2023, is the chain still a good business?

Author: BlockBeats

Are there too many chains?

I'm afraid no one can figure out how many chains there are today.

Once upon a time, blockchain replaced Bitcoin as the synonym for the entire industry, with chains becoming the pearls of the crypto world, and the market would discuss the similarities and differences of each chain as if they were treasures. However, with technological iterations and narrative shifts, the times have changed— the more chains there are, the more use cases are debunked; old chains are disproven, and new chains emerge with a "higher, faster, stronger" attitude. Who knows how many chains there are now?

In "100 Techniques of the Stabbing Sword," written by German fencing master Michael Hunter, Hunter's last technique suggests that his lord choose a firearm as a sidearm in duels.

Not only can no one count how many chains there are, but more importantly, large-scale financing for Layer 1 and Layer 2 no longer seems attractive in the eyes of the market. Faced with homogenized user experiences, it seems that only airdrop hunters and automated programs persist. Data shows that there are now chains whose Total Value Locked (TVL) is less than their funding amounts, and the market cap of public chain tokens is barely exceeding the value of on-chain assets. It seems that the public chains once envisioned to run the entire "world" ultimately only serve themselves.

In recent years, it seems that narratives can always act as the primary productive force in the financial industry. Everyone grows up listening to stories, but the stories in crypto have turned into narratives, with content shifting from childhood favorites like Little Red Riding Hood and the Big Bad Wolf to adult pursuits of paradigm shifts and "To the moon."

Every "king-level" project or popular track is wrapped in a story. Ideally, it should be a story that can evolve and iterate repeatedly. Such narratives crafted from stories are the favorites of event-driven investors—where there is a story, there are expectations, and with expectations, higher valuations can be exchanged. As a highly cyclical industry, narratives after the tide often find themselves exposed, and the stronger the narrative, the stronger the negative feedback it receives.

Narratives are good, but don't overindulge. For projects derived from various narratives, timing is key. It is common for once-attractive narratives like public chains to be washed up on the shore. From the historical patterns of the crypto industry, this is inevitable. Technological advancements give rise to new tracks, and blue oceans eventually turn into red oceans.

In the Bitcoin era, parameter adjustments and algorithms gave rise to Litecoin and Dogecoin. Projects like Polkadot, Cardano, Zilliqa, Qtum, ICON, and Aeternity—narratives of Ethereum and Ethereum killers in certain regions have created many so-called "zombie chains" that seem outdated today, and even IOTA once sparked the now-popular concept of DAG (Directed Acyclic Graph).

More widely known are the DeFi Summer and the boom of EVM chains, from DEX to yield aggregators, to decentralized contracts and options platforms, ultimately copying Ethereum's protocols onto other EVM-compatible chains. The poor imitators on various EVM chains that are still active in the market likely account for less than 10%.

Take DEX Clipper as an example; Clipper promotes itself as a service for retail investors, optimizing trades under $10,000. In 2021, it raised 20 million from institutions like Polychain, 0x Labs, 1inch, and DeFi Alliance, but after the token launch this year, even its fully diluted market cap is only $9 million. If the project had chosen to launch its token in 2021, even if DEX data hadn't changed much, the situation would likely have been much better—this highlights the importance of timing.

Chains are similar; if the timing is off, efforts may yield little. The current market situation is as Richard Chen from 1confirmation said: although many media reports claim that crypto VC funds are drying up, new financing is still ongoing. However, investors have long lost interest in supporting projects that lack Product Market Fit (PMF), which raised funds and spent them during the bull market.

PMF, Product Market Fit, refers to creating something that users want. It was mentioned and popularized by a16z founder Marc Andreessen in a blog post in 2007.

Returning to the initial question, how many chains are there?

The following data can only serve as a partial reference: the RPC service provider ChainList has recorded over 550 EVM-compatible mainnets, while the data site DefiLlama has listed 221 chains, of which 132 are EVM-compatible, and L2 BEAT has recorded 48 L2s (including 15 upcoming projects).

When discussing this issue with developers at LobsterDAO, a community member stated, "In addition to the chains listed on ChainList, I estimate there are another 500 private, non-public chains in operation."

Given the current market situation, it is clear that under traditional models, chains may no longer be a good business.

Demystifying Public Chains: The Era of One-Click Chain Creation

Faced with the influx of high-valuation public chains, users urgently need to break long-held misconceptions. In most people's minds, running a chain requires a lot of technology, money, and time. However, with RaaS (Rollup as a Service), existing technologies can be integrated and packaged, making chains no longer the unattainable crypto pearls for ordinary people, but rather akin to the swallows of the old Wang Xie Hall.

I spoke with the DF Archon team, which previously used the Raas service platform Altlayer to build an L2. During our conversation, the team expressed their recognition of RaaS's ease of building L2s and mentioned that mature code from various EVM networks could be directly deployed onto the chain, making it very convenient.

The DF Archon team previously launched a community round test for the full-chain game Dark Forest, which, unlike the official version built on the sidechain xDai (now Gnosis), used an L2 testnet supported by Altlayer. In our discussion, team members indicated that building an L2 testnet is relatively easy, and they received free services from Altlayer. If profit is the goal, even the native tokens of the new chain can be priced.

The DF ARES v0.1 Round 1 competition hosted by DF Archon, which received support from projects like AltLayer, Weirdo Ghost Gang, 01a1, briq, and TownStory Galaxy.

Not only Altlayer, but there are now many ready-to-use RaaS services in the market. I also used another RaaS product, Conduit, which previously helped Zora launch a testnet and mainnet based on OP Stack. After testing, it can be said without exaggeration that building an OP L2 test chain only requires a click of the mouse.

Note: When deploying the testnet, both Conduit's L1 and L2 are in testnet status, which may be why ordinary deployment users do not need to pay fees.

Requires some deployment time.

Transferring on the built L2 testnet.

According to the official documentation, in addition to deployment, users will also receive logs, monitoring, Blockscout browser, and samczsun's transaction tracker. As Conduit upgrades, users will automatically gain access to new components. Unlike Altlayer, Conduit currently does not support using its native tokens to pay gas fees, as they explain, "because these native token gas fees will ultimately be converted to ETH due to data availability." However, such details are not set in stone, and with the iteration of business models, anything is possible.

In summary, if you wish, you can completely build a Go game on your testnet, making every move without regret. Alternatively, you can deploy any potential use cases like Uniswap or Dark Forest for testing and even experience the thrill of dominating the "data center chain"—by pausing that chain.

In addition to the recently popular OP RaaS, L2BEAT, which focuses on L2 research, has also published a guide for users to deploy sovereign Rollup chains, titled Build Your Own Rollup.

BYOR, echoing the commonly used phrase in the crypto circle DYOR, Do Your Own Research.

The BYOR codebase consists of three programs: smart contracts, nodes, and wallets. It utilizes the following tech stack:

Nodes: Node.js, TypeScript, tRPC, Postgres, viem, drizzle-orm

Wallets: TypeScript, tRPC, Next.js, WalletConnect

BYOR can implement functions such as fee sorting, publishing state to L1 and retrieving state from L1, discarding invalid transactions, checking account balances, sending transactions, and viewing transaction statuses.

Moreover, Arbitrum's dedicated chain Orbit network is also set to launch soon. The Polygon team, recognized for its strong business development capabilities, has already brought in Canto, previously based on Cosmos, and Manta, which has transitioned through Polkadot and OP.

Overall, the technological development in the crypto industry has upgraded from "one-click token issuance" to "one-click chain creation."

Is a chain still a good business?

The reality of "one chain per person" has demystified chains among the general public, while the so-called top public chain market has received a lukewarm response, even having a somewhat "dead on arrival" feel. In this context, we see the harsh side of the market: traditional and uninteresting giants must either iterate or be replaced. The impatient and novelty-seeking market is already starting to look for the next narrative, such as Socialfi, RWA, and Telegram Bots.

Yet even in this highly competitive environment, some chains continue to develop. However, the traditional model of massive financing, star teams—issuing tokens—distributing tokens may no longer be viable.

Before introducing new possibilities, let’s cite a set of easily overlooked data: according to DeFiLlama, Tron (i.e., 波场) has over 1.5 million daily active users and generates over $1 million in daily revenue. In contrast, Ethereum's daily revenue is only around $2 million, which must be distributed among a wide range of interest groups. In terms of TVL, active user numbers, and stablecoin issuance, Tron has long been the second-largest public chain after Ethereum. With an annual revenue close to $400 million, Tron may be the most low-key yet stable "cash cow" in the industry.

Data source: Tronscan

Although users rarely see Tron in daily interactions with dApps, apart from Sun Yuchen's marketing events, Tron is indeed a cash cow—earning a fortune mainly from transaction service fees for stablecoin transfers.

Tron did not choose this path from the beginning; it was initially positioned as a digital content entertainment platform and evolved into its current form through continuous iteration. Tron's achievements are also due to its early recognition of on-chain stablecoins, launching fee-free transfers and collaborating with major centralized exchanges, gradually expanding into more underserved markets. If Tether built a stablecoin empire by issuing USDT, then Tron is the busiest and most profitable carrier within that empire.

Like a cycle, today's L2s have also entered a similar phase—centralized sequencers make running a chain more profitable.

Source link

The fee income mentioned in the above image mainly comes from transaction spreads: the fee income obtained on L2, minus the costs of packaging transactions on that chain and transmitting proofs to the Ethereum mainnet.

Igоr Barinov, a developer from the former xDAI team (now acquired by Gnosis), and now with Blockscout and zkBob, has stated that the costs of running a sequencer are negligible compared to the profits from fee surpluses and potential governance tokens.

Without considering accusations of centralization (some believe that today's L2s are somewhat similar to older consortium chain concepts; decentralized sequencers are imperative), today's L2s propose new business models for chains in the crypto industry and address some deeply rooted issues.

Real Cash Flow and "No-Token" Blockchains

Do you remember the revenue governance sharing agreement jointly announced by Base and Optimism on August 25? The main content of the agreement states that Base will pay 2.5% of its revenue or 15% of its profits to the Optimism Collective, whichever is higher. In return, Base will receive up to approximately 118 million OP tokens.

According to user @0xjaypeg's speculation and narrative, L2 projects can certainly capture existing market liquidity to create value—make money, but for Base and its backer Coinbase, issuing tokens poses regulatory and legal issues. By exchanging OP tokens for future revenue, it can act as a proxy for directly issuing Base tokens. Based on the data from Base at that time, Optimism effectively sold OP tokens to Base at a price of $0.25 to $0.30.

For Base, locking in excess "revenue" through chain income avoids legal risks. For Optimism, it bets on the future development prospects of Base, releases OP token liquidity, and advertises the Op Stack to potential customers through Coinbase, which seems to be a good business move.

As more projects like Uniswap choose to increase sustainable income by charging service fees, stable cash flow has become a focal point for projects. The business model of chains (L2) is undoubtedly the most adaptable and suitable field for sustainable cash flow in the crypto industry—wherever there are users, there is money to be made.

In the previous cycle, the once-popular catch-all use case of governance tokens has gradually lost its governance function against the backdrop of legal regulation and funding shortages. If some projects have legal concerns or are troubled by one of the ultimate challenges in the crypto industry—the token use case and token economic model issue—they may choose to weaken or even avoid the token issuance issue. In this case, swap-like forms like Base and Optimism may be a path worth exploring. Of course, this requires the protocol to have enough real users and actual revenue.

Optimizing Collaboration and Focusing on Self-Development

Distinguishing between the focus of chains and applications may be a good approach. If we shift our thinking, applications can focus on building solid and useful products, while public chains can shift from incentivizing with tokens to incentivizing based on the actual performance of each protocol. The effects may not only be better, but the distribution of actual income from public chains will also be far more transparent and sustainable than limited tokens, potentially achieving a scenario where chains and applications thrive or suffer together.

If a chain announces that it will return a certain percentage of fees generated by its on-chain applications to each protocol, it may open a new arms race between chains. The redistribution of protocol-level revenue upgraded to the public chain level will likely attract interest from popular protocols this year, whether it's Rollbit, Unibot, friend.tech, or user-interactive protocols like Opensea and Uniswap.

If we take it a step further, suppose applications are built directly on their own chains, then they can calculate their income based on the Gas consumed by their contracts. Taking L2 chains as an example, with Ethereum mainnet Gas fees being 1/50, from May 8 to October 22, Uniswap consumed over $64 million in Gas fees over five and a half months, translating to approximately $1.3 million in L2 income, with monthly revenue exceeding $200,000. While discussing such interaction volumes without considering liquidity is quite inappropriate, it does convey to developers: if you build a crypto project, you might focus on product design. Even if you only earn money from users using the protocol, you can still thrive.

Not only is there a new way to distribute income, but the division of labor between chains and applications can also be optimized. As building one's own chain has become a trend, whether it's Argus focusing on on-chain games, Merit Circle focusing on gaming guilds, Zora focusing on NFTs, or dYdX and Aevo focusing on derivatives, many projects have already launched or plan to launch their own chains, with many not starting from scratch but choosing to collaborate or draw inspiration.

Source: How to scale app rollups

Similar to the white-label companies that were popular on centralized platforms before. For professional public chain teams, building a decentralized network for protocols with specific use case needs, earning service fees and project development shares, is a good approach. Public chain teams can free themselves from the complexities of foundation operations and marketing, focusing on the technical iteration of the chain itself, providing users with a quality experience and developers with a good development environment.

Final Thoughts

"Every project has its era, and it also has the thresholds of its era. When the time has passed, it is just a door; if it hasn't passed, it is a threshold. When the era abandons you, it won't greet you; you can't even keep up with its heels." The era of traditional public chains may be slowly closing its doors.

The future of narratives and mass adoption remains uncertain, but chains are certainly no longer "rare commodities." When we view public chains through the lens of on-chain transaction volume, revenue, user data, and asset data rather than token prices, decentralization levels, technology, and orthodoxy, the focus will shift significantly: chains will lean more towards products, and data will reflect the market's alignment with those products, prompting chains to adjust their positioning based on data.

Looking back at history, the fact that "products evolve rather than are planned" is something even Ethereum must acknowledge. The obsession with absolute decentralization is neither existent nor realistic. With sequencer centralization, why can't the publicly transparent data of "Web 2.5" be a new path to drive industry ecosystem development and mass adoption?