Last week, the U.S. stock market ushered in the busiest "earnings week" in the first quarter, and nearly half of the U.S.-listed companies chose to release their own financial reports this week. After experiencing a big plunge last Friday, the market's eyes are on the financial report data that the technology giants have or will release this week.

Under the "financial report fever", several "public chain financial report" data charts released by blockchain data analysis company Token Terminal on its official Twitter account two days ago also attracted the attention and discussion of the crypto community. After several sets of data, the "financial status" of L1 and L2 public chains such as ETH, Solana, and Base has become much more intuitive. However, more people's first reaction to "public chain financial reports" is: Is this concept really reasonable?

The term "financial report" has always been far away from the crypto industry. In this market where the business model is not yet clear and the team's monetization is still mainly based on token issuance, data such as the number of active addresses, TVL, and market value seem to be more intuitive and transparent. Is the traditional financial report logic applicable to the crypto market? Is the subject of measurement the protocol or the team? What statistical indicators should be used? These problems make the "chain" business seem out of place when compared with traditional business. People keep shouting "Mass Adoption" but know the "Ponzi game" in their hearts. This is probably the general view and cognition of the industry by crypto people.

So is the concept of financial report applicable to the crypto industry? I prefer a positive answer. Although there may be many differences in specific indicators and presentation logic, public chains (especially general-purpose public chains such as Ethereum and Solana) as a decentralized network essentially need the ability to generate their own blood like traditional companies, otherwise they will become real Ponzi.

So for a chain, how can it be called "capable of generating blood"?

Public chains that burn money crazily

In fact, in the current crypto industry, except for Bitcoin, a decentralized ledger, almost all public chains need to have the ability to generate blood in order to survive long-term and safely.

For BTC, its market value and price reflect the amount of wealth that the outside world has put into the Bitcoin ledger, and in order to obtain the security of the Bitcoin network, these wealth are willing to pay the miners a satisfactory "property custody fee". But this does not seem to work for general-purpose public chains such as Ethereum and Solana. Because miners are a profit-seeking group, they go wherever they can make more money, and the "world computer" that general-purpose public chains have to maintain is not very attractive to the wealth of the outside world. Therefore, from the perspective of supply and demand, the burden of paying the cost of hiring miners (of course, most of them are validators now) to look after the house is generally on the shoulders of the network itself.

In simple terms, general-purpose public chains need to find ways to "generate revenue" to pay validators who maintain the network. This is not just a simple token issuance incentive, but also to ensure that the issued tokens have long-term value support. This is the basic hematopoietic ability of the public chain. Of course, hematopoiesis is not all for "survival". In the stock market, stronger revenue ability means stronger repurchase strength and stock price expectations, and the same is true for public chain business.

According to this logic, it is clear at a glance what data should be included in a "public chain financial report".

The first is naturally operating income. For public chains, this part comes entirely from network fees, and the part of the fees that is destroyed can be regarded as the network's revenue (equivalent to repurchase). The more network activities, the higher the fee income. The second is operating costs, including the part of each network fee paid to the validator (supply fee; Supply-Side Fees), and the token incentives issued by the network. The fewer tokens issued, the lower the cost. Finally, there is gross profit, which is the token destruction minus the token issuance (and validator fees), which is the ultimate manifestation of a public chain's hematopoietic ability and network value. It is not difficult to see that for a public chain, the amount of Gas destruction and block incentive issuance largely determines its revenue-generating ability and self-sustainability.

So how did the general-purpose public chains perform in the first quarter of this year? We selected three representative cases for comparative analysis, namely Ethereum, which repurchases and destroys Gas based on the basic block fee (Base Fees), Solana, which uses 50% of the fees for repurchase and destruction, and Avalanche, which destroys 100% of the fees.

From the final "quarterly report", Ethereum is still the most profitable general-purpose public chain in the current crypto world, with revenue of $1.17 billion and net profit of $369 million in the first quarter of 2024. Although Solana has a strong ecological momentum in the past six months, it has achieved less than $100 million in revenue in the first quarter due to its advocacy of ultra-low Gas concept and lack of dynamic fee mechanism, while its network operating costs (i.e. token incentives) are as high as $844 million, with a total loss of $796 million. The Avalanche network had almost no revenue in the first quarter, and lost $179 million after deducting costs.

ETH: Barely breaking even

To expand, the Ethereum network turned losses into profits in February this year, and its revenue continued to grow throughout the first quarter, with revenue of $606 million in March, accounting for 51.7% of the revenue in the first quarter. In March, the price of Bitcoin hit a record high, and the crypto market sentiment was high. Thanks to the surge in the number of on-chain transactions, the average gas per transaction and total fee income of the Ethereum network have increased significantly.

From the data comparison of network revenue and operating costs, the operating costs of the Ethereum network are relatively stable. Since the completion of the merger in September 2022, it has remained at around US$4 million per day for a long time. However, with the increase in ETH prices and block space demand, this number has begun to climb from mid-to-late February and currently remains at around US$8 million per day.

In terms of revenue, Ethereum has introduced a Gas buyback and destruction mechanism since the launch of EIP-1559 in August 2021, and has truly begun to generate network revenue. EIP-1559 stipulates that the base fee required for each transaction will be completely destroyed, so the network's revenue is positively linearly related to the on-chain transaction volume and the degree of block space demand. The more transactions on the chain and the greater the demand for block space, the higher the average basic fee for destruction.

However, it is worth noting that when we extend the observation range to the last bull market, the current revenue capacity of the Ethereum network is actually reduced, which is also strongly related to the market cycle. In contrast, the average daily revenue of the Ethereum network at the peak of the bull market at the end of 2021 was about 3 times the current level.

Another point that can be observed is that the transition to PoS has indeed become a key factor in Ethereum's balance of payments. Before switching from PoW to PoS, Ethereum still needed economically intensive labor such as graphics card mining machines to maintain its network, which also resulted in the network paying miners very high operating expenses. According to the Ethereum official website, before the merger, the Ethereum network had to pay miners 2 ETH in operating costs every 13.3 seconds (i.e., one block). Together with the ommer blocks (blocks not included in the longest chain), the daily operating costs of Ethereum were as high as about 13,000 ETH.

After switching to PoS, node validators no longer need high maintenance fees. The network operating costs are based on the total amount of staked ETH (about 14 million ETH) and only cost 1,700 ETH per day, directly saving the network about 88% of the cost. Therefore, although the current revenue capacity of Ethereum has declined, compared with the sudden drop in costs, the network can still maintain a basic balance of income and expenditure.

From the data comparison of network revenue and net profit, the gross profit margin of the Ethereum network after the merger is roughly maintained in the range of 40% to 70%. The more congested the network is, the higher the gross profit margin is. In addition, the entire network currently needs to maintain a daily revenue of US$8 million to achieve profitability. For example, although it is not within the scope of the first quarter, it can be seen from the figure below that due to the impact of market conditions, Ethereum's fee income has been declining throughout April. Therefore, after achieving profitability for two consecutive months, the Ethereum network has entered a loss-making state again. It can be seen how difficult it is to make a chain self-sufficient.

Further observing the comparison of the number of daily active addresses and contract deployers (ecological developer data proxy) on the Ethereum network, we can gain some additional perspectives. In the first quarter, the daily active addresses of the Ethereum network remained at around 420,000, but the number of contract deployers showed a significant decline, from an average of 4,000 people per day in January to an average of 2,000 people per day in March.

In the long run, the number of ecosystem developers in the Ethereum network seems to have stagnated since the end of the last bull market, and even began to shrink rapidly after February 2024. As the market enters a new round of rising cycles, the Ethereum network is caught in a dilemma of developer exodus and slowing growth of active users, which is closely related to the lack of innovation in application scenarios within the ecosystem.

During the bull market from 2020 to 2022, exciting native crypto innovations such as DeFi, NFT, GameFi, SocialFi, etc. were all born from the Ethereum ecosystem, and each narrative has had a profound impact on the future development of the industry. By 2024, people are once again expecting Ethereum to recreate its miracle and bring everyone a narrative innovation that will catch their eyes. However, as of now, apart from the re-staking of Eigen Layer, there are almost no "new things" in the ecosystem that can make people excited.

On the other hand, this is also because there is a mismatch between market expectations and the laws of industry development. The innovative development of an industry and the capital effect it brings often show a causal relationship. Similarly, just because the crypto market cycle is every 4 years, it cannot force the industry's innovation to proceed at the same pace. Of course, there are industries such as AI and nuclear energy that rely on financial leverage to achieve technological progress, but blockchain and Web3 are obviously not in this category.

More importantly, the crypto market in the past few months has been almost entirely driven by Bitcoin ETF funds. The macro environment has not brought significant liquidity injection to the market, and the field of altcoins is more of a game between existing funds. In this context, Solana's meme craze and the brewing "Base Season" narrative are undoubtedly sucking blood from the Ethereum ecosystem.

Without playing the two cards of "low gas" and "mass consumption", how to make the blocks sold by the Ethereum network have higher demand is the core issue that the foundation and the top VCs need to think about.

Solana: Crazy money burning drives revenue

Compared with Ethereum, which has basically achieved a balance between income and expenditure, Solana is still in an obvious "money burning stage", with an overall loss of US$797 million in the first quarter, of which US$380 million was lost in the third quarter, accounting for 47.6%. As the price of SOL rises, the operating costs of the Solana network have continued to rise in the past quarter, from $212 million in January to $414 million in March, nearly doubling.

However, it is worth noting that despite the sharp increase in costs, Solana's revenue growth in the first quarter was rapid, with network fees (including supply-side fees) of $69 million in March, nearly five times the $15.38 million in January. This is due to the continuous meme craze in the Solana ecosystem in March and the surge in transaction volume and priority fees brought by ORE mining, but it is still a drop in the bucket compared to the cost expenditure of the entire network.

From the data comparison of network revenue and operating costs, the expenditure-to-income ratio of the Solana network in the first quarter remained at 15 to 30 times, which means that the network needs to spend 15 to 30 US dollars for every US dollar earned, and the customer acquisition cost is extremely high. But if we look at it from a longer perspective, it will be found that for the Solana network, achieving this data is already a huge improvement. In the past year and the last bull market, Solana's network revenue was almost negligible. In March, the Solana network's daily revenue could reach US$1 million, which is a significant increase from the daily revenue of US$145,000 during the peak of the bull market in 2022.

The increase in revenue capacity is inseparable from the growth of network users. In the past quarter, the daily active addresses of the Solana network continued to rise, and in mid-March, when "meme gods" such as BOME and SLERF burst out one after another, it set a historical record of 2.4 million. The number of contract deployers on the network has also shown an upward trend since the end of last year, and remained at an average of 80 people per day throughout the first quarter.

Compared to Ethereum, Solana has cultivated strong stickiness among developers in the ecosystem because it has insisted on the non-EVM compatible route in the past, effectively reducing the situation of "developer fleeing". In addition, a series of wealth-making waves since the JTO airdrop have also attracted a large number of external users and developers to the network. However, it should be noted that since the current high growth of Solana network users is mainly driven by "burning money subsidies", there is also a lack of effective innovation in application scenarios in the ecosystem. Once the capital subsidy is released, this growth potential can easily fade quickly.

On the other hand, although 50% of the transaction fees of the Solana network are used for repurchase and destruction, the surge in the number of transactions has not brought considerable income, which also reflects from the side that there are certain problems in the current Solana network's fee mechanism.

Similar to Ethereum, Solana's fee mechanism is also divided into base fees and priority fees, but unlike Ethereum's dynamic base fee mechanism, Solana's base fee is statically measured in Lamports (usually 0.000005 SOL), while the priority fee is measured in Compute Units required for each transaction.

As can be seen in the figure below, the proportion of priority fees has been rising since the beginning of the year, and most of the fee income of the Solana network comes from priority fees. According to data from The Block, of Solana's record-high fee revenue of $15.6 million in January, $11.9 million came from priority fees, accounting for 92% of non-voting transaction fees.

However, as many people have experienced from the poor experience of the Solana network over the past month, the current priority fee mechanism does not seem to solve the problem of pricing specific block space well. Although setting a priority fee can increase the chances of a transaction being packaged into a block, due to the nature of Solana's continuous block production, setting a higher priority fee does not guarantee that the transaction will be included in the block earlier.

The lack of a dynamic fee mechanism for accurately pricing block space has led many bots to resort to sending spams to get their transactions included in blocks, because in most cases, the base fee cost of 0.000005 SOL will not exceed the expected profit after the transaction is successful. According to Umbra Research's research report, due to the extremely high requirements for Searcher speed, arbitrage transactions with priority fees exceeding 0.02 SOL are rarely seen on the Solana network, and about 96% of arbitrage attempts on the current Solana network will fail.

A large number of failed transactions seriously consumes block space, which not only affects the value capture efficiency of validators for the blocks they are responsible for producing, but also causes a large number of users and transaction volume to be lost. After Jito's MEV memory pool was closed in early March, Solana urgently needed to find a fee solution to effectively price block space and increase network fee income.

In addition to the growth dilemma on the revenue side, Solana needs to work harder on cost control if it wants to break even.

In order to achieve ultra-high performance, the operating costs of the validators and nodes of the Solana network are significantly higher than those of Ethereum. The joke of "running Solana nodes to crash the company's network" is still a stereotype of many people about the Solana network.

According to Validators.appstatistics, 14% of Solana validators use Latitude as their hardware equipment. Its bare metal product starts at $350 per month, and the monthly fee of C3 Large is between $370 and $470. In addition, many validators will choose to use dedicated bare metal servers directly. The Solana Foundation has also reached long-term agreements with many data centers to ensure rack availability and monthly contracts.

Currently, the Solana network has more than 1,000 validators in operation, but the income gap between them is huge. Large validators like Jito can earn millions of dollars in profits from delegated staking, while many validators are in a loss-making state. In addition to the hosting costs (which can reach tens of thousands of dollars per year), Solana validators must also pay for voting qualifications (Voting Fees). According to Heliusstatistics, the fixed cost of each Epoch is about 3 SOL.

Many people have found through personal testing that in order to make a profit, you need to have at least 5,000 SOL in basic funds, and you must also have your own entrusted staking income. Of course, this indirectly increases the marketing expenses of validators. And this does not include the cost of running a Solana node. Due to the extremely high requirements for bandwidth and Uptime, many members of the Reddit community said that Solana nodes "can only run in data centers."

In order to maintain a high-performance network, the cost that Solana pays to "super nodes" must be high. According to Solana's inflation plan, the network's initial annual inflation rate is 8%, and it will decrease at a rate of 15% per year, eventually keeping the annual inflation index at 1.5%.

On the bright side, Solana is designed to follow Moore's Law and promises to double the network's scalability every two years by relying on the development of CPUs and other technologies, which means carrying more users and creating higher fee income. On the negative side, it will take about 10 years for Solana to reach its target inflation level, and before that, the network is likely to remain in a loss-making state.

Although using "low gas" to beat Ethereum does work, it is like a price cut for new energy vehicles. No matter how fierce the price war is, you still have to find a way to make a profit. Low fees mean that Solana's selling point is no longer the block premium, and volume becomes the key to survival. What capital needs to consider is how long can its money last?

Avalanche: Gradually losing its hematopoietic ability

Compared with the first two, Avalanche is in the most severe situation, with almost no revenue in the first quarter, while also paying relatively high operating costs. This is also largely related to the lack of appeal of Avalanche ecological applications in the past period of time. Since the end of last year, Avalanche has become a passive follower of industry hot spots. First, AVAV followed the trend of inscription fever, and then the foundation launched the meme foundation half a beat later. Although the traffic has been caught up, the effect is just so-so, and there is no achievement in overall revenue capacity.

Although Avalanche has used 100% of the transaction fees for repurchase and destruction, if we extend the observation range, we find that except for the short-term profit achieved through AVAV during the "EVM inscription fever", the Avalanche network has been "burning money" like Solana like crazy for the rest of the time.

From the perspective of daily active addresses and the number of contract deployers, the number of users and developers in the Avalanche ecosystem declined severely in the first quarter, and in the long run, it showed extremely high volatility, which means that the stickiness of network users is low and is greatly affected by market conditions and hot spots.

In fact, the pessimistic data of Avalanche in the first quarter reflects to a certain extent the difficulties and challenges faced by the current EVM public chain and even the public chains that claim to have new languages and new narratives, that is, in the stock market with slow growth in the industry user base and oversupply of block space, it is difficult for products with basically similar user experience to stand out in the market and grab food from tigers like Ethereum and Solana. Like the wars in the Internet era, most of the public chains today have chosen to burn money, but it is still the same problem. If there is no hope, how long will capital be willing to persist?

L2, a profitable project

High initial operating costs and high uncertainty on the revenue side make it particularly difficult to start a public chain. This is why the list of the top 10 cryptocurrencies by market value has changed so frequently and drastically in the past 10 years. However, with the emergence of the modularization trend led by Celestia and the development of RaaS infrastructure such as Altlayer, the industry has gradually explored a more certain entrepreneurial opportunity than the public chain - L2.

The operating costs of an L2 include three parts: early development, running the sorter, and uploading packaged transactions (DA). Without considering the development costs, the fee income on an L2 can definitely cover the DA costs. Therefore, compared with the L1 public chain, L2 will hardly face the problem of not making ends meet. As long as the operating costs of the sorter are low enough, L2 is a profitable business. As the infrastructure of "one-click chain launch" becomes more and more complete, the cost of L2 entrepreneurship is also decreasing, which is why L2 has appeared in large numbers recently.

In this article, we selected the performance of three L2s, Arbitrum, Base and Blast, for comparison. You will find that L1 considers the problem of break-even, while for L2, the consideration seems to be the question of how much profit to make. In the first quarter, all three L2s achieved profitability, with Base and Arbitrum both having revenues of more than 27 million US dollars. As a new force in L2, Blast's quarterly revenue of 7.66 million US dollars inevitably makes a group of L1s ashamed.

Arbitrum's revenue is stable

In the first quarter, Arbitrum's average monthly revenue was stable at around $2.3 million. In January, Arbitrum's network revenue was $7.44 million, and after deducting DA costs of $4.88 million, the gross profit was about $2.5 million. In March, the revenue was $10.46 million, and after deducting DA costs of $7.94 million, the gross profit was also around $2.5 million.

It can be seen that before EIP-4844 and the Cancun upgrade, L2's revenue ceiling was fixed and very limited. Due to the positive linear relationship between fee income and on-chain costs, L2's gross profit margin has been limited to a fixed range. For Arbitrum, this figure remained between 25% and 40% in the first quarter. After the Cancun upgrade, the cost of L2 using Blob in DA was greatly reduced, which greatly improved L2's gross profit margin. As can be seen from the figure below, L2's gross profit margin has basically stabilized at 90% after EIP-4844 went online. Of course, this data does not take into account the operating costs of the sorter.

However, the reduction in DA costs also reduces transaction fees, which means a sharp drop in network fee income in the absence of incremental users. As can be seen from the figure below, although the operating costs are almost "zero" after the Cancun upgrade, the fee income of the Arbitrum network has also decreased significantly. According to the data in April, Arbitrum's revenue shrank by nearly 80%, only about 2 million US dollars, but thanks to the extremely low DA cost, it finally achieved a gross profit of 1.88 million US dollars, only 25.3% lower than in March.

The gross profit margin has reached the extreme, but the revenue cannot grow. The bottleneck of user growth is also the biggest challenge facing Arbitrum. Arbitrum's daily active addresses slowed down after March, while the number of contract deployers did not change much in the first quarter, and the number of cross-chain assets and transactions also stopped growing in March. From the user's perspective, Arbitrum's tool value seems to far exceed its application value. The application scenario in the ecosystem is single. On the one hand, it is difficult to activate existing users, and on the other hand, it is difficult to retain new users. In the eyes of many people, it has become a "transit chain."

Base's explosive growth

The growth bottleneck does not seem to be a problem for Base. In March, Base experienced explosive growth, with revenue increasing more than 4 times year-on-year. On the one hand, DA costs plummeted, and on the other hand, the number of users surged. Excluding the DA costs of $6.34 million, the Base network's monthly gross profit was twice that of Arbitrum's entire first quarter gross profit.

After the Cancun upgrade, Base also experienced a halving of revenue, but soon reversed this downward trend. Judging from the net profit data, the profits of the Bas network have been growing since the beginning of the year. After EIP-4844, Base directly "made a lot of money."

The explosive growth of revenue is inseparable from the narrative boost of "Base Season". In the past quarter, the Base network is one of the few networks with a high growth rate in the number of daily active addresses and contract deployers. But it is worth noting that developers in its ecosystem still show strong market speculation. In April, when the overall liquidity shrank, the number of contract deployers on the Base network also rapidly halved as the number of transactions and fee income continued to decline.

However, although the overall popularity of the Base network showed a significant decline in April, some fundamental signals about "Base Season" are still being strengthened. Since March, the net circulation of USDC and the value of cross-chain assets on the Base network have begun to rise rapidly, and this momentum has not slowed down significantly even after entering April. As market liquidity improves in the second half of the year, Base may become one of the most noteworthy ecosystems in the crypto industry.

Blast is tepid

Endorsed by Paradigm, traffic diverted by Tieshun IP, supported by KOLs, and joined by project parties, as a representative of the new L2 force, Blast has been in the spotlight when it was first launched. However, judging from the financial data of the past two months, Blast's performance is not particularly ideal. After achieving a highlight in March along with the entire crypto market, Blast was beaten back to its original form in April, with revenue down more than 60% from March and gross profit of only $700,000.

An interesting point is that Blast did not have a significant reduction in operating costs after the Cancun upgrade like other L2s, but instead has remained at a high level, making it impossible for the network's gross profit margin to break through.

However, compared with the gross profit margin issue, Blast's dilemma at the level of ecological growth is more worrying. The number of Blast contract deployers has dropped sharply in the past month, while the number of daily active addresses and daily transactions have stagnated after the decline in cross-chain capital inflows. Of course, it is a bit biased to use the April data generated against the background of overall market weakness to analyze Blast, but to be honest, Blast's performance in March was not much better.

Similar to Avalanche, Blast’s predicament also reminds the general-purpose L2 that is about to be launched, that is, in the current stock market that has been divided by the leading L2, it is difficult for the new general-purpose L2 to achieve scale effect and get a share of the market. Perhaps in this stock competition environment, differentiation and vertical fields, and small and beautiful markets are the way out.

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