Value Capture |Where Are Web3’s Revenues Going?
(1) Total Revenue: The Web3 business model has evolved significantly, with the dominant still being the “sale of blockspace”, followed by the NFT marketplace, DeFi, GameFi, and infrastructure.
(2) Protocol Revenue: Most of the revenue still comes from supply-side revenue created by players such as Liquidity Providers and Lenders. The profitability of the protocol itself is still relatively small. Even less revenue flows to token holders. Although users enjoy staking rewards and governance rights, the core economic benefits are still not guaranteed.
(3) Vulnerabilities in the Audit Procedure: Audit vulnerabilities in protocol revenue pose a risk to token holders. The risk accrual in protocol revenue is not reflected. Protocol revenue data is often confused with token sales data. Even some of the protocol revenue glosses over the risk of rug pulls.
1. Overview of Web3’s Revenue
1.1 Highest Revenue Web3 Companies /Protocols
Revenue is one of the most critical indicators for all companies. Therefore, you may wonder if Web3 companies are generating revenue. Currently, the most reliable and mainstream data on the market comes from Token Terminal. Also, the Block, Messari, and Web3 Index offer some valuable data. Unfortunately, no organization has complete statistics on companies’ revenues or protocols. For completeness of the analysis, we have combined the above four data sources to produce an exclusive analysis report. Even if we do our best, some of the on-chain data is missing. In the future, we will continue to improve these inevitable limitations.
(Source: Token Terminal, the Block, curated by FutureMoney Research 2022 Q2)
Since Web3’s revenue is dependent on market fluctuations, we only count total revenue for 180 days (not linear annualization). The top 17 companies (protocols) together generated over 10 billion USD in total revenue.
l Tier 1: Ethereum and Opensea. Ethereum leads the list with an impressive half-year total revenue of 4.6 billion USD; Opensea’s half-year total revenue is about 1.8 billion USD, also a cash cow.
l Tier 2: Mostly Defi protocols. The highest total revenue is from Convex and Uniswap, whose half-year total revenue is about 600 million USD.
l Tier 3: Metamask. The king of the most representative tools, with total revenue of 81 million USD for 180 days.
1.2 Business Models Limit Revenue?
Let’s start analyzing the above total revenue components and see the impact of the business model.
(Source: Token Terminal, curated by FutureMoney Research 2022 Q2)
The data shows that:
Layer1, which accounts for nearly half of its revenue, has a business model of “selling blockspace”.
The NFT marketplace relies primarily on royalty draw with a 22% revenue share.
Dex takes 15% of revenue, whose business model is trading fees and liquidity market-making revenue.
8% of revenue from the staking platforms, whose business model is to carry or spread on assets under management.
Gamefi has a 5% share, and its business model is royalty draw, transfer fees, sales of NFT, etc.
Lending revenue is about 1%, and its business model is interest rate spread.
Tooling’s revenue share is about 1%, and its business model is to charge a fee for its services.
Firstly, it is easy to see that the most potent revenue machine is Ethereum, with a business model of “selling blockspace”, which generates far more revenue than others. In the L1 blockchain, the differentiation of revenue is apparent.
Secondly, the “NFT marketplace” generates significant revenue. Not just because NFT itself is a sensation, the platform’s royalty draw is exceptionally high, about 2–2.5%. In contrast, for the usual Dex (Decentralized Exchange), such as TraderJoe, only about 0.05% of the royalty draw.
2. What Determines Total Revenue?
2.1 Protocol Revenue — a Reflection of the Value of the Protocol
Generally speaking, the revenue of Web3 protocol is composed of supply-side revenue and protocol revenue, where the destination of protocol revenue is divided into Treasury and token holders (figure below).
The figure shows:
Total Revenue = Supply-side Revenue + Protocol Revenue
Supply-side Revenue: Generated by suppliers. For example, the revenue received by all liquidity providers (borrowers, contributors in staking, etc.) in Defi after deducting the principal. From this perspective, suppliers are the value creators and revenue recipients.
Protocol Revenue: The revenue that the protocol receives after providing services. This portion is generally distributed to Treasury first and then to token holders.
According to our statistics, a large percentage of the 17 companies/products/protocols with the highest total revenue have a meager portion of protocol revenue.
For Defi projects, supply-side revenue primarily accounts for over 90% of Total Revenue. A more extreme case is, for example, Uniswap, which does not have any protocol revenue. However, the cumulative total transaction volume reaches $1 trillion and the total revenue is up to $600 million (half-year).
Centralized projects such as Opensea, Metamask, etc., do not have tokenomics, so protocol revenue represents the value attributed to the company for now.
2.2 Top Companies (Protocol) in Protocol Revenue: Profitability
(Source: Token Terminal, the Block, curated by FutureMoney Research)
Measuring the protocol’s profitability by protocol revenue yields an entirely different result than measuring it by total revenue. Defi’s share of the list plummets, while the L1 blockchain, NFT marketplace, and Gamefi project remain unchanged.
Note: Some of the above projects are marked in yellow.
Stepn is not featured on mainstream sites but does generate a significant amount of revenue, which we have estimated and measured based on public sources.
Axie Infinity’s revenue fluctuates excessively and has dropped to less than 10% of its peak.
Decentral Games is only included in Token Terminal so the data may be inaccurate.
So, let’s be rigorous, disregard governance rights, and continue to look for which of the above protocols leave value to Token.
2.3 How Much of the Protocol Revenue Goes to Token Revenue?
Protocol revenue can pass value to token holders in the following three ways:
1. Revenue Distribution: Direct money distribution. Less common due to compliance issues.
2. Real-Time Burn: Commonly found in L1 blockchains, implemented automatically in contracts.
3. Buyback and Burn: More centralized, with the project owner leading the buyback and burn.
Among the above protocols with protocol revenue, we adjusted them by adding BSC, whose documentation discloses detailed real-time burn and buyback plans, which are not included in Token Terminal. We found eight protocols that meet the “Token can capture revenue value” condition.
Real-time-burn is the most dominant approach; among them, Ethereum burned the most ETH, nearly 2.38 million ETH, followed by BSC, which has 37 million BSC for buyback and burns. In addition to these eight protocols, the remaining 12 protocols in protocol revenue’s top 20 rankings do not give any value back to token holders.
In addition, protocol revenue has some common audit vulnerabilities that, if left unchecked, could mislead our judgment about the value of the protocol.
3. Questionable Accounting in Protocol Revenue
3.1 Protocol Revenue with Considerable Risk Accrual
Many staking platforms brag about their core features as offering “high yield” or “high liquidity” to attract users. But the core competency of such a business is not the advanced technology but the sophisticated use of financial leverage.
Take Lido as an example. A user who stakes Ether usually faces a long lock-up time, but if he/she stakes on the Lido, he/she can get stETH and withdraw it immediately, while enjoying the staking revenue. The cost of the Lido protocol includes issuance cost and stETH for staking ETH 1:1. Its revenue is a 10% interest rate spread from the user’s ETH staking.
(Source: Lido, curated by FutureMoney Research)
There’s no such thing as a free lunch. Lido holds a large amount of locked ETH, but issues liquid stETH and promises a 1:1 cash out. Therefore, much capital is needed to cover the withdrawal risk of stETH. This type of business usually performs well in credit expansion cycles but is at significant risk of declining profits in credit contraction cycles. Although Lido has 16.6 million USD in revenue over 180 days, the withdrawal risk it bears could significantly reduce this revenue should it occur. Who is the first one the protocol will defend? It must be the stETH holders, not the LDO token holders.
3.2 Protocol revenue recognized by token sale
According to the Web3 Index, revenue can be split into implicit and explicit ones, so we have the definitions below:
l Explicit Revenue: Payments made by users for the service, with utility properties.
l Implicit Revenue: Payments made by users for protocol Tokens, with speculative arbitrage properties.
This part of implicit revenue is commonly found in x-2-earn and Web3 infra. It is somewhat similar to supply-side revenue, but more similar to Token Sale.
The user uses the protocol to gain speculative income from the Token, contributing “income” in the form of ETH or SOL to get the Token and sell it for a profit in the future.
(Source: Hildobby, curated by FutureMoney Research)
In the case of LooksRare, washtraders are the largest implicit revenue generator on the platform. Washtraders pay the platform a large amount of ETH as transaction fees, then get LOOKS and sell them. Washtraders continue to profit from this arbitrage trade. This type of arbitrage trading is more like a Token sale-driven financing revenue rather than a business-driven revenue guaranteeing continuous profitability.
In addition, while LooksRare distributes protocol revenue to users who stake LOOKS tokens, all of this ETH revenue is automatically sold as LOOKS and paid to users in LOOKS, similar to a default token sale.
Within this economy, LooksRare generated a staggering profit ($580 million in 180 days). Still, other participants — washtraders or token holders — ended up paying ETH and getting a bunch of LOOKS tokens. Who captured the value, Treasury or the LOOKS holders?
3.3 Protocol revenue in a dual token system
In Gamefi 2.0, there are several dual token models.
l Governance Token: Rewarded to VC/investors. Capped, and with buyback and burn.
l Utility Token: Rewarded to game players. With good design intentions, there is no cap and no buyback, aiming to maintain the stability of the game’s economic system from investors. However, if not done correctly, it will potentially make the project empty the value of the entire economy.
(Source: Hildobby, curated by FutureMoney Research)
Analysts on the blockchain are prone to make the mistake of cheering on the growing “inbound/ outbound” data, ignoring that Utility Tokens are being incrementally issued all the time. The project team may be making huge profits by trading this Utility Token repeatedly, through multiple addresses, without disclosing it to the community. According to the whitepaper, they only need to disclose the rules for releasing the Governance Token.
While the Governance Token is deflating and accumulating value, the Utility Tokens are profiting from their incremental issuance, allowing the project owner to be constantly siphoning off value from the game economy, similar to rug pulling the entire project, which is detrimental for investors. At this point, we are only speculating, as there is no data to prove this portion of potential revenue.
As of 2022, Web3 has the business model in place and the ability to generate significant revenue.
Finding ways to distribute the revenue in a way that is more valuable to the community, or even society, is a difficult task. Some protocols keep the revenue for themselves, some in treasury and choose to wait and see, and some give it back to the community. Of course, some projects choose to avoid disclosure and cover up their acquisition of benefits in various ways, while leaving token holders at significant risk.
We look forward to seeing the emergence of more audit, financial, and regulatory functions focused on Web3, rounding out the entire blockchain industry. If you are working on or interested in working with blockchain, please feel free to contact us via email.
✍️ Author: FMResearchTeam
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