Token Terminal: In-depth analysis of the economic principles, operational data, and market performance of L1 and L2

Token Terminal: Detailed analysis of the economics, operations, and market performance of L1 and L2.

Token Terminal explores the major L1 and L2 blockchain economic models based on PoW and PoS, as well as emerging models such as liquidity staking protocols, and breaks down and provides examples of the economic principles of each blockchain model in an easy-to-understand manner. By visualizing the daily fee changes of each blockchain, it provides insights into the market performance of mainstream blockchains for investors to compare the economic performance, potential, and sustainability of different blockchains using the framework provided in the article. The Chinese version is compiled and released by DeepTech.

L1 based on PoW: The demand for submitting transactions on Bitcoin creates a market for block space. Users pay miners for block space, and bulk subsidies (i.e., minted bitcoins) further incentivize miners, increasing the total currency supply. Currently, all fees and block subsidies for Bitcoin go to miners, and the Bitcoin economy is determined by these two variables. Transaction fees are determined by the network’s block space supply and demand. Block subsidies are inflation rewards that increase BTC’s circulating supply. Currently, a miner receives a reward of 6.25 BTC for one block, which halves every four years. Ultimately, Bitcoin will reach a maximum supply of 21 million (around 2140), and block rewards will consist only of transaction fees. This means that users’ adoption is crucial for the network to maintain economic sustainability.

L1 based on PoS: On Ethereum, about 85% of total transaction fees are burned as “stock buybacks” to benefit all ETH holders, and validators earn the remaining fees and additional staking rewards. Ethereum’s economic structure includes total transaction fees, burned transaction fees, and staking rewards. Transaction fees are determined by the network’s block space supply and demand. Staking rewards are inflation rewards that increase ETH’s total supply. The burning of transaction fees leads to ETH deflation, and a decrease in circulating supply could increase token value over time.

L2 based on PoS: The economics of L2 blockchains are driven by the fees collected by L2 and the cost of settling transactions on L1. The primary business model of L2 blockchains is to generate revenue by reducing the transaction fees users pay, and profit margins are determined by the cost of settling transactions on L1. As competition intensifies, profit margins for L2 blockchains are expected to decrease. L2 blockchains that can optimize their gas spending on Ethereum through data compression and other technological optimizations may gain market share in the future.

Liquidity staking projects: The technical and high capital requirements for staking have created opportunities for liquidity staking protocols. Traditional Ethereum staking requires users to maintain nodes, invest a large amount of capital (32 ETH), and sacrifice token liquidity. In contrast, Lido allocates users’ tokens in bulk to validators, eliminating capital barriers, while simplifying user experience, providing liquidity and democratizing staking. Shapella upgrades reduce the related risks of investing and earning assets with ETH. Therefore, it is expected that the ETH staking ratio (currently about 15%) will increase and be on par with other PoS chains (over 60%).