Author: Peter Horton, Research Analyst at Messari Protocol Services; Translation: Blockingxiaozou
Key Takeaways
The rebound in the crypto market in Q1 this year did not come with a recovery in network usage. Despite an average quarterly increase in market share of about 83% for certain specific L1s, network usage decreased by about 2.5%.
Ordinals have reignited interest in Bitcoin’s programmability, and Stacks outperforms competitors in several metrics, with quarterly increases in market capitalization (340%), revenue (218%), network usage (~35%), DeFi TVL (276%), and DEX trading volume (330%).
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Ethereum still leads in most key financial and ecosystem metrics, including market capitalization, revenue, DeFi TVL and transaction volume, NFT transaction volume, and full-time developers.
USDC’s temporary decoupling, coupled with Blockingxos’ discontinuation of BUSD issuance, has shifted the dominant position of stablecoins to USDT, benefiting TRON. TRON’s stablecoin market capitalization increased by 30% QoQ to $43.6 billion, while all other specific L1s with significant stablecoin market capitalization saw QoQ declines.
This report summarizes and compares Messari’s quarterly analysis results for 14 Layer 1 (L1) smart contract platforms in terms of financial, network, and ecosystem aspects. These L1s are: Avalanche, BNB Chain, Cardano, Ethereum, Harmony, Hedera, NEAR, Polkadot, Polygon, Solana, Stacks, Tezos, TRON, and WAX.
Financial Analysis
(1) Market Capitalization
After experiencing turbulence in 2022, the crypto market showed signs of rebound in the first quarter of this year. On average, the specific L1s we studied had a quarterly increase in market capitalization of 83%, but they still fell by 58% YoY. STX performed well in the first quarter, mainly driven by the popularity trend of Bitcoin Ordinals, which reignited interest in Bitcoin’s programmability. In absolute terms, ETH’s market capitalization still exceeds twice the sum of other network tokens.
(2) Revenue
Revenue is the total amount of fees collected by the protocol, regardless of how the fees are allocated within the protocol. Jon Charbonneau has written an in-depth article explaining why protocol revenue should be treated this way, and please take a quick look at the example below:
· Blockchain X collects 100 tokens through fees. These 100 tokens will be completely destroyed, but 100 tokens will be minted again to reward validators. If revenue is measured only by the fees accumulated by token holders, revenue is 100.
· Blockchain Y collects 100 tokens through fees. These 100 tokens will be distributed to validators. No additional tokens will be minted or destroyed. If revenue is measured only by the fees accumulated by token holders, revenue is 0.
The two blockchains have identical final outcomes in terms of fees, inflation, and validator rewards, but their revenues would be vastly different if measured based on fee allocation.
Due to its relatively high usage and gas fees, Ethereum’s revenue in the first quarter of this year was $457 million, nearly 2.8 times the total revenue of all other specific L1s.
The most significant revenue growth came from Hedera, with a quarter-on-quarter increase of 489%. Its growth was largely driven by increased usage of its Consensus Service, which provides verifiable timestamps and event ordering for Web2 and Web3 applications. These applications include tracking supply chain sources, computing DAO votes, and monitoring IoT devices.
(3) P / S R atio (Price-to-Sales Ratio)
The P/S ratio (Price-to-Sales Ratio) is the ratio of the relative price of a network token to its revenue. Although it may be a useful metric, network tokens are a new asset that may require new valuation models, such as the Expected Demand for Security Model.
TRON’s P/S ratio in the first quarter of this year was far ahead, 16 times that of specific L1, followed by Ethereum, which was 188 times. WAX is the only network outside the top 20 market capitalization rankings with a P/S ratio in the top half. While most networks generate revenue from transaction fees, WAX’s revenue is driven by a 2% tax on the NFT market.
TRON, Ethereum, Polygon, and Hedera are the only networks this quarter with decreasing market-to-sales ratios. In other words, their revenue growth has outpaced the growth of token market cap. The networks with the highest quarter-over-quarter market-to-sales ratio growth are NEAR (100%), Solana (112%), and Harmony (156%).
(4) Inflation
PoS reward issuance-driven inflation is a transfer of wealth from holders to stakers. The higher the inflation rate, the more beneficial it is for stakers and the more detrimental it is for holders, and vice versa.
BNB and ETH are the only deflationary tokens this year in Q1 with deflation rates of -5.4% and -0.2%, respectively. Both networks burn a portion of transaction fees. Additionally, the Binance team repurchases and burns tokens every quarter, which is the main reason for its deflationary pressure.
(5) Genesis Supply Liquid
Besides PoS reward issuance, the unlocking of genesis tokens can also bring inflationary pressure. Genesis Supply Liquid measures the percentage of unlocked genesis tokens, excluding staking rewards. The metric is standardized between networks with capped supply (which includes a fixed amount of staking rewards in the initial allocation) and uncapped supply (which has infinite staking rewards and doesn’t include them in the initial allocation).
Most specific network tokens are fully allocated except for Avalanche, Hedera, NEAR, and Harmony:
- Stacks’ allocated tokens are about 95%, with around 0.5% unlocking in Q2 2021 to the treasury.
- Harmony’s allocated tokens are about 95%, with around 0.6% unlocking in Q2 2021 for ecosystem development.
- NEAR’s allocated tokens are about 79%, with an additional 3% unlocking in Q2 2021 to core contributors and investors, as well as for grants.
- Avalanche’s allocated tokens are about 73%, with an additional 2.5% unlocking in Q2 2021 to strategic partners, the foundation, and the core team.
- Hedera’s allocated tokens are about 61%, with an additional ~4% unlocking in Q2 2023.
Note that Avalanche and Hedera have supply limits, and the unlock rate refers to the genesis supply (excluding staking rewards), not the total supply.
(6) Actual Yield and Qualified Staking Supply
PoS reward issuance rates typically depend on the staking supply rate and/or the number of validators. Networks rely on different equations to set the relationship, which determine the inflation rate, staking yield, and staking supply rate.
Low inflation tokens (such as BNB, ETH, and STX) allow holders to freely use tokens without punishment for not staking, resulting in a lower staking rate. On the other hand, high inflation tokens are optimized for higher staking rates. Although liquidity staking allows staked tokens to participate in the ecosystem, it often comes with worse liquidity, smart contract risks, and different tax implications. In addition, Cardano and Tezos have enabled liquidity staking at the protocol level, but there is still some additional complexity in allowing liquidity staked tokens to participate in DeFi and other ecosystem applications.
Network Analysis
(1) Usage
User activity is difficult to compare across different systems (such as between EVM, SVM, and Antelope). Each architecture has a unique way of processing and recording transaction and address activity. In addition, the ratio of addresses to users is not 1:1 and varies across networks.
The information that can be provided by the total number of transactions and addresses is far less than the information provided by the economic activity facilitated by these transactions and addresses. Therefore, we will briefly introduce the growth of user activity, which is more suitable for network comparison than absolute numbers. However, if you want to compare user activity based on absolute numbers, the ecosystem section below will provide a better metric.
Transaction activity did not increase with the market rebound. The quarter-on-quarter change in daily average transaction volume for a specific network was -2%, a decrease of 2%. Stacks is a notable exception: its user activity increased slightly before the STX price surge and grew 34% quarter-on-quarter.
Please note that Avalanche’s data only includes C-Chain activity. Due to the launch of subnets, C-Chain transaction volume decreased by 82.7% year-on-year. Including subnets, daily transaction volume grew by 130% year-on-year. However, there is currently no subnet that uses AVAX as gas fees. Although subnets can use AVAX as gas fees, the accumulation of subnet value usually depends on the subnet providing at least one validator to the global set while increasing security demands.
The quarter-on-quarter change in the daily active addresses of specific networks was -3%. In terms of transactions, Stacks led the entire L1 group with a 35% increase. Harmony’s 28% increase was largely due to an abnormal peak at the end of the quarter, which was not sustained.
Driven by the Sweat Economy released in mid-September, NEAR had the largest year-on-year increase in daily active addresses, reaching 157%.
Only Avalanche C-Chain and WAX had an increase in address growth rate in the first quarter. Avalanche’s quarter-on-quarter growth rate of new addresses increased by 56%. Boosted by the “BlastOff” NFT marketing campaign and Funko (a toy company that sells licensed pop culture collectibles) NFT sale, WAX’s quarter-on-quarter growth rate of new addresses surged by 38%.
Solana’s average transaction fee in the first quarter of this year was $0.0003, significantly lower than other specific L1s. Solana’s development team has released several upgrades over the past year to improve its fee market and overall network performance, with the most notable being the local fee market (and priority fee). Most blockchains have a global fee market, and all users are forced to compete in an auction. If an NFT minting triggers a gas fee war, users who only want to transfer tokens will also be affected. As the name suggests, Solana’s local fee market sets computational limits for each account and allows users to participate in separate gas auctions to adjust the status of each account. The local fee market, as well as QUIC and service stake weight quality, are explained in more detail in Solana’s Q4 22 report and Q1 23 report.
(2) Validators
All networks experienced quarter-over-quarter growth in the total value of staked tokens denominated in USD, as expected during a market upturn. Stacks (403%) and Solana (125%) had the highest quarter-over-quarter increases. The total staked (in USD) for each network increased slightly more than its market capitalization, indicating net growth in staked native tokens. Ethereum’s security budget remains the largest, exceeding $20 billion, with ETH staking at $32.6 billion as of Q1 2023.
Like users, validator counts are not fully standardized across networks. While tracking the number of validators is easy, tracking the number of node operators is more challenging. The number of validators per node operator varies by network and is largely dependent on the weighting mechanism.
Specific networks with some form of staking weight limit include:
· Ethereum: a staking weight ceiling of 32 ETH (0.0001% of total staked as of Q1).
· Avalanche: a staking weight ceiling of 3 million AVAX (1.3% of total staked as of Q1 2023).
· Cardano: staking weight limit is determined by dynamic parameters and is currently 70 million ADA (0.3% of total staked as of Q1 2023).
· Polkadot: all active validators receive the same reward regardless of weight. The minimum staking weight is dynamic and is currently around 2.14 million DOT (0.3% of total staked as of Q1 2023).
· Harmony: staking weight is limited to between 85% and 115% of the median effective stake.
Ethereum has the lowest staking weight limit relative to its total staked amount. While the number of validators exceeded 560,000 at the end of Q1 2023, there are far fewer node operators. According to ethernodes, there are over 3,500 synchronized physical validator nodes – likely an underestimate. Nodewatch’s data is roughly twice this number, though it is unclear if Nodewatch still includes non-validator nodes.
The data for other specific networks in the table above is only their validator count. They are all upper bounds compared to Ethereum’s data. Even if the network lacks the aforementioned weight limits, node operators still have an incentive to enable multiple validators, for example, to improve latency and MEV opportunities by being geographically close to other nodes. In summary, after Ethereum, the networks with the most validators are Cardano (2,932), Solana (1,620), and Avalanche (1,192).
The Nakamoto coefficient measures the number of entities that could lead to a network interruption. The Nakamoto coefficient for Ethereum is usually 1 or 2, primarily due to the centralized staking from Lido. However, we use the figure calculated by the Solana Foundation, which takes into account individual node operators within Lido and uses a 50% staking threshold instead of 33%.
Although the Nakamoto coefficient is commonly used today 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 can jeopardize 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 can jeopardize the health of the network due to service interruptions or bans on encrypted node operators (see Hetzner and Solana). Although validator nodes can self-host, self-hosting becomes increasingly difficult as hardware requirements increase. The Ethereum community wears its decentralized hat on its home stakers. While the number is not exact, Ethereum’s self-hosting validator operators may outnumber the total number of validator operators in many networks.
· Delegator distribution: If the total staking of a delegator is highly concentrated, the stability of the network may be compromised once that delegator withdraws its stake. In addition, many network foundations currently delegate a large portion of their tokens to subsidize support for minimum validator requirements and disperse voting power.
· Client diversity: Most networks rely on a single validator client, which makes the system susceptible to client errors or attacks. Jump’s Firedancer client will make Solana the only multi-client network outside of Ethereum (excluding clients that fork off from each other).
Note: Our analysis here does not include Hedera, as its validator set is permissioned. Similar to user activity analysis, only Avalanche C-Chain validator data is included. Each subnet can use the global set of three to all validators. As of the end of Q1 2023, the published subnets had four to 14 validators.
Ecosystem Analysis
(1) De Fi
As expected during the market rebound, TVL denominated in USD has also increased. The QoQ market cap change of most specific networks is greater than that of TVL. This relationship potentially indicates that the increase in TVL is more due to price appreciation than net capital inflows.
Nevertheless, Ethereum remains the major TVL player, followed by BNB Chain and TRON. Stacks and Cardano performed well, with increases of 276% and 172%, respectively. Stacks’ TVL rose sharply around February 17-22, in line with the rise in STX’s price. Cardano TVL has had a more stable increase throughout the quarter, benefiting from the release of several stablecoins (which will be discussed in more detail below).
NEAR is an exception, as its TVL has been declining throughout the quarter. The QoQ decline rate is 22%, mainly occurring during the USDC decoupling period (which will be discussed in more detail below).
DeFi diversity is used to measure the number of protocols that make up the top 90% of DeFi TVL. A larger distribution of TVL across protocols reduces the risk of widespread ecosystem infection due to events such as exploits or protocol migration.
Ethereum’s DeFi diversity score is 22, 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. TRON has the third largest TVL ($5.4 billion), but over 70% of it is concentrated in JustLend. Additionally, JustLend TVL is dominated by three unique wallets.
The daily average trading volume of most specific networks has increased QoQ. Like TVL, Stacks and Cardano had the largest QoQ increases, at 330% and 101%, respectively. On March 11, driven by over $20 billion in trading volume on Ethereum, DEX daily trading volume skyrocketed during the USDC decoupling from the US dollar. This peak was almost double the peak during the Terra/Luna, Celsius, and FTX crashes.
Overall, the market capitalization of stablecoins continued to decline steadily over the past quarter, with several major events related to stablecoins:
· The run on Silicon Valley Bank caused USDC to temporarily decouple and drop to a low of around $0.87 between March 10 and March 13. From March 10 to the end of the quarter, the market capitalization of USDC on all chains decreased by 24%.
· On February 13, regulators instructed Blockingxos to stop issuing Binance USE (BUSD), which was then the third most popular stablecoin after USDC and USDT. From February 13 to the end of the quarter, the market capitalization of BUSD on all chains decreased by 52%.
Ethereum, Polygon, Solana, Avalanche, and Hedera all have native USDC issuance. They were adversely affected by the outflow of USDC, which was the top stablecoin on each blockchain before decoupling. Similarly, BUSD is the main stablecoin on the BNB chain, leading to a quarterly decline in stablecoin market capitalization of 31%. This is the largest quarterly decline in specific networks except Hedera (which only uses USDC and has a quarterly decline of 36%).
The above events have caused some BUSD and USDC holders to switch to USDT. From February 13 to the end of the quarter, the market capitalization of USDT on all chains increased by 17%. TRON is the biggest beneficiary of this shift, as one of TRON’s main use cases has become holding and transferring USDT. Its stablecoin market capitalization increased by 30% on a quarterly basis.
Only Cardano had the highest quarterly increase in stablecoin market capitalization, at 262%. Cardano has no USDC, USDT, or BUSD, so it is not affected by the above events. In terms of market capitalization, Cardano’s top two stablecoins are IUSD and DJED, which were issued in the fourth quarter of 2022 and the first quarter of 2023, respectively. Their continued growth is crucial for the development and growth of the Cardano ecosystem.
The total value of borrowing provides additional context for a network’s DeFi activity. Although a large amount of borrowing may lead to more unstable liquidation, borrowing typically indicates where users trust to borrow and where protocols make money (from liquidation and borrowing fees). It is worth noting that GDP debt is not included in the borrowing data by DefiLlama. Therefore, Cardano, Stacks, and Tezos are excluded from this analysis, as all or most of their DeFi debt comes from CDP protocols.
Across all specific networks, the total amount borrowed increased by 17% on a quarterly basis. Like TVL and DEX trading volume, Ethereum still dominates the network with a total borrowing of nearly $4 billion, followed by BNB Chain with a total borrowing of $735 million. Unlike these metrics, Avalanche ultimately surpassed Polygon, despite the gap between the two narrowing throughout the quarter.
(2) N FT
Despite high gas fees, Ethereum remains the primary venue for NFT activity. Blur established its dominance in the Ethereum market in Q1 23 by its token issuance and mid-February airdrop. According to hildobby’s Dune dashboard, its average weekly trading volume share increased from 31% to 59%. Only Polygon’s quarterly MoM trading volume exceeded Ethereum, increasing by 101%.
While Ethereum is also leading in the number of daily unique NFT buyers, the difference in this metric is smaller compared to other chains. Ethereum’s daily unique NFT buyers increased by 88% QoQ. In late February, Coinbase released a commemorative NFT on Ethereum to celebrate the launch of its Base L2. The “Base, Introduced” series had several days of free minting and reached a peak in unique buyers on February 26, exceeding 122,000.
Once again, only Polygon’s quarterly MoM unique buyer count exceeded Ethereum’s, increasing by 89%.
Although Tezos’ daily unique buyer count QoQ has declined, the number of unique NFT buyers on Tezos has averaged over 10,000 in the week since the McLaren F1 series, which was released at the end of this quarter, with free open versions.
(3) Developers
Developer data is always imperfect, but Electric Capital’s developer report sets the best standard for measuring development activity. It defines developers as authors who contribute original, open-source code to the ecosystem and defines full-time developers as those who contribute 10 days or more of original, open-source code per month.
In specific networks, the number of full-time developers decreased by 4% QoQ. Ethereum only dropped by 0.1% and remains the top ecosystem for developers. The number of full-time Ethereum developers is 1,976, nearly equal to the total of all other specific networks. In specific networks, Hedera had the largest increase in the number of full-time developers, increasing by 28% QoQ to 64 people.
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