Last week, the U.S. stock market ushered in the busiest "earnings week" of the first quarter, and nearly half of the U.S. listed companies chose to report their earnings this week. After the big dump last Friday, the eyes of the market are on the earnings data that the tech giants have released or will release this week.

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

The term "financial report" has always been far away from the encryption industry, and in this market where the business model is not yet clear and the team's monetization is still dominated by token issuance, data such as the number of active addresses, TVL, and market capitalization seem to be more intuitive and transparent. However, whether the traditional financial reporting logic is applicable in the encryption market, whether the subject of measurement is the protocol or the team, and what statistical indicators should be used? These questions make the business of "chain" seem out of place compared with traditional business. Shouting "Mass Adoption" on the lips all day long, and clearing the door of "Ponzi Game" in the heart, this is probably the general view and cognition of encryption people on the industry.

So is the concept of financial reporting applicable in the encryption 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 like Ethereum and Solana) as a decentralization network essentially need the same self-hematopoietic ability as traditional companies, otherwise they will become real Ponzi.

So for a chain, how can it be called "hematopoietic"?

A public chain that burns money like crazy

In fact, in the current encryption industry, in addition to Bitcoin, a decentralization ledger, almost all public chains need to have hematopoietic ability in order to survive for a long time and safely.

For BTC, its market capitalization and price reflect the volume of wealth that the outside world has put into the Bitcoin ledger, and this wealth is willing to pay Miners a satisfactory "property custody fee" in order to obtain the security of the Bitcoin network. But this set does not seem to work on general-purpose public chains such as Ethereum and Solana. Because Miner is a mercenary group, where to make money long go there, and the "world computer" to be maintained by the general-purpose public chain is not very attractive to the wealth of the outside world, so from the perspective of supply and demand, the burden of hiring Miner (of course, now the long is validators) to look at the home, the burden of paying the cost is generally on the shoulders of the network itself.

To put it simply, the general-purpose public chain needs to find a way to "generate revenue" to pay the validators who maintain the network, not only to simply issue Token incentives, but also to make the issued Tokens have long-term value support, which is the basic hematopoietic ability of the public chain. Of course, hematopoiesis is not all about "living". In the stock market, stronger revenue capacity means stronger repurchase strength and stock price expectations, and the same is true for public chain business.

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

First of all, it is naturally the operating income, for the public chain, this part comes from the network fees, and the part of the fee that is destroyed can be regarded as the revenue of the network (equivalent to the repurchase), the more network activities long the higher the fee income. The second is operational costs, including the portion of each network fee paid to validators (supply-side fees), as well as Token incentives issued by the network, and the less Tokens issued, the lower the cost. Finally, there is gross profit, that is, token burning minus Token issuance (and validator fees), which is the ultimate embodiment of a public chain's hematopoietic ability and network value. It is not difficult to see that for a public chain, the longest of gas destruction and block incentive issuance largely determines its revenue capacity and self-sustainability.

So in the first quarter of this year, how did the revenue generation performance of general-purpose public chains perform? We selected three representative cases for comparative analysis, namely Ethereum based on Block Base Fees for gas buyback and burn, Solana with 50% fees for repurchase and destruction, and Avalanche with 100% fees for full burning.

Judging from the final "quarterly report", Ethereum is still the most profitable general-purpose public chain in the current encryption world, achieving revenue of $1.17 billion and net profit of $369 million in the first quarter of 2024. Although Solana has strong ecological momentum in the past six months, due to the advocacy of ultra-low gas concepts and the lack of dynamic fee mechanisms, it only achieved less than $100 million in revenue in the first quarter, while its network operating costs (i.e., Token incentives) were as high as $844 million, with a total loss of $796 million. Avalanche Networks had almost no revenue in the first quarter, accounting for a loss of $179 million.

ETH: Barely breaking even

In terms of expansion, Ethereum Network turned a profit in February this year, and its revenue continued to rise throughout the first quarter, of which the revenue in March was $606 million, accounting for 51.7% of the first-quarter revenue. In March, Bitcoin prices hit record highs and encryption market sentiment pumped, thanks to a surge in the number of on-chain transactions, the Ethereum network's single average gas as well as total fee income increased significantly.

In terms of the comparison of network revenue and operating costs, the operating costs of the Ethereum network have been relatively stable, and have remained around $4 million per day for a long time since the completion of the merge (Merge) in September 2022, but with the pump of ETH prices and Block short demand, this figure has climbed since mid-to-late February and is currently around $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 for each exchange will be burned, so the revenue of the network is positively and linearly related to the on-chain volume and the degree of demand between the Block short. on-chain the long transaction and the greater the inter-Block short demand, the higher the average base fee for burning.

However, it is worth noting that when we extend the observation to the last round of Bull Market, the current revenue capacity of the Ethereum network has actually dropped, which is also strongly related to the market cycle. In comparison, the average daily revenue of the Ethereum network at the end of 2021 during the bull peak was about 3 times that of the current one.

Another thing that can be observed is that the transformation of PoS has indeed become a key factor in Ethereum's balance of payments. Before switching from PoW to PoS, Ethereum still needed the economically-intensive labor of graphics card mining rigs to maintain its network, which also led to the high operating expenses paid by the network to miners. According to the Ethereum's official website, before the merger, the Ethereum network had to pay 2 ETH of operating costs like Miner every 13.3 seconds (i.e., one Block), plus the ommer Block (not counting the Block of the longest chain), Ethereum operating costs up to about 13, 000 ETH per day.

After moving to PoS, Node validators no longer need high maintenance expenses, and the network operating costs are based on the total number of stake ETH (about 14 million ETH) and only spend 1,700 ETH per day, directly saving the network about 88%. Therefore, despite the current decline in Ethereum's revenue capacity, the network can still maintain a basic breakeven compared to the plummeting costs.

From the comparison of network revenue and net profit, the gross Intrerest rate of the Ethereum network after the merger is about 40% to 70%, and the more congested the network, the higher the gross Intrerest rate. In addition, the entire network currently needs to maintain $8 million in revenue per day to become profitable. For example, although it is not within the scope of the first quarter, it can be seen from the chart below that Ethereum's fee income has been declining throughout April due to market conditions, so after achieving profitability for 2 consecutive months, the Ethereum network has entered a state of loss again. It can be seen that it is longest difficult to make a chain self-sufficient.

Looking further at the number of daily active Addresses and contract deployers (ecosystem developer data proxies) on the Ethereum network, we can gain some additional perspective. In the first quarter, the Ethereum network's daily active Address remained around 420,000, but the number of contract deployers declined significantly, from 4 k per day in January to 2 k per day in March.

In the long run, it seems that the number of ecosystem developers in the Ethereum network has been in a state of rise stagnation since the end of the last round of Bull Market, and even began to accelerate after February 2024. The market has entered a new round of rise cycle, but the Ethereum network has fallen into the dilemma of developers fleeing and active user rise slowing down, which is closely related to the lack of innovation in application scenarios in the ecosystem.

During the Bull Market from 2020 to 2022, exciting native encryption innovations such as Decentralized Finance, NFTs, GameFi, SolcialFi, and more were born from the Ethereum ecosystem, and each narrative had a profound impact on the future development of the industry. In 2024, people once again expect Ethereum to miraculously reappear and bring you a dazzling narrative innovation, but at present, except for the re-staking of Eigen Layer, there are almost no exciting "new things" in the ecosystem.

On the other hand, this is also because of the mismatch between market expectations and industry development laws. The innovation and development of an industry and the capital effect it brings often show a causal relationship, and similarly, just because the encryption market cycle occurs every 4 years, the innovation of the industry cannot be forced to follow the same rhythm. Of course, there are industries such as AI and nuclear energy that rely on capital leverage to smash technological progress, but obviously Blockchain and Web3 are not in this category.

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

Without playing the two cards of "low gas" and "mass consumption", how to make the Block sold Ethereum the Internet have a higher demand is the core issue that the Foundation and the top VC need to think about.

Solana: Crazy money burning drives revenue

Compared with Ethereum, which has basically achieved break-even, Solana is still in an obvious "cash burning stage", with an overall loss of $797 million in the first quarter, including a loss of $380 million in the third quarter, accounting for 47.6%. As SOL prices have pumped, Solana Network's operating costs have continued to climb over the past quarter, nearly doubling from $212 million in January to $414 million in March.

However, it is worth noting that despite the sharp rise in costs, revenue in the first quarter of Solana grew rapidly, with network fees (including supply-side fees) revenue of $69 million in March, nearly five times rise from $15.38 million in January. This was driven by the continuous meme boom within the Solana ecosystem in March and the surge in volume and priority fees from ORE mining, but it is still a drop in the bucket compared to the cost of the entire network.

From the comparison of network revenue and operating costs, the Solana network's expenditure-to-income ratio remained at 15 to 30 times in the first quarter, which means that the network needs to spend $15 to $30 for every $1 earned, and the cost of customer acquisition is extremely high. But a closer look reveals that achieving this figure is a huge step forward for Solana networks, with Solana of network revenue being negligible over the past year and in the last round of Bull Market. In March, the Solana network reached $1 million in daily revenue, a significant increase from the $145,000 daily revenue in 2022 during the bull peak.

In the past quarter, the daily active Address of the Solana network continued to rise, and in mid-March, BOME, SLERF and other "meme magic disks" burst out one after another, setting a historical data of 2.4 million.rise The number of contract deployers in the network has also pumped since the end of last year, and has remained at an average of 80 people per day throughout the first quarter.

Compared with Ethereum, Solana has adhered to the non-EVM compatible route in the past, and developers in the ecosystem have cultivated strong stickiness, effectively reducing the situation of "developer flight". In addition, a series of waves of wealth creation since 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 rise of Solana network users is mainly driven by "cash burning subsidies", there is also a lack of effective innovation in application scenarios in the ecosystem, and once the capital subsidies are released, this growth potential can easily rise quickly.

On the other hand, although 50% of the Money Laundering fees of the Solana network are used for repurchase and burning, the surge in the number of transactions has not brought significant revenue, which also reflects the current Solana network has certain problems in the 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 (generally 0.000005 SOL), while priority fees are measured in Compute Units required for each exchange.

As you can see in the chart below, the percentage of priority fee usage has been increasing since the beginning of the year, with the majority of the Solana network's fee revenue coming from priority fees. According to The Block, $11.9 million of Solana's record fee income of $15.6 million in January came from priority fees, accounting for 92% of non-voting Money Laundering.

However, anyone in long can sense from the poor experience of the Solana network over the past month that the current priority fee mechanism does not seem to solve the problem of pricing specific blocks short between them. Although setting a priority fee increases the chances of a transaction being packaged into the Block, due to the nature of Solana 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 blocks and short leads to the fact that many long bots will send SPAM to include their own transactions in the Block, because in the case of large long, the base fee cost of 0.000005 SOL will not exceed the expected profit after a successful transaction. According to a research report by Umbra Research, due to the extremely high requirements for Searcher speed, Arbitrage transactions with priority fees of more than 0.02 SOL are rarely seen on the Solana network, and about 96% of Arbitrage attempts on the current Solana network fail.

A large number of failed transactions have severely consumed Block short, which not only affects the efficiency of value capture for the production Block that validators is responsible for, but also causes the loss of a large number of users and volume. After Jito's MEV memory pool was shut down in early March, Solana needed to find a fee solution that would effectively price Block short and increase network fees revenue.

In addition to the rising dilemma on the revenue side, Solana needs to make greater efforts in cost control if it wants to break even.

In order to achieve ultra-high performance, the validators and Node operating costs of Solana networks are significantly higher than those of Ethereum, and the joke of "running Solana Node and destroying the company's network" is still the stereotype of long Solana networks.

According to Validators.app, 14% of Solana validators use the Latitude as their hardware device, with bare-metal products starting at $350 per month and the C 3 Large costing between $370 and $470 per month. In addition, Xu long validators will choose to use dedicated bare metal servers directly, and the Solana Foundation has entered into a long-term protocol with Xu long Data Center to guarantee rack availability and monthly contracts.

Currently, the Solana network has more than 1,000 running validators, but the revenue gap between them is huge, with large validators like Jito making millions of dollars in profits from delegated stake, while Xu long validators is losing money. In addition to the cost of hosting (which can reach tens of thousands of dollars per year), Solana validators must also pay for voting fees, which according to Helius are about 3 SOL per epoch.

Xu long personally tested and found that in order to make a profit, you need to have at least about 5,000 SOL of basic funds, and you must also have your own entrusted stake income. Of course, this indirectly increases the marketing spend of validators. And that's not even counting the cost of running a Solana Node, with long members of the Reddit community saying that Solana Node "can only run in the data center" due to the high bandwidth and uptime requirements.

In order to maintain a high-performance network, the cost Solana pay to the "super Node" is necessarily high. Under Solana's inflation plan, the network starts with an annual inflation rate of 8% and drops at a rate of 15% per year, eventually keeping the annual inflation measure at 1.5%.

On the bright side, Solana is designed to follow Moore's Law and promises to double the scalability of the network every two years with the development of CPUs and other technologies, which means more long users and higher fee revenues. On the downside, it will take about 10 years for Solana to reach target inflation, and the network is likely to be in the red until then.

Although using "low gas" to fight Ethereum does work, this is like a new energy vehicle price reduction promotion, no matter how fierce the price war is, it is still necessary to find a way to make a profit. Low fees mean that Solana's selling point is no longer a block premium, and volume has become the key to survival. And what capital needs to consider is, how long can its money be burned for long?

Avalanche: Gradual loss of hematopoietic ability

Compared to the first two, Avalanche was in the worst position, with almost no revenue for the entire first quarter and relatively high operating costs. This has a lot to do with the lack of attractiveness of the Avalanche ecosystem in the past. Since the end of last year, Avalanche has become a passive follower of industry hotspots, first AVAV followed the inscription craze, and then the Foundation slowly launched the meme foundation. Although the traffic has been rubbed up, the effect is just like that, and there is no achievement in the overall revenue capacity.

Although Avalanche has spent 100% of its Money Laundering on buyback burns, extending the scope of observation, we find that the Avalanche network has been "burning money" like Solana except for a short period of profit through AVAV during the "EVM inscription fever".

From the perspective of daily active addresses and the number of contract deployers, the number of users and developers in the Avalanche ecosystem fell seriously in the first quarter, and in the long term, 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, Avalanche's unoptimistic data in the first quarter reflects to a certain extent the dilemma and challenges faced by the current EVM public chain and even the public chains that advertise new languages and new narratives, that is, in the stock market where the user base of the industry is slow to rise and the Block short is oversupplied, it is difficult for products with basically similar user experience to stand out in the market and Ethereum and Solana Such tigers grab food from their mouths. Like the war in the Internet era, today's public chains have long chosen to burn money, but it is still the same problem, if there is no hope, long capital is willing to hold on for a long time?

An L2 of a million profits

Factors such as high operating costs in the early stage and high uncertainty on the revenue side make it particularly difficult to start a public chain business, which is why in the past 10 years, the iteration of the list of the top 10 market capitalization in the encryption field has been so frequent and drastic. However, with the emergence of the trend of modularization 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 cost of an L2 consists of three parts: pre-development, running the sequencer, and uploading a packaged transaction (DA). Regardless of development costs, a single L2 fee income must cover DA costs. Therefore, compared with L1 public chains, L2 will hardly face the problem of making ends meet, as long as the operating cost of the sequencer is low enough, L2 is a profitable business. With the improvement of the infrastructure related to "One-Click Chaining", the cost of L2 entrepreneurship is also drop, which is why L2 has emerged recently.

In this article, we have selected the performance of Arbitrum, Base, and Blast to compare the performance of three L2s. You'll notice that L1 is thinking about break-even, while for L2 it's about making long making less. In the first quarter, all three L2s were profitable, with Base and Arbitrum both having revenues of more than $27 million, and Blast, as a new L2 force, with quarterly revenue of $7.66 million, which inevitably embarrassed many L1s.

Arbitrum has a stable income

Broadened up, Arbitrum's average monthly revenue in the first quarter was stable at around $2.3 million. In January, Arbitrum Network generated $7.44 million in revenue, $4.88 million in DA costs, and a gross profit of about $2.5 million, while March's revenue was $10.46 million, with a gross profit of $7.94 million in DA costs, which was also about $2.5 million.

As you can see, before EIP-4844 and the Cancun upgrade, the revenue ceiling for L2 was fixed and very limited. Due to the positive linear relationship between fee income and on-chain costs, the L2 gross Intrerest Rate has been limited to a fixed range, and in the case of Arbitrum, this figure remained between 25% and 40% in the first quarter. After the Cancun upgrade, the cost of DA for L2 using blobs was greatly drop, which greatly improved the gross Intrerest Rate of L2, and as you can see in the chart below, the gross Intrerest Rate of L2 basically stabilized at 90% after the EIP-4844 went live. Of course, this data does not take into account the running costs of the sequencer.

However, the drop of DA costs also makes Money Laundering drop, which means a sharp drop in network fees revenue in the absence of incremental users. As you can see from the chart below, the Arbitrum network's fee income has also dropped significantly after the Cancun upgrade, despite almost "zero" operating costs. Looking at April's data, Arbitrum's revenue shrank by nearly 80% to about $2 million, but thanks to extremely low DA costs, it eventually achieved a gross profit of $1.88 million, down only 25.3% from March.

Gross Intrerest Rate has been extreme, but revenue has not risen, and user rising bottlenecks are also Arbitrum's biggest challenges. Arbitrum's daily active Address slowed down rise after March, while the number of contract deployers did not change significantly in the first quarter, and the number of assets and transactions in cross-chain also stopped rise in March. From the user's point of view, the value of Arbitrum's tools seems to far exceed its application value, and the single application scenario in the ecosystem makes it difficult to activate existing users on the one hand, and it is difficult to retain new users on the other hand, which has become a "transit chain" in the eyes of many long people.

Base explosion rises

Rising bottlenecks don't seem to be a problem on the Base side. In March, Base ushered in explosive rise, with revenue rise more than 4 times year-on-year. On the one hand, the cost of DA has plummeted, and on the other hand, the number of users has surged, and after removing the $6.34 million in DA cost, the gross profit of the Base network in a single month has long twice the gross profit of Arbitrum in the entire first quarter.

After the Cancun upgrade, Base also experienced a revenue lump, but quickly reversed the decline. Judging from the net profit data, the profit of the Bas network has been rising since the beginning of the year, and after EIP-4844, Base directly "earned".

The explosive revenue rise is fueled by the narrative of "Base Season", which has been one of the few networks that has long rise at a high rate in terms of daily active Address and contract deployers in the past quarter. However, it is worth noting that developers in its ecosystem still show strong market speculation, and in April, when the overall liquidity shrank, the number of contract deployers on the Base network also quickly Halving as the number of transactions and fee income continued to decline.

It is worth noting that although the overall popularity of the Base network has declined significantly in April, some fundamental signals about the "Base Season" are still strengthening. Starting in March, the USDC net Circulating Supply of the Base network, as well as the value of cross-chain assets, began to climb rapidly, and this momentum shows no signs of slowing down significantly even into April. With the improvement of market liquidity in the second half of the year, Base may become one of the most noteworthy ecosystems in the encryption industry.

Blast is tepid

Paradigm endorsement, Tieshun IP draw attention, KOL support, project party entry, as a representative of L2 new forces, Blast has been out of the limelight when it was just launched, but 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 encryption market, Blast was beaten back to its original shape in April, with revenue down more than 60% from March and a gross profit of only $700,000.

One of the more interesting points is that Blast, like other L2s, did not significantly reduce operating costs after the Cancun upgrade, but remained at a high level, making the network's gross Intrerest Rate never break through.

However, Blast's predicament at the rise level is more worrying than the gross Intrerest Rate issue, with the number of contract deployers in Blast falling sharply in the past month, while the number of daily active Address and the number of daily transactions have both stagnated after the decline in rise cross-chain inflows. Of course, it is a bit biased to use the April data generated against the backdrop of the overall market weakness to evaluate Blast, but to be honest, Blast did not perform much better in March.

Similar to Avalanche's situation, Blast's dilemma also serves as a wake-up call to the upcoming general-purpose L2, that is, in the current stock market has been played people for suckers by the leaders L2, it is difficult for the new general-purpose L2 to achieve scale and get a share of the market. Perhaps in this stock competition environment, the way out is to play differentiation and vertical fields, and to be a small and beautiful market.