. As a layer-1 blockchain built for developer use, its DAU/MAU ratio of 11.7 M /30.1 M (38.87%) indicates a highly engaged user base. While its market capitalization may be smaller than the other projects on this list, a healthy ratio indicates growth potential.

    If we think about the use case for Ronin, this makes logical sense. As a token created in support of gaming economies, we would expect regular usage of the token to be the norm (assuming the games are successful). Gamers tend to play their favorite games regularly, and they would naturally need to transact within the game on a regular basis, leading to increased DAU and a higher DAU/MAU ratio.

    Bitcoin

    Bitcoin has the largest market cap on our list. However, its DAU figure doesn’t correlate with market capitalization. The token’s DAU performance has been a horizontal channel over the past year despite its price growing roughly 150% simultaneously. And there’s a logical reason for this. Most investors aren’t trading bitcoin regularly. Instead, they are buying and holding the token, as a long-term store of value.

    Context is important when using this ratio. Though high ratios often indicate strong user interest and retention, more research is always necessary to find the “why” behind the data. (Conversely, a low DAU/MAU ratio does not mean a useless project.)

    Ask yourself: is this a project that’s meant to engage users regularly? If so, a high DAU/MAU ratio could be a good indicator of product/market fit.

    Investor Takeaway

    The DAU/MAU ratio helps investors determine the “stickiness” of a crypto project or product. It measures how many users are coming back regularly.

    However, the ratio should be taken with a grain of salt. It is primarily useful for projects that strive for frequent usage (think games, social media platforms, DeFi protocols, and metaverse projects). It is not as useful for projects that might be used infrequently.

    Remember, higher=better. When you’ve found a project with good DAU/MAU ratio, dig in deeper with our top valuation metrics – and of course, do your qualitative research with our Blockchain Investor Scorecard.

     

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