Development Status of Q1 L1 in 2023
Q1 L1 Dev Status 2023
Author: Peter Horton / Source: Messari / Translation: Baihua Blockchain
The rebound of the cryptocurrency market in Q1 2023 did not bring an increase in the usage of public chains. Although some unique L1s had an average market capitalization growth of 83%, usage decreased by about 2.5%.
With the emergence of Ordinals, people have become interested in comparing Bitcoin’s programmability again. Currently, Stacks is outperforming its peers in multiple indicators, leading in the quarter-over-quarter growth of market capitalization (340%), revenue (218%), network usage (35%), DeFi TVL (276%), and DEX trading volume (330%).
Ethereum still leads in most key financial and ecosystem indicators, including market capitalization, revenue, DeFi TVL and count, NFT count, and full-time developers.
The temporary decoupling of USDC and the suspension of BUSD issuance by Blockingxos has shifted the dominance of stablecoins to USDT, benefiting TRON. The market capitalization of TRON’s stablecoin increased by 30% quarter-over-quarter to US$43.6 billion; all other unique L1s with stablecoin market capitalization decreased quarter-over-quarter.
This report summarizes and compares Messari’s financial, network, and ecosystem analyses of 14 Layer 1 (L1) smart contract platforms covered through its Protocol Services. These L1s and their links to each quarter’s report include: Avalanche, BNB Chain, Cardano, Ethereum, Harmony, Hedera, NEAR, Polkadot, Polygon, Solana, Stacks, Tezos, TRON, and WAX.
Let’s dive into the report:
01 Financial Analysis
After the turbulent 2022, the cryptocurrency market rebounded in Q1 2023. On average, unique L1s experienced an 83% quarter-over-quarter growth in market capitalization, but still decreased by 58% year-over-year. STX performed well in Q1, thanks to the popularity of Ordinals, which made people interested in Bitcoin’s programmability again. ETH’s market capitalization is still more than twice the sum of other network tokens.
Revenue is defined as the total fees collected by the protocol, but how are those fees allocated? Jon Charbonneau, an investor in crypto venture DBA, wrote an in-depth analysis of how revenue is handled, with the following examples:
Blockchain X charges 100 tokens as a fee. All 100 tokens are burned, but it mints 100 tokens to reward validators. If revenue is measured only as the fees accrual to token holders, then revenue is 100.
Blockchain Y charges 100 tokens as a fee, all 100 tokens are distributed to validators, and no additional tokens are minted or burned. If revenue is measured only as the fees accrual to token holders, then revenue is 0.
These two blockchains have completely different revenues when measured by fee allocation, despite having identical end results in terms of fees collected, inflation, and validator rewards.
Driven by its comparatively high usage fees and gas fees, Ethereum’s Q1 2023 revenue was $457 million, nearly 2.8 times the sum of all other well-known L1 revenues.
The most significant revenue growth came from Hedera, which increased by 489% compared to the previous quarter. This is mainly due to an increase in usage of its consensus service, which enables verifiable timestamps and event ordering for Web2 and Web3 applications. These applications include tracking supply chain sources, calculating votes in DAOs, and monitoring IoT devices.
Price-to-Sales Ratio (P/S)
The Price-to-Sales Ratio (P/S) ratio is the relative price of a network token compared to its revenue. Although it is a useful measure, network tokens are a new asset that requires new valuation models, such as the expected demand for a security model.
That being said, TRON leads the way with a P/E ratio of 16 in Q1 2023, followed by Ethereum at 188x. WAX stands out as the only public chain with a high P/E ratio despite not being in the top 20 in terms of market capitalization. Most L1s earn revenue from transaction fees, while WAX’s revenue is mainly derived from a 2% tax on the NFT market.
TRON, Ethereum, Polygon, and Hedera are the L1s with falling P/S ratios this quarter. In other words, their revenue growth exceeded the growth in token market capitalization. The networks with the largest P/S ratio growth on a QoQ basis are NEAR (100%), Solana (112%), and Harmony (156%).
The inflation caused by PoS reward issuance is a wealth transfer from holders to stakers. The higher the inflation rate, the more helpful it is to become a staker and the more harmful it is to become a holder, and vice versa.
BNB and ETH are the only deflationary tokens in Q1 2023, with -5.4% and -0.2%, respectively. Both networks consume a portion of transaction fees. In addition, the Binance team repurchases and burns tokens every quarter, which accounts for most of its deflationary pressure.
Genesis (Token) Supply Liquidity
In addition to PoS reward issuance, inflationary pressure may also come from the unlocking of Genesis tokens. The Genesis (Token) Supply Liquidity metric measures the percentage of unlocked Genesis tokens, excluding staking rewards. This metric has been standardized between public chains with capped supply and those with uncapped supply (without infinite staking rewards in the initial allocation).
Most public chain tokens have been fully unlocked, except for Avalanche, Hedera, NEAR, and Harmony:
– Stacks is about 95%, of which about 0.5% will be unlocked in Q2 2023 for its funds.
– Harmony is about 95%, of which about 0.6% will be unlocked in Q2 2023 for ecosystem development.
– NEAR is about 79%, with another 3% unlocking in Q2 2023 for grants, core contributors, and investors.
– Avalanche is about 73%, with another 2.5% unlocking in Q2 2023.
– Hedera is about 61%, with about 4% unlocking in Q2 2023.
Note that Avalanche and Hedera have supply caps, and these unlocking percentages are for Genesis supply (excluding staking rewards) rather than total supply.
Actual Yield and Qualified Supply Staking
The PoS reward issuance rate usually depends on the percentage of staking supply and/or the number of validators. Networks rely on different equations to set the relationship to determine where the inflation rate, staking yield, and staking supply percentage will settle.
Low-inflation tokens like BNB, ETH, and STX allow holders to freely use their tokens without being penalized for not staking, resulting in lower staking rates. On the other hand, high-inflation tokens are optimized for higher staking rates. Although liquidity staking allows staked tokens to participate in the ecosystem, LST often brings inferior liquidity, smart contract risks, and different tax implications. In addition, both Cardano and Tezos have enabled liquidity staking in their protocols, but there are still some additional challenges to allow liquidity-staked tokens to participate in DeFi and other ecosystem applications.
02 Public Chain Analysis
User activity is difficult to compare across different public chain systems (e.g., EVM vs. SVM vs. Antelope). Each architecture has unique ways of handling and recording transactions and address activity. In addition, the ratio of addresses to users is not 1:1 and varies by public chain.
The total number of transactions and addresses is not as informative as the economic activity facilitated by these transactions and addresses. Therefore, we briefly introduce the growth of user activity, which is more feasible than comparing absolute numbers. But if you want to compare user activity based on absolute numbers, the ecosystem section below provides better metrics.
Transaction activity did not increase with the market rebound. The average MoM change in daily transactions for these public chains is -2%. Stacks is a clear exception: its user activity growth was slightly ahead of the STX price surge and rose 34% MoM at the end of this quarter.
Please note that the Avalanche data only includes C-Chain activity. Due to the launch of its subnets, C-Chain transactions decreased 82.7% YoY. Including the subnets, the average daily transaction volume increased 130% YoY. However, none of the current subnets use AVAX as gas. Although subnets can use AVAX for gas, the subnet value should generally depend on a subnet that contributes at least one validator to the global set while increasing security requirements.
The average MoM change in daily active addresses for public chains is -3%. Like transactions, Stacks leads the way with a growth rate of 35%. Harmony’s 28% growth was mainly due to an exceptional surge at the end of this quarter, but it did not continue.
Near had the highest YoY growth rate in daily active addresses, at 157%, thanks to the launch of the Move-to-Earn project Sweatcoin (sweat economy) in mid-September.
Only Avalanche C-Chain and WAX saw an increase in address growth rate in Q1 23. Avalanche’s new addresses increased by 56% MoM. WAX’s new addresses increased by 38% MoM, thanks to the “BlastOff” NFT marketing campaign and the sale of Funko, the toy company’s popular culture collectibles NFTs.
Solana’s average transaction fee in Q1 23 was $0.0003, much lower than other L1s. The Solana development team has released several upgrades in the past year to improve its fee market and overall network performance, most notably the local fee market (and priority fees). Most blockchains have a global fee market where all users are forced to compete in auctions. If an NFT minting factory sparks a gas war, users who only want to transfer tokens will also be affected. As the name suggests, Solana’s local fee market sets calculation limits for each account and allows users to participate in separate gas auctions to modify the state of each account.
All public chains experienced a MoM increase in the USD-denominated total staked token amount, as expected during a market uptrend. Stacks (403%) and Solana (125%) led the way in MoM growth. The total staked (USD) for each network grew slightly faster than its market cap growth, indicating net growth in staked native tokens. Ethereum’s security budget is still the largest, exceeding $20 billion, and there is $32.6 billion worth of ETH staked as of Q1 2023.
Validator counts in networks are also not fully standardized, just like users. Although tracking the number of validators is easy, tracking the number of node operators is more challenging. The ratio of validators to node operators will vary for each public chain, largely depending on its staking weight mechanism.
L1s with some form of staking weight restrictions include:
– Ethereum: Staking weight limit of 32 ETH (0.0001% of total staked as of Q1 2023).
– Avalanche: Staking weight limit of 3 million AVAX (1.3% of total staked as of Q1 2023).
-Cardano: The stake weight limit is determined by dynamic parameters and is currently 70 million ADA (0.3% of total stake at the end of Q1 2023).
-Polkadot: All active validators receive the same reward regardless of their stake weight. The minimum stake weight is dynamic and currently around 2.14 million DOT (0.3% of total stake at the end of Q1 2023).
-Harmony: The stake weight limit is between 85% and 115% of the effective median stake.
Ethereum has the lowest stake weight limit relative to its total stake. Although there are over 560,000 validators in Q1 2023, the number of node operators is far less. According to ethernodes data, there are over 3,500 synchronized physical validation nodes, which may be an underestimate. Nodewatch’s number is about twice that, although it is currently unclear whether Nodewatch includes nodes other than validators.
After Ethereum, Polkadot (2932), Solana (1620), and Avalanche (1192) have the most validators.
The Nakamoto coefficient measures the number of entities that could cause the network to stop. Ethereum often refers to a Nakamoto coefficient of one to two, primarily due to the concentration of staking in Lido. However, we use the number calculated by the Solana Foundation, which takes into account the various node operators within Lido and uses a 50% share threshold instead of 33%.
Although the Nakamoto coefficient is now commonly used to measure the distribution of voting power among validators, there are several other important factors that affect the elasticity of the validator set, including:
-Geographic distribution: Too many nodes in the same location may endanger the health of the network due to geopolitical risks, regulations, natural disasters, and other events.
-Hosting provider distribution: Too many nodes using the same hosting provider may endanger the health of the network due to interruptions or crypto node operator bans (see Hetzner and Solana). Although validator nodes can self-host, this becomes increasingly difficult as hardware requirements increase. The Ethereum community hangs its decentralized hat on how many stakers it has. Although the number is not accurate, Ethereum’s self-hosted validator operators may outnumber the total number of validator operators that many networks have.
-Delegator allocation: High concentration of total shares from one delegator may undermine the stability of the network if the delegator un-stakes. In addition, many networks’ foundations currently delegate a large portion of their tokens to subsidize the minimum validator requirements and to 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. As with user activity analysis, we include only Avalanche C-Chain validator data. Each subnet can use a globally centralized set of three to all validators. The subnets launched have between 4 and 14 validators at the end of Q1 2023.
03 Ecosystem Analysis
As expected during a market rebound, TVL denominated in USD increased. For most L1s, the market cap change was greater than the TVL change. This relationship may indicate that the increase in TVL is more due to price increases than net capital inflows.
Nevertheless, Ethereum remains the top leader in TVL, followed by BNB Chain and TRON. Stacks and Cardano performed well, growing 276% and 172%, respectively. Stacks TVL increased significantly from around Feb 17 to 22, coinciding with the price increase of STX. Cardano TVL steadily increased throughout the quarter and benefited from the launch of several stablecoins discussed below.
NEAR is an exception, with its TVL declining throughout the quarter with a 22% MoM decline occurring mainly during the USDC unpegging period, which is detailed below.
DeFi diversity measures the number of protocols that make up the top 90% of DeFi TVL. A larger distribution of TVL across protocols can lower the risk of widespread ecosystem contagion from events such as exploits or protocol migrations.
Ethereum scores 22 in DeFi Diversity, followed by Polygon (19), Solana (18), and BNB Chain (16). This ranking is roughly similar to the TVL ranking, but TRON is a notable exception, with a TVL ranking of third ($5.4 billion), but over 70% of which is from JustLend. Additionally, JustLend TVL is dominated by three independent wallets.
Most L1s saw MoM growth in daily DEX trading volume, with Stacks and Cardano seeing the largest MoM increases at 330% and 101%, respectively, similar to TVL. Daily DEX trading volume surged during the USDC uncoupling period on March 11, thanks to Ethereum’s over $20 billion in volume. The peak was almost twice the previous year’s peak during the Terra/Luna, Celsius, and FTX crashes.
Overall, stablecoin market capitalization continued to steadily decline over the past quarter, with several major events related to stablecoins:
-The Silicon Valley Bank run caused USDC to temporarily uncouple, reaching a low of $0.87 from March 10 to March 13. From March 10 to the end of the quarter, USDC’s market capitalization on all chains fell 24%.
-On February 13, regulators instructed Blockingxos to stop issuing BUSD, which was the third most popular stablecoin after USDC and USDT at the time. From February 13 to the end of the quarter, BUSD’s market capitalization on all chains fell 52%.
Ethereum, Polygon, Solana, Avalanche, and Hedera all have native USDC issuances. They were negatively affected by the outflow of USDC, which was the highest stablecoin on each chain before the uncoupling. Similarly, BUSD is the main stablecoin on the BNB Chain, leading to a MoM drop in stablecoin market capitalization of 31%. This is the largest MoM drop among L1s except for Hedera, which only uses USDC and had a 36% MoM drop.
The above events caused some BUSD and USDC holders to switch to USDT, which saw a 17% increase in market capitalization on all chains 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 saw a MoM increase of 30%.
Only Cardano saw a larger MoM increase in stablecoin market capitalization at 262%. Cardano does not have any USDC, USDT, or BUSD, and thus was not affected by the above events. The top two stablecoins by market capitalization in Cardano’s ecosystem, IUSD and DJED, are set to launch in Q4 2022 and Q1 2023, respectively. Their continued growth will be crucial to the Cardano ecosystem.
The total value of borrowing indicator L1 provides additional context for DeFi activity. While a large amount of borrowing can lead to more unstable liquidations, borrowing generally indicates user trust and where the protocol is earning money (from liquidation and borrowing fees). Note that CDP debt is not included in DefiLlama’s borrowing data. Therefore, Cardano, Stacks, and Tezos are excluded from this analysis, as their entire or majority DeFi debt comes from the CDP protocol.
Across all L1s, the total value of borrowing increased by 17% MoM. Ethereum is still the dominant network, nearing $4 billion, followed by BNB Chain at $735 million. Unlike these metrics, Avalanche is ahead of Polygon, although the gap narrowed throughout the quarter.
Ethereum remains the primary venue for NFT activity despite high gas. Blur was the top Ethereum marketplace in trading volume in Q1 2023, with a strong foothold gained through a token launch and airdrop in mid-February. According to hildobby’s Dune data, its average weekly trading volume share rose from 31% to 59%. Only Polygon surpassed Ethereum in MoM average daily trading volume, up 101% MoM.
While Ethereum is also leading in daily unique NFT buyers, the gap between it and other chains is smaller than in trading volume when using this metric. Ethereum’s average daily unique NFT buyers increased by 88% MoM. Coinbase launched a commemorative NFT on Ethereum at the end of February to celebrate its L2 Base. The “Base, Introduced” series was available for free minting for several days and peaked on February 26, attracting over 122,000 unique buyers.
Also, only Polygon surpassed Ethereum in the quarterly average daily unique buyers, up 89% MoM. Although its average daily number decreased MoM, Tezos’ unique NFT buyers exceeded 10,000 in the week following the launch of the free open edition McLaren F1 series at the end of this quarter.
Developer data is incomplete, but Electric Capital’s developer report sets the best standard for measuring developer activity. It measures developers as authors who contribute original open-source code to the ecosystem and measures full-time developers as those who work more than 10 days per month.
In L1, full-time developers (devs) decreased by 4% compared to the previous period. Ethereum only decreased by 0.1% and remains the top ecosystem for developers. Ethereum has 1,976 full-time developers, almost equal to the total of all other L1s. Hedera was the public chain with the largest increase in full-time developers, with an increase of 28% to 64 people compared to the previous period.