Q1 L1 development status in 2023

Author: Peter Horton / Source: Messari Compilation: Vernacular Blockchain

Summary

• The rebound of the cryptocurrency market in Q1 of 2023 did not bring about an increase in the use of public chains. While the market capitalization of some featured L1s has increased by an average of 83% month-on-month, usage has decreased by about 2.5%.
• With the advent of Ordinals and renewed interest in Bitcoin’s programmability, Stacks now outperforms its peers across multiple metrics, in market cap (340%), revenue (218%), network usage (35% ), DeFi TVL (276%), and DEX trading volume (330%) all led the way in month-over-month growth. *Ethereum still leads across most key financial and ecosystem metrics, including market cap, revenue, DeFi TVL and volume, NFT count, and full-time developers. *The temporary depegging of USDC and Paxos’ cessation of issuing BUSD shifted stablecoin dominance to USDT, benefiting TRON. TRON’s stablecoin market cap increased 30% month-on-month to $43.6 billion; all other featured L1s with stablecoin market caps declined month-on-month.

This report aggregates and compares financial, network, and ecosystem analysis of the 14 Layer 1 (L1) smart contract platforms covered by Messari's engagement through protocol services. These L1s and their links to each quarterly report include: Avalanche, BNB Chain, Cardano, Ethereum, Harmony, Hedera, NEAR, Polkadot, Polygon, Solana, Stacks, Tezos, TRON, and WAX.

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01 Financial Analysis

Market Cap

After a tumultuous 2022, the cryptocurrency market rebounded in 1Q23. On average, the market capitalization of featured L1s increased 83% quarter-over-quarter, but still fell 58% year-on-year. Driven by the popularity of Bitcoin, STX outperformed in the first quarter, thanks to the popularity of Ordinals and renewed interest in Bitcoin programmability. The market capitalization of ETH is still more than 2 times that of other network tokens combined.

income

Revenue is defined as the sum of all fees charged by the protocol, how does the protocol allocate these fees? Crypto VC DBA investor Jon Charbonneau wrote an in-depth look at how revenue is handled, with the following examples:

*Blockchain X collects 100 tokens through fees. All 100 tokens are burned, but it mints 100 tokens to reward validators. If revenue is measured only as fees accrued by token holders, revenue is 100. *Blockchain Y collects 100 tokens via fees, all 100 tokens are distributed to validators, no additional tokens are minted or burned, and revenue is measured only as fees accrued by token holders is 0.

These two blockchains have the exact same end result in terms of fees collected, inflation, and validator rewards, but their revenues are very different if measured in terms of fee distribution.

Driven by its relatively high usage and gas fees, Ethereum's 2023 Q1 revenue of $457 million is almost 2.8 times that of all other well-known L1 revenues combined.

The most notable revenue growth came from Hedera, which grew 489% sequentially. This is largely due to the increased usage of its consensus service, which enables verifiable timestamping and event ordering for Web2 and Web3 applications. These applications include tracking supply chain provenance, counting votes in DAOs, and monitoring IoT devices.

Price-to-sales ratio P/S

The P/S (Price-to-Sales Ratio) ratio refers to the relative price of a network token compared to its revenue. While it is a useful metric, web tokens are new assets that require new valuation models, such as expected demand for security models.

That is to say, TRON leads other L1s with a price-earnings ratio of 16 times in the first quarter of 23, followed by Ethereum at 188 times. WAX stands out as the only public chain with a high P/E ratio despite its market capitalization being outside the top 20. Most L1s earn income from transaction fees, and WAX’s main source of income is a 2% tax on the NFT market.

TRON, Ethereum, Polygon, and Hedera are the public chains whose price-to-sales ratios have declined this quarter. In other words, the growth in their revenue outpaced the growth in the token market cap. The networks with the largest quarter-over-quarter increases in P/S were NEAR (100%), Solana (112%), and Harmony (156%).

Inflation

Inflation from PoS reward issuance is a transfer of wealth from holders to stakers. The higher the inflation rate, the more helpful it is to be a staker and the more harmful it is to be a holder, and vice versa.

BNB and ETH were the only deflationary tokens in Q1’23 at -5.4% and -0.2%, respectively. Both networks consume a portion of transaction fees. Additionally, the Binance team buys back and burns tokens quarterly, which accounts for the majority of its deflationary pressure.

Genesis (token) supply liquidity

In addition to PoS reward issuance, inflationary pressure may also come from genesis token unlocking. Genesis (token) supply liquidity measures the percentage of genesis tokens unlocked, excluding staking rewards. The metric is normalized between public chains with capped supply and uncapped supply (unlimited staking rewards not included in the initial distribution).

Most public chain tokens are fully unlocked, except for Avalanche, Hedera, NEAR and Harmony:

-Stacks are about 95%, of which about 0.5% will be unlocked in Q2 2023 for its funds

-Harmony is about 95%, of which about 0.6% will be unlocked in Q2 2023 for ecosystem development

-NEAR about 79%, another 3% unlocked in Q2 2023 for grants, core contributors and investors.

-Avalanche is around 73%, another 2.5% unlocked in 2Q23

-Hedera is about 61%, and about 4% will be unlocked in Q2 in 2023

Note that Avalanche and Hedera have supply caps, and these unlock percentages are the genesis supply (excluding staking rewards) and not the total supply.

Actual Earnings and Eligible Supply Staking

The PoS reward distribution rate typically depends on the percentage of staked supply and/or the number of validators. The network relies on different equations to set up relationships to determine where the inflation rate, staking yield, and staking supply percentage will settle.

Low-inflation tokens such as BNB, ETH, and STX allow holders to use tokens freely without being penalized for not staking, thus resulting in lower collateralization ratios. On the other hand, tokens with higher inflation rates are optimized for higher collateralization ratios. While liquidity staking allows staked tokens to also participate in the ecosystem, LST tends to result in poorer liquidity, smart contract risk, and different tax implications. Additionally, both Cardano and Tezos have liquidity staking enabled on the protocol, but there are still some additional challenges to allow liquidity-staked tokens to participate in DeFi and other ecosystem applications.

02 Public chain analysis

Usage

User activity is difficult to compare across different public blockchain systems (eg, EVM vs. SVM vs. 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 the ratio varies from public chain to public chain.

The total number of transactions and addresses is not as informative as the economic activity facilitated in those transactions and addresses. Therefore, we briefly describe the growth of user activity, which is more feasible than comparing absolute numbers. But if you want to compare user activity based on absolute numbers, the ecosystem section below provides a better measure.

Trading activity has not grown as the market rebounded. The average month-to-month change in daily transactions for these public chains is -2%. Stacks was a notable exception: its growth in user activity slightly preceded the surge in STX price and ended the quarter up 34% quarter-over-quarter.

Note that the Avalanche data only includes C chain activity. C-Chain transactions fell 82.7% year-over-year due to the launch of its subnet. Including subnets, the average daily transaction volume increased by 130% year-on-year. However, none of the current subnets use AVAX for gas. While subnets can use AVAX for gas, subnet value accrual typically depends on subnets contributing at least one validator to the global set, while increasing the need for security.

The average month-on-month change in the daily active addresses of the public chain is -3%. As with transactions, Stacks led the group with a 35% growth rate. Harmony's 28% growth was largely due to an unusual spike late in the quarter, but it didn't last.

Near saw the fastest year-on-year average daily active address growth of 157%, thanks to the launch of the Move-to-Earn project Sweatcoin (sweat economy) in mid-September.

Only Avalanche C-Chain and WAX increased address growth rate in 1Q23. Avalanche saw a 56% increase in new addresses quarter-over-quarter. WAX saw a 38% increase in new addresses month-over-month, driven by a “BlastOff” NFT marketing campaign and a decline in NFTs from Funko, a toy company that sells licensed pop culture collectibles.

Solana's average transaction fee in Q1'23 was $0.0003, much lower than other L1s. The Solana development team has released several upgrades over the past year to improve its toll market and overall network performance, most notably the local toll market (and priority toll). Most blockchains have a global fee market where all users are forced to compete in an auction. If NFT mints start a gas war, users who just want to transfer tokens will also be affected. As the name suggests, Solana's native fee market places computational limits on each account and allows users to participate in individual gas auctions to modify the state of each account.

Verifier

All public chains experienced a month-on-month increase in the total amount of staked tokens denominated in USD, as expected during a market rally. Stacks (403%) and Solana (125%) lead the sequential growth. Total stake (USD) growth per network was slightly higher than its market capitalization growth, indicating a net increase in staking native tokens. Ethereum still has the largest security budget at over $20 billion, with $32.6 billion in ETH staked as of Q1 2023.

Like users, the number of validators is not fully standardized across the network. While tracking the number of validators is easy, tracking the number of node operators is more difficult. The proportion of validators for each node operator will vary for each public chain, largely depending on the stake weighting mechanism.

L1 with some stake weight limit includes:

-Ethereum: The upper limit of pledge weight is 32 ETH (0.0001% of the total pledge at the end of Q1 in 2023).

-Avalanch: The upper limit of pledge weight is 3 million AVAX (accounting for 1.3% of the total pledge at the end of Q1 in 2023).

-Cardano: The staking weight limit is determined by a dynamic parameter, currently 70 million ADA (0.3% of total staking at the end of Q1 2023).

-Polkadot: All active validators receive the same reward regardless of stake weight. The minimum staking weight is dynamic and is currently about 2.14 million DOTs (0.3% of total staking at the end of Q1 in 2023).

-Harmony: Staking weight is limited to between 85% and 115% of the effective median stake.

Ethereum has the lowest stake weight limit relative to its total stake. While there are more than 560,000 validators in Q1 2023, there are far fewer node operators than that. According to ethernodes, there are over 3,500 simultaneous physical validators, which may be an underestimated number. Nodewatch's figure is roughly double that, though it's unclear if Nodewatch also includes nodes other than validators.

After Ethereum, Polkadot (2932), Solana (1620) and Avalanche (1192) have the most validators.

The Satoshi Coefficient measures the number of entities that can bring the network to a halt. Ethereum often quotes a Satoshi coefficient of one to two, mainly due to Lido’s centralization of staking. However, we used figures calculated by the Solana Foundation, which considered individual node operators within Lido, and used a 50% stake threshold instead of 33%.

While the Satoshi coefficient is commonly used today to measure the distribution of voting power among validators, there are several other important factors that affect the resilience of the validator set, including:

• Geographical distribution: Due to geopolitical risks, regulations, natural disasters, and other events, having too many nodes in the same location can compromise the health of the network.

• Hosting provider distribution: Due to outages or crypto node operator bans, having too many nodes using the same hosting provider can compromise the health of the network (see Hetzner and Solana). Although validator nodes can be self-hosted, this becomes more difficult as hardware requirements increase. The Ethereum community hangs its decentralized hat on how many stakers it has. While the numbers are not exact, Ethereum probably has more self-hosted validator operators than many networks have in total.

• Delegator Allocation: High concentration of total stake from one delegator could destabilize the network if delegators cancel stake. Additionally, foundations for many networks currently delegate a significant portion of tokens to subsidize minimum validator requirements and decentralize voting power.

• Client Diversity: Most networks rely on a single validator client, leaving the system vulnerable to client bugs or attacks. Jump's Firedancer client will make Solana the only multi-client network other than Ethereum (excluding clients that fork each other).

Note: We excluded Hedera from the analysis here because its validator set is permissioned. As with user activity analysis, only Avalanche C chain validator data is included. Each subnet can use from three to all validators in the global set. At the end of Q1 in 2023, the launched subnet has 4 to 14 validators.

03 Ecosystem Analysis

DeFi

TVL also increased in USD terms, as expected during a market rally. For most L1s, the quarter-over-quarter change in market capitalization is greater than the change in TVL. This relationship may suggest that the increase in TVL is due more to price increases than to net capital inflows.

Nonetheless, Ethereum remains the main leader in TVL, followed by BNB Chain and TRON. Stacks and Cardano performed well, growing 276% and 172% respectively. Stacks TVL increased significantly from approximately February 17th to 22nd, coinciding with the price increase of STX. Cardano TVL rose steadily throughout the quarter and benefited from the launch of several stablecoins detailed below.

NEAR is an exception, with its TVL declining throughout the quarter, with a 22% quarter-on-quarter decline mainly occurring during the USDC de-pegging, as detailed below.

DeFi diversity measures the number of protocols that make up the top 90% of DeFi TVL. Greater TVL distribution across protocols reduces the risk of widespread ecosystem contagion due to undesirable events such as exploits or protocol migrations.

Ethereum scored 22 points in DeFi Diversity, followed by Polygon (19), Solana (18) and BNB Chain (16). The ranking is broadly similar to that of TVL, with the notable exception of TRON, which ranks third in TVL ($5.4 billion), but over 70% of that comes from JustLend. Additionally, JustLend TVL is dominated by three separate wallets.

Average daily DEX trading volumes for most L1s increased quarter-over-quarter. Like TVL, Stacks and Cardano saw the largest month-to-month increases of 330% and 101%, respectively. During the USDC unpegging on March 11, daily DEX volumes soared, fueled by over $20 billion in volume on Ethereum. This spike is nearly double the previous year’s spike that occurred during the Terra/Luna, Celsius, and FTX crashes.

Overall, stablecoin market capitalization continued to decline steadily over the past quarter, with several large stablecoin-related events:

• The Silicon Valley bank run event caused USDC to temporarily suspend decoupling from March 10 to March 13, reaching a low of $0.87. From March 10 to the end of the quarter, USDC’s market capitalization across all chains fell by 24%.

• On Feb. 13, regulators directed Paxos to stop issuing BUSD, which at the time was the third most popular stablecoin after USDC and USDT. From February 13 to the end of the quarter, BUSD’s market capitalization across all chains dropped by 52%.

Ethereum, Polygon, Solana, Avalanche, and Hedera all have native USDC issuances. They were negatively impacted by outflows of USDC, the top stablecoin per chain prior to the depeg. Similarly, BUSD is the main stablecoin on BNB Chain, causing its stablecoin market cap to drop 31% month-on-month. This is the largest quarter-on-quarter drop for L1 outside of Hedera, which only uses USDC, down 36% quarter-on-quarter.

The aforementioned events caused some BUSD and USDC holders to switch to USDT, increasing the market capitalization of all chains by 17% from February 13 to the end of the quarter. TRON is the biggest beneficiary of this migration, because one of the main use cases of TRON has become holding and transferring USDT. Its stablecoin market capitalization increased by 30% month-on-month.

Only Cardano’s stablecoin saw a larger quarter-on-quarter increase of 262%. Cardano does not have any USDC, USDT or BUSD and thus is not affected by the above events. Cardano's top two stablecoins by market capitalization, IUSD and DJED, will be launched in Q4 of 2022 and Q1 of 2023, respectively. Their continued growth is critical to the impact of the Cardano ecosystem.

The total value metric borrowed and lent provides additional context for L1’s DeFi activity. Borrowing is generally an indication of user trust and where the protocol is making money (from both liquidation and borrowing fees), although large borrowings can lead to more volatile liquidations. Note that DefiLlama does not include CDP debt in its borrowing data. Therefore, Cardano, Stacks, and Tezos are excluded from this analysis because all or most of their DeFi debt comes from CDP protocols.

Across all L1s, the total value of lending increased 17% sequentially. Along with TVL and DEX volume, Ethereum remains the dominant network at nearly $4 billion, followed by BNB Chain at $735 million. Unlike those metrics, Avalanche was ahead of Polygon, although the gap narrowed throughout the quarter.

NFTs

Despite the higher gas, Ethereum is still the premier venue for NFT activity. Blur is #1 in the Ethereum market in terms of transaction volume in Q1 2023, gaining a strong foothold through its token launch and airdrop in mid-February. According to Hildobby's Dune data, its average weekly volume share rose from 31% to 59%. Only Polygon outpaced Ethereum in quarter-over-quarter average daily transaction volume, with a quarter-over-quarter increase of 101%.

While Ethereum also leads in terms of daily unique NFT buyers, the gap between it and other chains is smaller than transaction volume using this metric. Average daily unique NFT buyers on Ethereum are up 88% quarter-over-quarter. Coinbase launched a commemorative NFT on Ethereum at the end of February to celebrate the announcement of its L2 Base. The "Base, Introduced" series was free to mint for multiple days, which peaked on February 26, attracting more than 122,000 unique buyers.

Additionally, only Polygon outpaced Ethereum in quarterly average daily unique buyers, up 89% quarter-on-quarter Over 10,000 people in the week following the Karen F1 series.

Developer

Developer data is imperfect, but Electric Capital's developer report sets the best bar for measuring developer activity. It measures developers as authors who contribute original open source code to the ecosystem, and full-time developers as those working 10+ days per month.

In L1, full-time developers (dev) fell 4% quarter-over-quarter. Ethereum is down just 0.1% and remains the top ecosystem for developers. The number of full-time developers on Ethereum is 1976, almost equal to all other L1s combined. Hedera is the public chain with the largest increase in the number of full-time developers, with a quarter-on-quarter increase of 28% to 64 people.