Blockchain Revenue: How Crypto Projects Make Money

generalize: Blockchain is business.As investors, this mental shift allows us to analyze them as businesses, asking fundamental questions such as How do these things make money? Are they profitable? How fast are they growing? Here’s how to answer these questions.

Blockchain has been hailed as one of the most transformative technologies of the 21st century. Its proponents cite security, privacy and transparency as reasons why blockchain will outperform traditional technologies.

These are noble reasons, but at the end of the day, companies and investors in blockchain technology want to know one thing: How can blockchain projects be profitable?

Thinking about blockchain like a business allows us to understand how they generate revenue and profits, where they are growing, and whether their business models are sustainable.

And because these “businesses” are blockchain-based, the numbers are transparent to everyone. That’s it.

Blockchain business model

Blockchain technology is an entirely new business model that provides a new way to store and manage data. The technology has enormous potential to disrupt any industry that values ​​database management, especially those involving money.

While this has been enough to attract investors so far, these blockchain projects must also be profitable in the long run. Because whether in the traditional stock and bond markets or in the new “large-cap market,” it is the revenue prospects that attract investors to projects.

Take digital payments, for example. Visa and Mastercard have thriving business models because they provide a valuable service: a “settlement layer” that connects billions of merchants and customers. But these companies have centralized control over data and payment records. They make billions of dollars in profits every year from fees charged for using the network.

Compare it to cryptocurrency networks like Ethereum, a faster and often cheaper alternative to a settlement layer, with important promises to users: a neutral, decentralized platform where all parties in a transaction have equal access to data. But how much money does Ethereum make?

Which protocols are sound business
Best Blockchain Business (Courtesy) Token Terminal)

Some of the best analysis of blockchain revenue comes from Token Terminal, where you can see a leaderboard that aggregates some key data points, as shown in the table above.

cost: These are the fees that users pay to use the protocol or network (gas fees for Ethereum, transaction fees for Uniswap, etc.). This is the standard way blockchain projects make money. (Think about expenses such as income.)

These fees are usually paid in two ways (think about these fees):

  • supplier: Mostly to validators who help run the network (validators on Ethereum, liquidity providers on Uniswap, etc.).
  • token holder: Confusedly called “revenue” in the token terminal, it is the value returned to token holders (usually by burning tokens, which increases the value of someone else’s pie).

Token Incentive: Finally, we have new tokens created and paid to validators or miners, which is another fee because it reduces the value of the asset held by everyone else.

Well, to read the chart above, we might say “Ethereum earned $93.3 million in transaction fees over the past 30 days. It burned $73.6 million in ETH tokens while creating $63.2 million in New ETH, creating a net gain of $10.4 million.”

Of course, these are not traditional yield metrics, but they do reflect an understanding of how blockchain creates value.

How blockchain creates value

Treat any “product” in the blockchain as Blocks that hold transaction data. A company makes widgets; blockchain makes blocks.

If you want to complete a transaction on the blockchain network, you need to buy space on the next block in the chain. product of blockchain is a block.

The simplest example is Bitcoin. Bitcoin has a storage capacity of 1MB per block. Assuming a minimum data storage size of 258 bytes, you get an average of 500 to a maximum of 2000 transactions per bitcoin block. To make a Bitcoin transaction, you need to buy a block on the Bitcoin blockchain.

The Ethereum blockchain has additional features such as smart contract programs. It has smaller blocks of up to 80KB storage capacity. An Ethereum block can hold anywhere from 2 to 200 transactions, depending on the size and complexity of the transactions.

But Ethereum is significantly faster than Bitcoin, completing a 4MB transaction in 10 minutes, while the latter can only do 1MB. More transactions per hour means more revenue (i.e. fees) the blockchain can generate.

If the chain is able to generate more revenue than it spends (i.e. paid to the people running the network), then the result will be profitability.

The problem is that blockchains are expensive to run because they have to be highly focused on network security. In a proof-of-work blockchain like Bitcoin, security is guaranteed by paying miners. In a Proof of Stake blockchain, security is guaranteed by paying stakers and validators.

In mining and staking, those who provide security (i.e. run the network) are rewarded in the form of project-native tokens. The more tokens are issued, the more diluted its token value to others.

Ethereum Q3 Income Statement
As a proof-of-work blockchain, Ethereum pays out huge rewards to miners every quarter. As a proof-of-stake blockchain, this will change. (Photo courtesy of Messari)

Currently, most blockchains don’t earn enough revenue from gas or transaction fees to cover the fees paid to miners or stakers to make it worthwhile.

Projects built on existing blockchains face another problem. Most DeFi projects, such as Uniswap, Aave, and Compound, use incentives to attract users. These incentives come in the form of token emissions or minting new tokens to reward users who run their network.

So, as investors, we must ask the following questions:

  • income: What is the fee for blockchain projects? How did they earn it?
  • cost: How much is returned to those who run the network? What other costs do we have to consider?
  • token dilution: How many tokens are created (or destroyed), thereby reducing (or increasing) the value of all other token holders?
income and expense
income and expense: Ethereum fees (green line) vs. fees paid to validators (blue line).polite Token Terminal.
revenue and profit
Revenue and Profit: Ethereum fees (green line) and “profit” are returned to ETH holders by burning (blue line).polite Token Terminal.

How to Create Blockchain Profitability

To improve business profitability, you have two options: increase revenue and/or reduce costs. In blockchain business, this means:

Create cheaper security

Proof of Work (mining) is too expensive, energy intensive and ecologically unsustainable. Instead, many newer blockchains use proof-of-stake: instead of power-hungry computers brute-forcing math problems, investors can use their crypto assets as “stake” to validate transactions.

Since staking is easier and cheaper than mining, less rewards may be paid to stakers. As a result, this translates into cost reductions for blockchain businesses.

Create more deals

The woes of the Ethereum blockchain in recent years have highlighted the importance of blockchain network scaling. Despite the high demand for transactions, the network is currently unable to take advantage of it due to inherent limitations in scalability.

Since low transaction fees are the unique selling point of blockchain networks, higher fees are not the solution. We’ve seen the same with Ethereum, where gas fees sometimes over $100 per transaction do little to improve the profitability of the blockchain.

The Ethereum network is undergoing a multi-year upgrade that will increase capacity from 30 transactions per second to 100,000 transactions per second. This is expected to significantly reduce transaction fees, but the resulting increase in the number of transactions will more than offset the impact of higher revenue.

Reduce (or terminate) token incentives

Blockchain projects can all be considered tech startups that are known for using incentives to grow their businesses, even if it means they need to operate at a loss.

As a comparison in the Web2 space, look at Amazon.Operating at a loss for six years After listing, before finally achieving a modestly profitable year. Amazon was motivated by its low prices and large inventory, both of which paid dearly in the early years.

Blockchain projects are now in the start-up growth phase, but in the next few years, incentives paid in the form of crypto tokens will need to come to an end to ensure the future profitability of the project.

Every token minted reduces the value of assets held by other investors, like an ever-growing pie, while your share remains the same. Conversely, every token burned makes the pie smaller, increasing the value for all investors.

Investor takeaway

Blockchain is a disruptive technology with revolutionary potential.But we can’t ignore Profitabilitywhich is critical to encouraging its continued adoption across the economy.

As investors, we look for projects that are profitable and likely to increase revenue over the long term. In the past six months, the most profitable projects were:

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