zkSync silently earns over 20 million US dollars in half a year. How does Layer 2 make profits?

zkSync earns $20M in 6 months. How does Layer 2 profit?

Author: Day, Plain Language Blockchain

This year, Ethereum Layer2 has experienced explosive growth, similar to the previous explosion of public chains. Many project parties have started to lay out the Layer2 track, whether they have jujube or not, they are taking the first shot. Recently, some people believe that due to the expectations of Layer2 Token distribution, many studios have become targets for reverse combing. By earning Token distribution fees, Layer 2 project parties have become the biggest winners of this combing game.

According to The Block analysis, based on the current daily profit, Coinbase can obtain an annual profit of $61 million from the Base network, surpassing a host of public chain platforms or DAPP applications. Today, let’s take a brief look at how Layer 2 project parties actually make profits (referring to Rollup solutions).

01 How does Layer2 make profits

Layer2 refers to the extension technologies and protocols built on top of the blockchain underlying layer, aiming to improve the scalability, performance, and transaction throughput of the blockchain. Traditional blockchains (such as Ethereum) have some limitations, such as high transaction fees, low throughput, and long confirmation times. Layer2 typically introduces new protocols and mechanisms on top of the blockchain, allowing a large number of transactions to be processed in auxiliary networks before leaving the main blockchain. The results of these transactions are aggregated and submitted to the main blockchain, reducing the burden on the main blockchain and achieving higher throughput, lower costs, and faster confirmation speeds, while maintaining security and interoperability with the main blockchain.

As a hot track at present, Layer2 is highly anticipated. In the current bear market environment, can Layer2 still make money? How exactly is it done?

(1) Transaction Fees

Layer 2 platforms can generate profits by charging users transaction fees. When users conduct transactions on Layer 2, they need to pay certain fees, which can flow directly or indirectly to maintainers or node operators of Layer 2 platforms. The platform can set different fee structures, such as rate models based on transaction quantity or value, to generate revenue.

Let’s first take a look at the composition of Layer 2 transaction fees:

  • Computation fees: Fees required for executing smart contracts or computational operations on Layer 2 chains. This includes executing contract code, calculating state transitions, and other operations.

  • Storage fees: Layer 2 involves storing user data. In this case, users need to pay storage fees to cover the costs of data storage and management. Storage fees may vary based on the amount of data stored, storage time, and complexity of the data.

  • Main chain transaction fees: Fees for submitting transaction results on the Rollup chain to the main chain. This includes the cost of submitting information such as aggregated transactions or hash values of state updates to the main chain for verification and storage. A few transactions on the main chain are also needed to support the operation and security of the Rollup chain, which may involve operations such as opening, closing, and updating the state of the Rollup chain, thus requiring transaction fees related to the main chain.

The profit obtained by the project party = Layer 2 gas – data computation and storage costs – Layer 1 verification costs.

This is just a rough calculation, and it does not include transaction hardware facilities, node operation and maintenance costs, and labor costs.

(2) MEV

Layer 2 separates transaction verification and Sequencer (transaction submission sorting) into two parts. Currently, the majority of Layer 2 Sequencers are centralized and mostly controlled by the project party, such as Base. Coinbase is its only Sequencer, which allows Coinbase to profit from all gas. Due to the centralization of Sequencers, Layer 2 project parties also earn some MEV (Maximum Extractable Value).

(3) Developer tools and services

Layer 2 platforms provide various developer tools and services to facilitate and support developers. These tools and services may include software development kits (SDKs), smart contract templates, cross-chain bridging, etc. The platform can generate revenue by charging developers license fees, usage fees, or subscription fees for advanced features.

For example, OP Stack. Twitter KOL w3tester revealed that the cost for each project to enter OP Stack is 30% of its revenue, and it is even more expensive if a one-click launch project is used. This also means that if the operation is not done properly and a sufficient number of transactions cannot be guaranteed, launching Layer 2 with one click may also result in losses.

(4) Ecosystem benefits

The success of a Layer 2 platform is closely related to the prosperity of its ecosystem. If the platform can attract more users and projects to join and provide better scalability and user experience, it will help increase the value of the entire ecosystem. The platform can benefit from the appreciation of tokens, equity, or other means of value-added in the ecosystem. Additionally, the prosperity of the ecosystem will bring a large number of popularity and activity to Layer 2, allowing it to earn revenue from gas fees.

(5) Token economic model

Layer 2 platforms issue their own tokens, and token holders can earn income by participating in platform governance, staking tokens, or enjoying other benefits. Layer 2 platforms can raise funds through equity or token sales. If there is a bull market and the relevant track explodes, the appreciation of tokens will also bring considerable profits to Layer 2 project parties.

The above are the main profit models for Layer 2 project parties.

02 Head Layer 2 on-chain profit status

On-chain profit table of top Layer 2

Let’s briefly look at the on-chain profit situation of the top Layer 2 in August. Here, profit mainly refers to the fees collected, L2 profit = L2 fees – L1 data storage costs – L1 verification costs, which can only be estimated because the off-chain resource consumption and operation costs of Layer 2 are not calculated:

  • zkSync

Around 3.4 million US dollars. It can be seen that since the launch of zkSync, its profitability has always been at the forefront. If other project parties engage in short selling, zkSync’s income will also increase. Since the launch of the mainnet until now, in half a year, it has made a total profit of about 23.5 million US dollars. What can be confirmed is that most of zkSync’s income is contributed by the “Lubu Mao” (a term referring to traders who profit from arbitrage opportunities). When this number was calculated, I was really surprised. Even in such a poor market this year, they can still make so much money. With the support of top institutions and leading tracks, making money is not too difficult.

  • BASE

Around 2.1 million US dollars, BASE just went live at the end of last month. The huge traffic owned by the Coinbase platform itself plus the short-term outbreak of the BALD project brought a lot of traffic to BASE. Although the BALD project eventually RUGed, it still retained a large number of users for BASE. In addition, the recent strong rise of the social application Friend and the entry of Twitter KOLs continue to bring popularity to BASE. In less than two weeks, Friend has already obtained a total locked value (TVL) of 6 million US dollars, achieved revenue of 3 million US dollars, and attracted over 100,000 users.

  • Arbitrum

Around 930,000 US dollars, the heat of Arbitrum has declined recently. In March and April, when Arbitrum Token just went live, the on-chain ecosystem was boosted. The outstanding performance of projects such as GMX, RDNT, GNS, etc., caused the heat to rise at that time and increased on-chain activity.

  • Optimism

Around 800,000 US dollars, the Optimism ecosystem has always been in a lukewarm state. The rise of the Arbitrum ecosystem in March and April has attracted the attention of some on-chain players to Optimism, which is also in the OP track. Recently, due to the selection of projects such as Coinbase, BNB Chain, and Worldcoin to launch chains based on the OP stack, the Optimism ecosystem has also benefited, and there has been a slight increase in on-chain activity.

The revenue mentioned above for Layer 2 mainly comes from gas fees. The more people use it, the more revenue it generates. When popular projects appear in the ecosystem or there are potential positive factors, the projects can earn more.

03 Summary

Regardless, both tracks have profits and losses. It is relatively easier to catch the wind, but if you want to earn more, you can only become a leader to have a chance. The majority of projects are just followers, and profits always belong to the minority.

Overall, if Layer 2 wants to develop better, it needs to occupy a larger market share. At the same time, the ecosystem needs popular projects to bring activity to it.