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Blockchain Revenue: How Crypto Projects Make Money

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Overview: Blockchain is a business. As an investor, this mental shift allows you to analyze them like a business and ask basic questions like: How do these things make money? are they profitable? how fast are they growing? Here’s how to answer these questions:

Blockchain is hailed as one of the most revolutionary technologies of the 21st century. Its proponents cite security, privacy and transparency as reasons why blockchain will overtake legacy technology.

These are all lofty reasons, but at the end of the day, blockchain technology companies and investors want to know one thing.

Thinking of blockchain like a business helps us understand how blockchain earns and benefits, where it is growing, and whether the business model is sustainable.

And since these “businesses” are based on blockchain, the numbers are transparent to everyone. Method is as follows.

Blockchain business model

Blockchain technology is a radical new business model that offers new ways to store and manage data. This technology has great potential to disrupt industries where database management is important, especially those where money is involved.

So far this has been enough to attract investors, but in the long run these blockchain projects should also be profitable. Income prospects are what draw investors to projects, whether in the traditional stock or bond market or the new “block markets.”

For example, consider digital payments. Visa and Mastercard have a thriving business model because they offer a valuable service called the “payments layer” that connects billions of merchants and customers. However, these companies centralize data and payment records. And they make billions of dollars a year from the fees they collect using their network.

Compare this to cryptocurrency networks like Ethereum. Ethereum is a faster and often cheaper alternative to this payment layer, with important promises for users. It is a neutral, decentralized platform that allows parties to a transaction to have equal access to data. But how much money does Ethereum make?

Which protocols are sound business
Best Blockchain Business (Courtesy token terminal)

Some of the best analyzes of blockchain revenue are token terminalwhere you can see Leader board It summarizes some key data points and is summarized in the table above.

commission: These are the fees a user pays to use a protocol or network (e.g. Ethereum gas fees, Uniswap transaction fees, etc.). This is a standard way for blockchain projects to generate revenue. (Think of fees as equal to earnings.)

These charges are typically paid in two ways (think of them like costs):

  • supply side: The majority is given to validators who help run the network (Ethereum validators, Uniswap liquidity providers, etc.).
  • token holder: Confusingly called “earnings” in token terminals, this is the value returned to the token holder (often burning the token increases the value of everyone else’s pie).

token incentive: Finally, there are new tokens that are created and paid out to validators or miners. This is another type of expense as it devalues ​​all other holders.

Reading the chart above, “In the last 30 days, Ethereum earned $93.3 million in trading fees. has produced.”

Granted, these aren’t traditional revenue metrics, but they do reflect our understanding of how blockchain creates value.

How blockchain creates value

Think of a blockchain “product” as: Individual blocks holding transaction dataThe company creates the widget. Blockchain makes blocks.

If you want to complete a transaction on the blockchain network, you have to buy space on the next block in the chain. product of blockchain block.

The simplest example is Bitcoin. Bitcoin storage capacity is 1MB per block. Assuming a minimum data storage size of 258 bytes, each block of Bitcoin yields an average of 500 to a maximum of 2000 transactions. To make transactions with Bitcoin, you buy blocks on the Bitcoin blockchain.

The Ethereum blockchain comes with additional features such as smart contract programs. There are small blocks of storage capacity up to 80KB. Depending on transaction size and complexity, an Ethereum block can hold between 2 and 200 transactions.

However, Ethereum is much faster than Bitcoin and can handle 4MB transactions in 10 minutes, while Bitcoin can only handle 1MB. More transactions per hour means the blockchain can generate more revenue (i.e. fees).

If a chain can generate more revenue than it costs (i.e. pays the people who run the network), the result is profitability.

The problem is that blockchain is expensive to implement as it has to focus on network security. In a proof-of-work blockchain like Bitcoin, security is guaranteed by payments to miners. A Proof of Stake blockchain guarantees security through payments to stakers and validators.

In both mining and staking, those providing security (i.e. those running the network) will be rewarded in the form of the project’s native tokens. The more tokens issued, the more diluted the token’s value for everyone else.

Ethereum Q3 Income Statement
As a proof-of-work blockchain, Ethereum paid out huge rewards to miners every quarter. As a Proof of Stake blockchain, this changes. (via image Messari)

Currently, the income most blockchains receive through gas or transaction fees is not enough to cover the costs that miners or stakers pay to meet their time and energy bills.

Projects built on top of existing blockchains face another problem. Most DeFi projects such as Uniswap, Aave, and Compound attract users through incentives. These incentives come in the form of token issuance or new token issuance to reward users for running the network.

As an investor, you should ask the following questions:

  • Earnings: How much are blockchain project fees? How are they earned?
  • cost: How much is going back to the people running the network? What other costs do you have to consider?
  • token dilution: How many tokens have been created (or burned) that have decreased (or increased) the value of all other token holders?
income vs. expenses
Income vs. Expense: Comparison of Ethereum fees (green line) and costs paid to validators (blue line).courtesy token terminal.
revenue to profit
Revenue to Profit: “Profits” returned to ETH holders by Ethereum fees (green line) and burning (blue line).courtesy token terminal.

How to generate blockchain profitability

To make your business more profitable, you have two options: increase revenue or reduce costs. In blockchain business, this means:

Create cheaper security

Proof of work (mining) is too expensive, energy intensive, and ecologically unsustainable. Instead, many new blockchains use proof of stake. Instead of power-hungry computers brute-forcing math problems, investors can present their crypto assets as “wagers” to validate transactions.

As staking is easier and cheaper than mining, less rewards are paid to stakers. As a result, this leads to cost savings for blockchain businesses.

Create more transactions

The recent plight of the Ethereum blockchain highlights the importance of scaling blockchain networks. Despite the high demand for transactions, the network is currently unable to take advantage of it due to its inherent limitations in scalability.

High fees are not the answer, as low transaction fees are a unique selling point of blockchain networks. This was also the case with Ethereum, where gas fees, which could exceed $100 per transaction, did little to improve the profitability of the blockchain.

Ethereum network is Multi-year upgradeThis increases the number of transactions per second from 30 to 100,000. While this is expected to dramatically lower transaction fees, the resulting increase in transaction volume will more than offset this in terms of increased revenue.

Reduced (or Ended) Token Incentives

All blockchain projects can be considered tech startups famous for using incentives to grow their business, even if that means they have to operate at a loss.

Look at Amazon as a comparison from the Web2 space. 6 years of deficit management After publication, before finally delivering a reasonably profitable year. Amazon’s incentives are its low prices and large inventory, both of which were initially expensive.

Blockchain projects are currently in the growth phase of this startup, but in the coming years, incentives paid in the form of crypto tokens need to come to an end to ensure the future profitability of the project.

Every token created reduces the value of all other investors’ holdings. Like, for example, the slice stays the same and the pie keeps getting bigger. Conversely, every token burned makes the pie smaller and increases value for all investors.

Tips for investors

Blockchain is a disruptive technology with revolutionary potential.but we can’t miss Profitabilityis essential to spur continued adoption across the economy.

As an investor, we look for projects that are profitable and have a high potential for long-term revenue growth. Here are the most profitable projects in the last 6 months:

Premium member Access a complete library of research reports on profitable projects.

and don’t forget Subscribe to our free daily newsletter Learn about the latest profitable projects (find them before the market moves).

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