The battle for value in smart contract platforms

The battle for the value of smart contract platforms! If value accumulation is properly implemented into the protocol, increased network usage will not only incentivize users to hold tokens, taking them out of circulation and hopefully boost their value growth, but also become validators or token stakers, thus helping to increase Cybersecurity. In addition to network security, transaction fees will incentivize more validators to join, thus promoting greater decentralization and censorship resistance. So, value accumulation is a flywheel that connects fees and network usage to token valuation and the security and decentralized nature of the network.

Today, the editor of this website will share with you the value analysis of the smart contract platform. The value of the smart contract platform is mainly reflected in the cost, but also in terms of technical requirements. How to better understand the value of smart contract platforms? Friends who need it can take a look!

Abstract

• In the world of smart contract platform crypto, value accumulation is an equation that combines fees and network usage with token valuation and the network A flywheel that connects security and decentralization features.
• Smart contract platforms Networks within the crypto space take a variety of approaches to compete for fee benefits: some platforms seek fee benefits with relatively high transaction costs, while other projects try to achieve relatively low fees transaction costs to obtain more transaction volume.
• Grayscale Research believes that fee returns can be seen as the main driver of token value accumulation in this segment, but other fundamental factors are also important as they affect fee returns over time .
• While industry leader Ethereum has accumulated several years of network fee revenue (over $2 billion in 2023), other smart contract platforms such as Solana have also shown maturity (to date in 2024 fee income is approximately US$200 million).

There is a common misconception that crypto assets have no fundamental value and cannot be analyzed like traditional investments. Grayscale Research doesn't think so. For example, smart contract platforms like Ethereum and Solana generate fees from economic activity on their networks. Grayscale Research believes that one way investors value assets in the crypto space of smart contract platforms is by analyzing their fee-generating capabilities over time.

1. Fundamentals of smart contract platforms

Smart contract platforms like Ethereum and Solana are networks that support developers to build decentralized applications, ranging from games to finance to Various applications for NFTs. The role of a smart contract chain is to process transactions for the applications it serves in a secure and censorship-resistant manner.

Therefore, the value of a smart contract platform is inherently tied to the activity on its network. Key metrics of network activity include the number of transactions the network can process, the number of users it can support (often measured by daily active addresses), the value of assets it can support – known as Total Value Locked (TVL) – and the network’s block space monetization capabilities, or network fee benefits – more on that later.

Every indicator tells a story. For example, Ethereum’s leadership in the TVL metric ($66 billion, more than 7 times larger than its next-largest TVL competitor) reflects its liquidity advantage and value proposition in financial applications. Additionally, its dominance over the total number of ecosystem applications creates a network effect that continuously attracts new developers, applications, and users. At the same time, Solana’s daily transaction volume—reflecting its throughput advantages and low cost—makes the chain more suitable for high-volume use cases like DEPIN, as well as retail-friendly use cases like NFTs and meme coins.

In addition to comparing these basic metrics between assets, investors can also think of this data in the context of market capitalization, or how the market currently values ​​a specific asset. For example, as shown in the chart below, while Solana's TVL ($4.7 billion) is currently higher than Arbitrum's ($3.2 billion), Arbitrum's market cap to TVL ratio (1x) is much lower than Solana's (16x). Not only do these metrics allow investors to understand the relative strengths and weaknesses of different assets, they also help them discover value.

Figure 1: Fundamentals of smart contract platform

(Bold indicates the largest fundamental indicator in its category)

2. Fees The core role of

Although there are many different ways to measure network activity, theoretically and empirically, the single most important fundamental variable for smart contract platform valuation is network fee revenue (see figure below). This metric can be thought of as the total amount of money a user pays to use the network. Smart contract platforms have many different revenue models, but ultimately fees are generated in order to provide value to token holders.

Similar to centralized entities in traditional industries, decentralized networks also use different methods to compete for fee income. For example, some smart contract platforms seek fee benefits with relatively high transaction costs, while other platforms try to obtain more transaction volume with relatively low transaction costs. Both methods are valid methods. Let us assume there are two blockchains as follows:

Chain 1: fewer users and transactions, higher cost per transaction

5 users, 10 transactions, per transaction Fee $10

Network fee income = $100

Chain 2: Larger number of users and transactions, lower cost per transaction

100 users, 100 transactions , 1 USD per transaction

Network fee income = 100 USD

The above example shows that although chain 2 has more users and total transaction volume, the network fees generated by the two chains The benefits are the same. While metrics such as users and transaction volume are also important, they need to be considered in conjunction with transaction costs, as these will determine fee returns.

The importance of fee income is established both empirically and theoretically. For example, the chart below shows the relationship between fee revenue and market capitalization for various components of our smart contract platform in the crypto space. Although the crypto market is still maturing, investors are already distinguishing different projects based on fundamentals. Grayscale Research’s analysis shows that the relationship between fee returns and market capitalization is relatively stable over time, with fee returns being more closely related to market capitalization than other indicators of smart contract platform fundamentals.

Figure 2: Network fee income has the closest correlation with market capitalization

Grayscale Research believes that part of the reason for the close relationship between fees and market capitalization is due to the network Fee revenue is critical to token value accumulation. Value accumulation means that the protocol structures its tokens in a way that links network activity to the long-term sustainable value of the token. Value accumulation in different stages can be seen through the following three examples: Ethereum, Solana, and Near.

(1) Ethereum: The “premium chain” of value accumulation

Calculated by market value, Ethereum, the first and largest smart contract blockchain, will begin to face serious problems starting in 2022 expansion problem. Increased usage has led to network congestion, which has made transactions expensive for users: its average daily network fees reached a high of $200 per transaction on May 1, 2022.

However, increased usage and high average transaction fees have also translated into significant value accumulation, with Ethereum generating over $2 billion in total network fee revenue in 2023. The network fee revenue of the Ethereum network consists of two parts: base fee and tip. Whenever a user pays a transaction fee, the base fee is burned, removing the ETH supply from the network. At the same time, tips paid for prioritizing transactions will be distributed as rewards to validators and stakers who help secure the network.

Thus, massive Ethereum network gains in 2023 resulted in approximately 2 million ETH being burned (1.7% of supply), accumulating value for ETH holders and providing validators and stakers with $390 million in incentives to promote higher levels of cybersecurity.

Ethereum has reached a stage of maturity where it has proven its ability to create value accumulation. On the Ethereum mainnet, users pay a premium for premium products – in this case, block space powered by a smart contract platform with maximum network security. This is especially important for applications that involve large amounts of transaction value and prioritize cybersecurity, such as stablecoins or tokenized financial assets. Its ability to monetize its users is quite mature, which is reflected in its valuation of $458 billion (as of June 6, 2024), which is almost six times that of other smart contract platforms.

Figure 3: Increased network usage (reflected in periods of greater supply consumption) tends to correspond with higher valuations

( 2) Solana: A “High-Performance Chain” for Value Accumulation

While Ethereum has a fee revenue acquisition model, Solana has taken another approach, and it has recently been closing the gap with the market leaders. , and significant progress has been made. Solana, the second-largest smart contract platform by market capitalization, has long been considered a faster and cheaper alternative to Ethereum, with impressive transaction processing speeds (335 transactions per second) and low costs (average $0.04 per transaction fee). However, in previous years, Solana was unable to convert these into fee income. In 2023, despite processing significantly more transactions, Solana generated only $13 million in network fee revenue, compared to Ethereum’s $2 billion (154x less).

In the past, the lack of a value accumulation mechanism was Solana’s relative disadvantage. However, in 2024, this situation changed. So far this year, Solana has generated 6 times more fees than in all of 2023, narrowing the fee gap between Ethereum and Solana from 154 times in 2023 to 16 times (shown in the chart below). This suggests that the Solana model—low transaction costs and high throughput—also helps create economic value.

Figure 4: Solana has begun accruing value through its fee calculation

It is worth noting that this substantial increase in fee income coincides with the substantial increase in market capitalization consistent. The huge increase in network fee revenue is mainly due to the huge increase in average transaction fees (up 37 times compared to last year), rather than overall growth in transactions (up only 33% compared to last year). Ironically, the increase in average fees for a blockchain traditionally known as the “cheap option” coincides with a drop in Ethereum L2 transaction fees due to the Dencun upgrade (see chart below). Since April 1, the average transaction fee for Solana users ($0.04) remains lower than Ethereum ($4.80) but higher than Arbitrum ($0.01).

Figure 5: ETH’s Dencun upgrade makes Layer 2 cheaper; the increase in fees helps Solana achieve value accumulation

Due to Solana’s every transaction Transaction fees are more expensive for its users than Ethereum L2 Arbitrum, so could jeopardize its positioning as a cheap, high-throughput chain. Nonetheless, Grayscale Research believes that overall this fee increase is benign as it reflects both high levels of user activity and value accumulation for stakers and token holders.

(3) Near: There has been real adoption in getting started with Crypto, but it is still in the early stages of monetizing the network

The above two examples are in sharp contrast to the smart contract platform Near, which The platform has recently seen significant adoption through non-speculative use cases but has yet to demonstrate its ability to accumulate value. Near is the underlying platform for KaiKai and Hot Protocol, two of the largest decentralized applications (dApps) for users across all crypto fields. Near leads all smart contract platforms with 1.4 million daily active users and competes with the fastest chains in the industry such as Solana in terms of throughput (see chart below). Figure 6: Near leads all smart contract platforms in terms of daily active users In terms of technology, Near still lags far behind its competitors, with fee income of just $4.1 million so far this year. This suggests that it is currently at a relatively immature stage of development, which is also reflected in its valuation relative to its competitors (market cap of $7.9 billion, compared to Ethereum’s $458 billion and Solana’s $78 billion). While the Near network has shown the ability to process transactions at high speeds, it currently does not provide accumulated value to token holders or stakers.

Although Near’s profitability has been relatively weak so far, its mass adoption is an important starting point. If the network can continue to expand network adoption without reducing network activity or increasing average transaction fees (similar to Solana’s recent progress), it could achieve meaningful value accumulation.

Each of these three smart contract platforms—Ethereum, Solana, and Near—represents a different stage of maturity for decentralized networks to generate network fee revenue. Ethereum has had years of gains and growth. Solana has a strong user base but is just starting to generate significant revenue. Finally, Near's product has shown traction, in part because of its lower cost, but has yet to capture significant revenue.

3. Notes and nuances on fees and valuations

To be sure, there are many caveats and nuances when it comes to fees and valuations in the crypto space of smart contract platforms. First, each protocol involves different forms of value accumulation and different rates of token distribution (inflation) and token burning (deflation). For tokens with higher inflation rates, the impact of fee value accumulation may be significantly diluted by the distribution of the token. Each agreement has its own fee structure. On Ethereum, transaction fees facilitate token burning, benefiting all token holders, and priority fees are distributed to validators and stakers. On Solana, the distribution works differently: 50% of transaction fees are burned, and the remaining 50% goes to stakers. Recently, a governance vote determined that Solana’s entire priority fee will be paid directly to validators. These measures reflect Solana's larger verification hardware needs. Additionally, high levels of MEV activity on Solana provide additional rewards to validators and stakers, but constitute “indirect” costs for token holders. So, regular token holders will receive more value in Ethereum’s fee structure, while Solana’s validators and stakers will receive more value through Solana.

Similar to how the valuation of traditional assets may involve discounting future cash flows, the valuation of crypto assets may also involve discounting future expected network fees. This variable captures the potential future growth in adoption, usage, or monetization of a specific network in a way that is distinct from the total fees currently incurred. For example, one could reasonably argue that Ethereum's $458 billion valuation reflects not only the fees it currently generates, but also its potential to leverage network effects and future growth in L2 adoption, usage, and fee revenue potential.

Finally, the valuation of certain cryptoassets may include a “currency premium.” In other words, users may be willing to hold an asset because its function as a monetary medium—as a medium of exchange and/or store of value—overrides the network’s ability to generate fee revenue. For Ethereum in particular, the idea of ​​currency premium may be very important for its valuation considerations (especially if the token is widely used as a collateralized asset across the industry).

4. Conclusion

If value accumulation is correctly implemented into the protocol, the increase in network usage will not only encourage users to hold tokens, but also make their withdrawal from circulation expected to promote their value growth. You will also become a validator or token staker, helping to improve network security. In addition to network security, transaction fees will incentivize more validators to join, thus promoting greater decentralization and censorship resistance. So, value accumulation is a flywheel that connects fees and network usage to token valuation and the security and decentralized nature of the network.

But it’s important to recognize that while fees can serve as an indicator of a network’s maturity, there are many other factors in this flywheel that can impact a network’s growth and its valuation. For example, if a particular application is widely adopted, it may bring more users and attract more developers to build in the same ecosystem. Therefore, the issue of network fees should be considered in the context of other fundamental metrics and the relative valuation (market capitalization) of the specific ecosystem.

Going forward, it will be quite important to focus on some of these growth narratives. Although the average transaction cost for users is relatively high ($4.80), can Ethereum continue to sustain fee growth on mainnet through high-value transaction use cases such as tokenized financial assets? Can Ethereum increase its transaction fees as L2 activity increases? How will Solana strike a balance between profitability and keeping its transaction costs low enough to avoid losing users to other cheap, high-throughput chains? Will Near try to make a profit, or will it, as before, give up meaningful fee income and prioritize user growth?

These developments highlight the importance of monitoring basic metrics including fees, transactions, active users and TVL. Grayscale Research believes that as the crypto asset class continues to mature and gain greater adoption, the importance of these fundamental metrics will continue to increase. These metrics will provide deeper insights into the relative strengths and opportunities in the crypto space for smart contract platforms, ultimately helping to guide informed investment decisions by promoting a more nuanced understanding of the value of the network.

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