Grayscale Report: Which Smart Contract Platform Will Lead in Fees and Growth?

Original Title: 《The Battle for Value in Smart Contract Platforms》

Author: Grayscale

Compiled by: Yanan, BitpushNews

In the cryptocurrency field of smart contract platforms, there is a value accumulation mechanism known as the "flywheel effect." This mechanism is akin to a snowball, tightly linking transaction fees and network usage with the value of tokens, network security, and the degree of decentralization.

Different smart contract platforms adopt various strategies regarding fee income. Some platforms increase revenue by setting relatively high transaction fees, while others attract more transaction volume by lowering transaction fees.

Grayscale's research shows that fee income can be viewed as a primary driver of token value growth in this field. Of course, there are other important fundamental factors worth our attention, as they will impact fee income over time.

Ethereum, as a leader in this field, has accumulated enormous network fee income after years of successful operation, successfully surpassing the $2 billion mark in 2023. Meanwhile, other smart contract platforms like Solana are also rapidly rising, with fee income expected to reach approximately $200 million in 2024.

Many people mistakenly believe that crypto assets lack substantial value and are difficult to evaluate using traditional investment methods. However, Grayscale's view is quite the opposite. They point out that smart contract platforms like Ethereum and Solana can actually generate revenue through the economic activities on their networks. Grayscale suggests that a feasible method for investors to assess the value of smart contract platform cryptocurrencies is to look at how much fee income they can generate over time.

Overview of Smart Contract Platforms

Smart contract platforms such as Ethereum and Solana provide developers with a network environment to build various decentralized applications. These applications cover a wide range, from gaming to finance, and even NFTs. The core function of these smart contract blockchains is that they can process various transactions of the applications they host in a secure and censorship-resistant manner.

As a result, the value of smart contract platforms is closely tied to the activity level of their networks. Key indicators for measuring network activity primarily include: the transaction volume the platform can handle, the user scale it can support (usually measured by daily active addresses); the asset value the platform can accommodate, known as total value locked (TVL); and the platform's ability to monetize block space, reflected through network fee income (which will be elaborated on later).

Each indicator has its specific significance. For example, Ethereum's significant advantage in total value locked (TVL), reaching $66 billion—seven times that of its closest competitor—highlights the platform's liquidity advantage and unique value positioning in the financial application space (as shown in Figure 1). Additionally, Ethereum's leading position in the number of ecosystem applications further fosters a strong network effect that attracts new developers, new applications, and new users. At the same time, Solana's daily transaction volume, a key indicator, not only highlights its high throughput and low cost advantages but also demonstrates that its blockchain technology is well-suited for large-scale application scenarios, such as DEPIN, and projects related to the retail market, like NFTs and meme coins.

In addition to cross-asset comparisons of these fundamental indicators, investors can also analyze this data in conjunction with market capitalization or the current market valuation of specific assets. For example, as shown in Figure 1, although Solana's total value locked ($4.7 billion) is currently higher than Arbitrum's ($3.2 billion), Arbitrum's market cap to TVL ratio (1x) is far lower than Solana's ratio (16x). These indicators provide investors with a way to gain deeper insights into the relative strengths and weaknesses of different assets, while also helping them discover potential value investment opportunities.

The Key Role of Fees

While there are numerous ways to assess platform network activity from both theoretical and practical perspectives, network fee income undoubtedly becomes a crucial foundational indicator when evaluating the value of smart contract platforms (see Figure 2). This indicator can be understood as the total fees users pay to enjoy network services. Smart contract platforms may have various revenue models, but ultimately, they all need to generate fees to create value for token holders.

Similar to the competition of centralized entities in traditional industries, decentralized networks are also vying for fee income in various ways. For instance, some smart contract platforms increase fee income by setting relatively high transaction costs, while others attempt to attract more transaction volume by lowering transaction costs. Both strategies can potentially succeed. For example, consider two hypothetical blockchains:

Example Chain 1: Few users and transaction volume, high cost per transaction

5 users, 10 transactions, $10 per transaction: network fee income = $100

Example Chain 2: Many users and transaction volume, low cost per transaction

100 users, 100 transactions, $1 per transaction: network fee income = $100

This case reveals a phenomenon: even though Chain 2 has far more users and total transactions than Chain 1, the network fee income generated by both chains is comparable. Of course, metrics like users and transaction volume are indeed critical, but we also need to consider them in conjunction with transaction costs, as this directly determines the level of fee income.

From both practical experience and theoretical concepts, the importance of fee income is evident. As shown in Figure 2, it illustrates the relationship between the fee income of our smart contract platforms in the cryptocurrency industry and their market capitalization (using a logarithmic scale). Although the cryptocurrency market is still maturing, investors are already able to distinguish between different projects based on fundamental data. Grayscale's analysis indicates that the relationship between fee income and market capitalization is quite stable, and compared to other fundamental measurement standards of smart contract platforms, the correlation between fee income and market capitalization is higher.

Grayscale emphasizes that there is a close connection between fees and market capitalization, partly because network fee income plays a key role in the value accumulation of tokens. Value accumulation means that the way protocols construct tokens can link network activity with the long-term sustainable value of tokens. We can observe different stages of value accumulation through the following three examples: Ethereum, Solana, and Near.

Ethereum: A Proven Value Accumulation "Quality Chain"

Ethereum is not only the first smart contract blockchain but also the one with the highest market capitalization. However, since 2022, it has begun to face severe scalability challenges. As usage frequency increases, network congestion issues have become more pronounced, leading to a significant rise in users' transaction fees: on May 1, 2022, the average network fee per transaction once soared to $200.

Despite this, the surge in usage and high average transaction fees have also brought enormous value accumulation to Ethereum. In 2023 alone, Ethereum's total network fee income exceeded $2 billion. Each time a user conducts a transaction, the base fee is "burned," meaning that this portion of the coin will permanently disappear from the network, thereby reducing the total supply. At the same time, the tips paid by users will be used for prioritizing transactions, and these fees will reward validators and network security maintainers who participate in staking.

Thus, in 2023, the Ethereum network achieved the "burning" of 2 million Ethereum tokens through enormous income (accounting for 1.7% of the supply), which not only created value for Ethereum holders but also provided validators and stakers with rewards of up to $390 million, incentivizing them to enhance the network's security.

Ethereum has entered a mature stage and has fully demonstrated its ability to generate value accumulation. On Ethereum's mainnet, users are willing to pay high prices for quality products—here, the "products" refer to block space supported by a smart contract platform with top-notch network security. This is particularly important for applications involving large transactions and placing a high value on network security, such as stablecoins or tokenized financial assets. As of June 6, 2024, the platform's valuation has reached an astonishing $458 billion, nearly six times that of any other smart contract platform. This significant advantage undoubtedly highlights its exceptional ability in user monetization and market maturity.

Solana: Exploring Value Accumulation "High-Performance Chain"

Unlike Ethereum's fee income model, Solana has chosen a unique path and has gradually narrowed the gap with the market leader in recent times. As the second-largest smart contract platform by market capitalization, Solana has been viewed as a faster and more economical alternative to Ethereum, with a speed of 335 transactions per second and an average transaction cost of only $0.04. Although in 2023, Solana processed a transaction volume far exceeding that of Ethereum, its network fee income was only $13 million, compared to Ethereum's $2 billion (a difference of 154 times).

In the past, this lack of value accumulation reflected Solana's relative shortcomings; however, in 2024, this situation is changing. So far, the fees generated by Solana have already reached six times that of the entire year of 2023, reducing the fee gap between Ethereum and Solana from 154 times in 2023 to 16 times (see Figure 4). This shift indicates that Solana's model—low transaction costs combined with high throughput—can also create significant economic value.

The significant growth in network fee income is primarily due to a substantial increase in average transaction fees (up 37 times compared to last year), rather than solely relying on overall growth in transaction volume (which only increased by 33% compared to last year). Interestingly, while Ethereum's L2 transaction fees have decreased due to the Ethereum Cancun upgrade, the average fees of SOL, traditionally known as the "cheap option," have risen. Since April 1, although the average transaction fee for Solana users ($0.04) is still lower than Ethereum's ($4.80), it is higher than L2's Arbitrum ($0.01).

Compared to Ethereum's L2 solution Arbitrum, Solana's transaction fees have increased for users, which may impact its brand image as a low-cost, high-efficiency chain. However, Grayscale points out that from an overall perspective, the rise in fees remains a positive signal. It not only reflects high user activity but also indicates that the value for stakers and token holders is continuously growing.

Near: Leading Crypto Onboarding, Network Monetization Emerging

In stark contrast to the two previously mentioned cases is Near, a smart contract platform that has recently seen significant application in non-speculative scenarios but has yet to show notable value accumulation. Near serves as the foundational platform for KaiKai and Hot Protocol, the two decentralized applications (dApps) with the largest user bases in the cryptocurrency field. Among all smart contract platforms, Near stands out with a daily active user count of 1.4 million, and its throughput can compete with the fastest chains in the industry, such as Solana (see Figure 6).

Despite having a significant advantage in user numbers, Near's performance in monetizing its user base is far inferior to its competitors, generating only $4.1 million in fees over the past year. This reflects its current relatively immature development stage, which can also be seen from its market capitalization compared to competitors (with a market cap of $7.9 billion, while Ethereum and Solana have market caps of $458 billion and $78 billion, respectively). Although the Near network has demonstrated the ability to process transactions at high speed, it has not yet created sufficient value accumulation for token holders or depositors to justify a market cap on par with larger competitors.

Although Near has not yet achieved significant results in monetization, its broad application base is undoubtedly a good start. If the Near network can continue to expand its application scope or increase average transaction fees without reducing network activity (similar to Solana's recent progress), it is likely to achieve significant value accumulation.

The three smart contract platforms—Ethereum, Solana, and Near—represent different maturity stages in network fee income within decentralized networks. Ethereum has years of stable income and growth. Solana has a solid user base and has just begun to generate considerable income. Meanwhile, Near, although it has shown the attractiveness of its product, partly due to its low costs, has yet to achieve substantial income.

Fees and Valuation: Key Points and Subtle Differences to Consider

The issues of fees and valuation for smart contract platforms in the cryptocurrency field indeed contain many key points and subtle differences that require careful consideration. The primary point is that each protocol has its unique value accumulation method, accompanied by varying token issuance rates (inflation) and consumption rates (deflation). For tokens with relatively high inflation rates, the value accumulation effect brought by fees may be significantly weakened due to the large consumption of tokens.

Furthermore, different protocols have established their own fee structures. Taking Ethereum as an example, its transaction fees not only help in token burning, indirectly benefiting all token holders, but priority fees are also distributed to validators and stakers. In contrast, Solana's fee distribution mechanism has its own characteristics: 50% of transaction fees are burned, while the remaining 50% goes to stakers. Recently, a vote determined that Solana's priority fees would be allocated 100% to validators. This strategy reflects Solana's higher requirements for validator hardware to some extent.

It is worth noting that the high level of MEV (Miner Extractable Value) activity on Solana brings additional rewards to validators and market makers, but this reward may represent an "indirect" cost for token holders. Therefore, from a certain perspective, Ethereum's fee structure seems to provide more value feedback to ordinary token holders, while in Solana's system, validators and market makers may receive more substantial returns.

Similar to how the valuation of traditional assets typically discounts future cash flows to the present, the valuation of crypto assets may also involve discounting expected future network fee income to the present. This method considers the potential growth of specific networks in terms of adoption, usage, or monetization, and its assessment differs from the current overall fee generation situation. For instance, we can reasonably argue that Ethereum's $458 billion valuation is not solely based on its current fee generation but also takes into account its ability to leverage network effects, as well as the future adoption rates, usage frequencies, and fee income growth potential of Layer 2 technologies.

Additionally, the valuation of certain crypto assets may also include a component of "currency premium." In other words, users may be willing to hold an asset because it serves as a medium of exchange or a store of value, a value that often transcends the network's ability to generate fee income. This concept of "currency premium" is particularly important when considering Ethereum's valuation, especially when the token is widely used as collateral across the industry.

Conclusion

If a value accumulation mechanism is properly implemented within a protocol, the growth in network usage will not only incentivize users to hold tokens, encourage them to exit circulation, and potentially boost token value, but will also further encourage users to become validators or holders, thereby enhancing the network's security. In addition to contributing to network security, the collection of fees can stimulate more validators to participate in the project, thereby increasing the network's degree of decentralization and censorship resistance. Thus, value accumulation acts like a flywheel, tightly linking fees, network usage, token valuation, and the network's security and decentralization.

We must recognize that while fees can serve as an indicator of network maturity, there are many other factors within this flywheel that can influence the growth of the network and its valuation. For example, when the adoption rate of a certain application increases, it will attract more users, which in turn will attract more developers to work within the same ecosystem. Therefore, when evaluating network fees, we should consider them in conjunction with other fundamental indicators and the relative valuation (market cap) of specific ecosystems for a comprehensive assessment.

Looking ahead, continuously monitoring the development dynamics of these growth "myths" will be crucial. Despite the relatively high average transaction cost for users (reaching $4.80), will Ethereum be able to further enhance its fee income on the mainnet through high-value transaction scenarios like tokenized financial assets? As Layer 2 activities become more frequent, will Ethereum's fee income increase accordingly? And how will Solana find a balance between monetization and maintaining low on-chain costs to prevent users from shifting to other low-cost, high-throughput competitors? Will Near attempt to monetize, or will it choose to continue forgoing meaningful revenue opportunities to prioritize the expansion of its user base?

These dynamic changes emphasize the importance of continuously monitoring key indicators such as fees, transaction volume, active users, and total value locked (TVL). Grayscale firmly believes that as the cryptocurrency asset class matures and application rates continue to grow, the significance of these core indicators will become increasingly prominent. They can provide deeper insights into the relative advantages and opportunities of smart contract platforms, helping investors gain a more detailed understanding of network value, thereby providing them with more informed decision-making support.