Coin Metrics: A Beginner’s Guide to Blockchain Network Health

Author: Matías Andrade, Kevin Bornatsch Source: Coin Metrics Translation: Shan Ouba, Golden Finance

Key Takeaways:

• Key health indicators include block time consistency, transaction inclusion rate, centralization, and validator participation - informing key institutional decisions.

• Institutional enhancements increase the importance of network performance, making health monitoring essential for risk management.

• In the evolving crypto space, advanced market monitoring and risk management tools have become essential for institutions.

Introduction

Network health has become a key focus for institutional players in the cryptocurrency space. As digital asset markets mature and attract more significant participants, the need for reliable, real-time metrics for assessing network performance and stability has grown exponentially. In this week’s Coin Metrics State of the Network, we explore the importance of network health, its impact on institutional operations, and how advanced monitoring tools are shaping risk management strategies in the crypto ecosystem.

What is network health? Why does it matter?

Network health is a comprehensive concept that is interpreted differently across the industry. At the highest level, Coin Metrics considers network health to include all factors that indicate whether a network is operating as expected. This may include factors such as whether blocks are being produced as expected (i.e., the blockchain is functioning properly and able to process new transactions), whether the mempool is receiving transactions at a normal rate (i.e., whether the network is experiencing a DDOS attack), whether the number of transactions broadcasted is within the expected range, and whether the supply of the native asset used to secure the network is operating as expected (i.e., whether the economic security considerations of the network continue to apply).  

While “network health” is a broad term, we believe it is the most basic and important indicator of network functionality. Significant deviations from expected values ​​in any of these areas could indicate serious potential network issues with far-reaching consequences.  

Network Health Indicators: Vital Signs of Blockchain Networks

In traditional financial markets, institutions rely on a variety of indicators to measure market health and develop strategies. Similarly, in the cryptocurrency space, a set of key indicators have emerged to measure the robustness and efficiency of blockchain networks. These indicators include:

• Block Time Consistency: Regular block times indicate that the network is functioning well.

• Transaction Inclusion: Regular and timely inclusion of transactions in blocks reflects the efficiency of the network in processing transactions. A high rate of transaction inclusions in the memory pool indicates a healthy and smooth network.

• Decentralization and Censorship Resistance: Supply distribution shows the decentralization of an asset, while the composition of consensus participants (i.e., miners or validators) indicates how decentralized the consensus is, and in turn, how censorship-resistant the network is.  

• Validator Participation Rate: Crucial in Proof-of-Stake networks like Ethereum, high participation rates indicate that the network is secure and decentralized.

For institutional clients, these metrics are more than just numbers, they are important signals that can inform critical operational and investment decisions, whether for a tokenized fund or launching a layer 2. Each of these metrics provides important insights into different aspects of network performance.  

What’s at Stake for Institutional Participants

The growing institutionalization of cryptocurrency markets raises the stakes for network performance and reliability. Institutional participants, including investment funds, banks, and financial services providers, operate in an environment where even minor disruptions can have severe consequences, as evidenced by their reluctance to adopt networks that present downtime or other execution risks.

Consider the following scenario:

• A hedge fund executes time-sensitive arbitrage strategies across multiple exchanges and networks.

• Custody services ensure timely and secure transfers of large amounts of assets for clients while minimizing fees paid to the network.

• A DeFi protocol manages billions in total value locked (TVL) across multiple blockchain networks.

In each of these cases, network health is not just a technical consideration, but a critical business factor. Institutions need not only high performance, but also assurance and predictability. They need to know that transactions will be processed within the expected time, that the network can handle sudden surges in activity, and that there are no imminent security threats that could jeopardize their operations or assets.

This is where comprehensive network health monitoring becomes indispensable. By obtaining real-time, accurate data about network performance, institutions can make informed decisions about transaction times and fee allocations, provide better service and assurance to their customers, and more effectively manage the risks of their digital asset operations.  

In the following sections, we will list the main subcategories that make up network health, including consensus health and centralization for both Proof-of-Work (PoW) and Proof-of-Stake (PoS) networks.

Consensus Health

Proof of Work (PoW)

A key indicator of the health of the PoW consensus is the relationship between block fees and issuance, which provides insight into the network's economic model and miner incentives. The chart below shows the remarkable stability of Bitcoin's block fees and issuance in the last few blocks (860,545 to 860,57). This consistency is a positive sign for the health of the Bitcoin network, indicating that the reward structure for miners is balanced and predictable, ensuring network security.