Messari: Q1 2023 L1 Public Chain Operation Report
Messari: Q1 2023 L1 Chain Report
Original Title: State of L1 s Q1 2023
Author: Peter Horton
Source: Messari
Translation: Lynn, MarsBit
Key Insights
- Nostr2.0: A Layer 2 off-chain data storage layer for Bitcoin
- US SEC frequently fires at cryptocurrencies, overseer Gary Gensler ...
- Blur will see a token unlock worth 10 million dollars this week. Bu...
-
The rebound in the cryptocurrency market in Q1 2023 did not come with a recovery in network usage. Despite an average quarterly market cap growth of 83% among featured L1s, network usage fell by about 2.5%.
-
Stacks outperformed its peers on several metrics as Ordinals became interested in Bitcoin’s programmability. Stacks led featured L1s in quarterly growth for market cap (340%), revenue (218%), network usage (~35%), DeFi TVL (276%), and DEX volume (330%).
-
Ethereum still leads in most key financial and ecosystem metrics, including market cap, revenue, DeFi TVL and number, NFT count, and full-time developers.
-
TRON’s stablecoin market cap grew by 30% MoM to reach $43.6B; all other L1s with significant stablecoin market cap saw MoM declines.
This report summarizes and compares financial, network, and ecosystem analysis for 14 Layer 1 (L1) smart contract platforms covered by Messari through its protocol service. These L1s, along with links to each of their quarterly reports, include: Avalanche, BNB Chain, Cardano, Ethereum, Harmony, Hedera, NEAR, Polkadot, Polygon, Solana, Stacks, Tezos, TRON, and WAX.
Financial Analysis
Market Cap
After a tumultuous 2022, the cryptocurrency market rebounded in Q1 2023. On average, featured L1s saw a 83% MoM increase in market cap, but still saw a YoY decline of 58%. STX performed well in Q1, driven by the popularity of Bitcoin Ordinals, reigniting interest in programmable Bitcoin. At an absolute level, Ethereum’s market cap still exceeds the total tokens of other networks combined.
Revenue
Revenue is defined as the sum of all fees collected by the protocol, regardless of how the protocol allocates those fees. Jon Charbonneau wrote a thorough explanation of why revenue is treated this way, but consider the following examples:
-
Blockchain X collects 100 tokens through fees. All 100 tokens are burned, but it mints 100 tokens to reward validators. If revenue is measured only by the fees accruing to token holders, then revenue is 100.
-
Blockchain Y collects 100 tokens through fees. All 100 tokens are allocated to validators. No extra tokens are minted or burned. If revenue is measured only by the fees accruing to token holders, then revenue is 0.
These two blockchains have identical final outcomes in terms of fees, inflation, and validator rewards, but their revenues would be vastly different if measured by fees collected.
Driven by its relatively high usage fees and gas fees, Ethereum’s Q1 2023 revenue was $457 million, almost 2.8 times the sum of all other L1s’ revenues combined.
The most significant revenue growth came from Hedera, which grew 489% QoQ. This was largely due to increased usage of its consensus service, which provides verifiable timestamps and event ordering for web2 and web3 applications. These applications include tracking the provenance of supply chains, computing votes in DAOs, and monitoring IoT devices.
P/S Ratio
The P/S ratio shows the relative price of a network’s token compared to its revenue. While it can be a useful metric, network tokens are a new asset class that may require new valuation models, such as the expected security demand model.
That being said, TRON led all L1s in Q1 2023 with a P/S ratio of 16x, followed by Ethereum at 188x. WAX stood out as the only network outside the top 20 by market cap with a P/S ratio falling in the top half. Most networks derive revenue from transaction fees, but WAX’s revenue is driven by a 2% tax on the NFT market.
TRON, Ethereum, Polygon, and Hedera were the only networks with a lower P/S ratio this quarter. In other words, their revenue growth exceeded the growth in the value of their tokens. The networks that saw the most significant increase in P/S ratio this quarter were NEAR (100%), Solana (112%), and Harmony (156%).
Inflation
Inflation from PoS rewards is a form of wealth transfer from holders to validators. Higher inflation rates are more conducive to becoming a validator, and harmful to holders, and vice versa.
BNB and ETH were the only deflationary tokens in Q1 2023, at -5.4% and -0.2%, respectively. Both networks burn a portion of transaction fees. Additionally, the Binance team buys back and burns tokens every quarter, which is the primary reason for its deflationary pressure.
Genesis Supply Liquidity
Inflationary pressure may also come from the unlocking of genesis tokens, in addition to PoS reward issuance. Genesis Supply Liquidity measures the percentage of unlocked genesis tokens, excluding staking rewards. This metric standardizes between networks with capped and uncapped supplies, where the former includes a fixed amount of staking rewards in their initial allocation, and the latter does not include infinite staking rewards in their initial allocation.
Except for Avalanche, Hedera, NEAR, and Harmony, most featured networks’ tokens are fully distributed:
-
Stacks are at about 95%, with about 0.5% unlocking to their treasury in Q2 2023.
-
Harmony is at about 95%, with about 0.6% unlocking for ecosystem development in Q2 2023.
-
NEAR is at about 79%, with 3% unlocking in Q2 2023 for grants, core contributors, and investors.
-
Avalanche is at about 73%, with 2.5% unlocking in Q2 2023 for strategic partners, foundation, and core team.
-
Hedera is at about 61%, with about 4% unlocking in Q2 2023.
Note that the supply of Avalanche and Hedera is capped, and the unlocked percentages are of the genesis supply (excluding staking rewards), not the total supply.
Actual yields and eligible staked supply
The issuance rate of PoS rewards usually depends on the percentage of the supply that is staked and/or the number of validators. Networks rely on different equations to set the relationship and determine the settlement position of inflation rate, staking yield, and staked supply percentage.
Tokens with low inflation rates, such as BNB, ETH, and STX, allow holders to freely use the token without penalty for not staking, resulting in lower staking rates. Tokens with higher inflation rates optimize for higher staking rates. Although liquidity staking can allow staked tokens to participate in the ecosystem, LSTs typically introduce poorer liquidity, smart contract risks, and different tax implications. In addition, Cardano and Tezos both enable liquidity staking at the protocol level, but there are still some additional complexities to allow liquidity staked tokens to participate in DeFi and other ecosystem applications. (For an in-depth analysis of Ethereum’s fixed supply after the Shanghai incident, see Kunal’s report.)
Network analysis
Usage
User activity is difficult to compare across different systems (e.g., EVM vs. SVM vs. Antelope). Each architecture has its own unique way of processing and recording transaction and address activity. In addition, addresses are not 1:1 with users, and their ratio varies across different networks.
The total number of transactions and addresses does not have as much information value as the economic activity facilitated by these transactions and addresses. Therefore, we briefly introduce the growth of user activity, which is more feasible for comparing networks than absolute numbers. However, if you want to compare user activity based on absolute numbers, the ecosystem section below provides a better metric.
Trading activity did not increase with the market rebound. The average quarterly change in daily trading volume for the featured networks was -2%. Stacks is an obvious exception: its user activity increased slightly ahead of STX’s price surge and completed 34% quarterly growth this quarter.
Note that Avalanche’s numbers only include C-Chain activity. Due to the launch of subnets, C-Chain transaction volume decreased by 82.7% YoY. Including subnets, average daily transaction volume increased by 130% YoY. However, none of the current subnets use AVAX gas. While subnets could use AVAX to swap gas, the accumulation of subnet value usually depends on the subnet contributing at least one validator to the global set while increasing the demand for security (for a deeper discussion on subnet value accumulation, see the 1Q23 Avalanche report).
The average quarterly change in daily active addresses for the featured networks was -3%. Like trading volume, Stacks is leading the group in growth with 35%. Harmony’s 28% growth was mainly driven by a one-time spike at the end of the quarter that did not continue.
NEAR had the largest YoY increase in average daily active addresses, reaching 157%, driven by the launch of the Metaverse Economy in mid-September.
Only Avalanche C-Chain and WAX increased their address growth rates in 1Q23. Avalanche’s new addresses grew quarterly by 56%. Under the push of “BlastOff,” WAX’s new addresses increased by 38% QoQ. NFT marketing campaigns and Funko’s NFT drop, the latter being a toy company that sells licensed pop culture collectibles.
Solana’s average transaction fee in 1Q23 was significantly lower than other featured L1s at $0.0003. Over the past year, the Solana development team has released a number of upgrades to improve its fee market and overall network performance, most notably the native fee market (along with priority fees). Most blockchains have a global fee market where all users are forced to compete in auctions. If an NFT minting factory causes a gas war, users who just want to transfer tokens will be affected as well. As its name suggests, Solana’s local fee market calculates limits for each account and allows users to participate in individual gas auctions to modify the state of each account. The native fee market, as well as QUIC and equity-weighted quality of service, are explained in more detail in the Q4’22 and Q1’23 Solana reports.
Validator
All networks experienced quarterly growth in the total amount of tokens denominated in US dollars, which is expected during a market upswing. Stacks (403%) and Solana (125%) led in quarterly growth. The growth in the total stake (in USD) for each network was slightly higher than the growth in its market cap, indicating a net increase in the native tokens of the stakes. Ethereum’s security budget is still the largest, exceeding $20 billion, and Ethereum’s stake price was $32.6 billion at the end of Q1 2023.
Like users, the number of validators is not completely standardized across different networks. While tracking the number of validators is easy, tracking the number of node operators is more difficult. The ratio of validators to node operators for each network will vary, largely depending on the staking mechanism.
Characteristic networks with some stake weight limit include:
-
Ethereum: 32 ETH is the upper limit for stake weight (0.0001% of the total stake at the end of Q1 2023).
-
Avalanche: 3 million AVAX is the upper limit for holding (1.3% of the total holding at the end of Q1 2023).
-
Cardano: The upper limit for stake weight is determined by dynamic parameters and is currently 70 million ADA (0.3% of the total stake at the end of Q1 2023).
-
Polkadot: All active validators receive the same reward, regardless of stake weight. The minimum stake weight is dynamic and is currently around 2.14 million DOT (0.3% of the total stake at the end of Q1 2023).
-
Harmony: Stake weight is between 85% and 115% of the median effective stake.
Ethereum’s stake weight limit is the lowest relative to its total stake. Although there were over 560,000 validators at the end of Q1 2023, the number of node operators is far less than this number. According to ethernodes, there are over 3,500 synchronized physical validator nodes – a number that may be underestimated. Nodewatch’s number is roughly twice this number, although it is unclear whether Nodewatch includes nodes other than validators.
In the table above, the numbers for other notable networks are just their validator counts. They are upper bounds as opposed to Ethereum’s number, which is the exact count. Even if a network lacks the staking weight limits mentioned above, it can still incentivize node operators to spin up more than one validator, for example, to be geographically close to other nodes and improve latency and MEV opportunities. All told, the networks with the most validators after Ethereum are Cardano (2,932), Solana (1,620), and Avalanche (1,192).
The Nakamoto coefficient measures the number of entities that could cause the network to stop. Ethereum’s Nakamoto coefficient is frequently cited as 1 or 2, largely due to the concentration of stock from bullish whales. However, we use the number calculated by the Solana Foundation, which takes into account the various node operators within Lido and uses a 50% stock threshold instead of 33%.
Although the Nakamoto coefficient is typically used today to measure the distribution of voting power among validators, there are several other important factors that affect the resilience of the validator set, including:
-
Geographic distribution: Too many nodes in the same location can jeopardize the health of the network due to geopolitical risks, regulation, natural disasters, and other events.
-
Hosted service provider diversity: Too many nodes using the same hosting providers can jeopardize the health of the network due to failures or bans on crypto node operators (see Hetzner and Solana). While validator nodes can self-host, it becomes increasingly difficult as hardware requirements increase. The Ethereum community hangs its decentralization hat on how many self-hosted validators it has, and while the number is not accurate, Ethereum likely has more self-hosted validator operators than many networks have total validator operators.
-
Representative distribution: If a delegator’s total stake is highly concentrated, it can destabilize the network once that delegator unbonds. Additionally, many networks’ foundations currently delegate a large portion of tokens to subsidize the minimum validator requirements and distribute voting power.
-
Client diversity: Most networks rely on a single validator client, making the system vulnerable to client errors or attacks. Jump’s Firedancer client will make Solana the only multi-client network besides Ethereum (excluding clients that fork from each other).
Note: We exclude Hedera from the analysis here because its validator set is permissioned. Like user activity analysis, only Avalanche C-Chain validator numbers are included. Each subnet can use any three to all validators in the global set. By the end of Q1 2023, there were 4 to 14 validators launched on the subnets.
Ecosystem Analysis
DeFi
As expected during the market rebound, TVL denominated in USD is also growing. For most featured networks, the quarterly change in market cap was greater than the change in TVL. This relationship may indicate that the growth of TVL is more due to price appreciation than net capital inflows.
Nevertheless, Ethereum remains the TVL leader, followed by BNB Chain and TRON. Stacks and Cardano outperformed the pack, with increases of 276% and 172%, respectively. Stacks TVL saw a large increase from February 17 to 22, coinciding with the appreciation of STX’s price. Cardano’s TVL increased more steadily throughout the quarter and benefited from the launch of several stablecoins, which will be further discussed below.
NEAR is an exception, with its tangible asset-liability ratio declining throughout the quarter. The 22% quarterly decline mainly occurred during a period of USD depreciation against the yen, as detailed below.
DeFi Diversity measures the number of protocols that make up the top 90% of DeFi TVL. More TVL distributed among protocols reduces the risk of ecosystem-wide contagion caused by adverse events such as vulnerabilities or protocol migrations.
Ethereum scored 22 points in DeFi Diversity, followed by Polygon (19), Solana (18), and BNB Chain (16). This ranking is roughly similar to the ranking by TVL, with one notable exception being TRON. TRON ranks third by TVL ($5.4 billion), but over 70% of it is on JustLend. Furthermore, JustLend’s TVL is dominated by three unique wallets.
The daily DEX trading volume of most featured networks increased over the quarter. Like TVL, Stacks and Cardano saw the largest QoQ increases, at 330% and 101%, respectively. On March 11, during the USDC depreciation period, DEX daily trading volume surged, with Ethereum’s volume exceeding $20 billion. This peak was almost twice the annual peak that occurred during the Terra/Luna, Celsius, and FTX crashes.
As a whole, the market capitalization of stablecoins continued to decline steadily over the past quarter, with several major stablecoin-related events:
-
The run on Silicon Valley Bank caused USDC to temporarily depeg on March 10-13, reaching a low of about $0.87. From March 10 to the end of the quarter, USDC’s market capitalization on all chains decreased by 24%.
-
On February 13, regulators instructed Blockingxos to stop issuing Binance USD (BUSD), which was the third most popular stablecoin at the time after USDC and USDT. From February 13 to the end of the quarter, BUSD’s market capitalization on all chains decreased by 52%.
Ethereum, Polygon, Solana, Avalanche, and Hedera all have native USDC issuance. They were negatively affected by the outflow of USDC, which was the top stablecoin on each chain before being stripped. Similarly, BUSD is the main stablecoin on the BNB chain, leading to a month-on-month decline in stablecoin market capitalization of 31%. This is the largest quarterly decline among featured networks, except for Hedera, which only uses USDC, with a quarterly decline of 36%.
The above events led some BUSD and USDC holders to exchange to USDT, which increased USDT’s market capitalization on all chains by 17% from February 13 to the end of the quarter. TRON was the biggest beneficiary of this migration, as one of TRON’s main use cases has become holding and transferring USDT. Its stablecoin market capitalization increased by 30% month-on-month.
Only Cardano’s stablecoin market capitalization had a larger month-on-month increase, reaching 262%. Cardano does not have any USDC, USDT, or BUSD, so it was not affected by the above events. The two highest market capitalization stablecoins on Cardano, IUSD and DJED, were launched in the fourth quarter of 22 and the first quarter of 23, respectively. Their continued growth will be crucial to the strength of Cardano’s ecosystem.
The total value borrowed index provides additional context for DeFi activity on the network. While a large amount of borrowing can lead to more unstable liquidations, borrowing typically indicates where users trust debt and protocols to make money (from liquidation and borrowing fees). Note that DefiLlama does not include CDP debt in its borrowing figures. Therefore, Cardano, Stacks, and Tezos are excluded from this analysis because their DeFi debt is all or mostly from CDP protocols.
Across all featured networks, the total value of lending grew by 17% quarter-on-quarter. Ethereum remains the primary network, with nearly $4 billion, followed by Binance Chain at $735 million. Different from these metrics, Avalanche completed its lead over Polygon, although the gap decreased throughout the quarter.
NFT
Despite high gas fees, Ethereum remains the primary home for NFT activity. Blur established its dominance in Ethereum market trading volume in Q1 23, gaining a strong foothold through its token issuance and mid-February airdrop. According to hildobby’s Dune dashboard, its average weekly trading volume share increased from 31% to 59%. Only Polygon’s daily trading volume surpassed Ethereum on a quarterly basis, increasing by 101% over the quarter.
While Ethereum also leads in daily unique NFT buyers, the gap between it and other chains is smaller on this metric than on volume. Ethereum’s daily unique NFT buyer count increased by 88% MoM. Coinbase launched commemorative NFTs on Ethereum in late February to celebrate its Base L2 announcement. The “Base, Introduced” series, which was free to mint for a few days, peaked at over 122,000 unique buyers on February 26.
Again, only Polygon’s daily unique buyers surpassed Ethereum, increasing by 89% over the quarter.
Although its daily figure decreased MoM, Tezos’ unique NFT buyers averaged over 10,000 people in the week following the launch of a free open edition McLaren F1 collection around the end of this quarter.
Developers
Developer data is always imperfect, but Electric Capital’s Developer Report sets the gold standard for measuring developer activity. It measures developers as authors of original open-source code contributing to the ecosystem and measures full-time developers as those who spend 10 or more days per month on this work.
Across all featured networks, full-time developers decreased by 4% quarter-on-quarter. Ethereum only decreased by 0.1% and remains the top ecosystem for developers by a wide margin. Ethereum has 1,976 full-time developers, nearly equivalent to the sum of all other featured networks. Hedera had the largest increase in full-time developers among featured networks, growing 28% over the quarter to 64 people.
