Research Summary
The report discusses the evolving business models in the crypto space, focusing on Layer 2 (L2) networks and their revenue generation methods. It highlights the importance of user acquisition and application development in L2s, using Base and Blast as examples. The report also emphasizes the role of marketplaces in crypto protocols and the value capture methods in DeFi.
Key Takeaways
Layer 2 Networks as Businesses
- Role of Layer 2 Networks: L2s batch transactions and send them to Layer 1 for settlement, providing low gas costs and higher throughput. They generate revenue from gas fees, part of which is used for L1 settlement and the rest is kept by sequencers.
- Revenue Generation: According to Token Terminal data, leading L2s generated $154 million in revenue YTD, with Base capturing a third of the market share. The key to revenue generation is activity, defined by transactions.
Application Development and User Acquisition
- Importance of Applications: L2s need applications to attract users and generate transactions. The L2 arms race is about developing applications that draw users in and keep them engaged.
- User Acquisition Strategies: L2s need a unique factor for user acquisition and incentives for applications to build on their L2. Base, for example, leverages the Coinbase marketing engine to attract users.
Value Capture in DeFi
- DeFi Business Models: Most DeFi protocols operate on a fee structure that takes a percentage fee on value created or exchanged. For example, Maker’s revenue sources include a stability fee paid by borrowers and liquidation penalties.
- Role of Marketplaces: Crypto dApps and protocols are almost all marketplaces, matching supply and demand across multiple participants. This requires a balance between the technical aspects of a protocol and coordination of high-value attention.
Evolution of Crypto Ecosystems
- Shift in Focus: The report notes a shift from DeFi protocols and DAOs building out their ecosystems on Ethereum L1 to L2s funding or incentivizing projects and initiatives in a competition for the best dApps.
- Fragmented Liquidity: The rise of L2s has led to critiques about fragmented liquidity as capital on one chain cannot be used without transferring it to another. However, the report suggests that liquidity within winning ecosystems will be sufficient to meet most needs.
Actionable Insights
- Monitor the Evolution of L2 Networks: As L2 networks continue to evolve and compete for users and applications, it’s important to keep an eye on their strategies and growth trajectories.
- Understand the Role of Applications: Applications play a crucial role in attracting users and generating transactions on L2 networks. Understanding the types of applications that succeed can provide insights into user behavior and preferences.
- Consider the Impact of Fragmented Liquidity: The rise of L2s and the resulting fragmented liquidity can create inefficiencies and opportunities. Understanding these dynamics can help in making informed decisions in the crypto space.
