Which Blockchains Actually Make Money?

Two weeks ago, I wrote about the protocols with strong fundamentals, such as outsized revenue or token supply, that were showing promise amid the latest wave of price appreciation.

Now, we're taking that same fundamentals-driven approach to dive deeper into L1s and L2s.

Whether it's the influx of institutional investment or the general disillusionment with high-FDV token launches, the recent surge presents a potential opportunity to take a closer look at the fundamentals of blockchains overall, including, not only their revenue, but also their earnings.

Today, we’ll explore just this, analyzing the top 4 L1s and L2s by revenue, before delving deeper to explore just how much, if any, of the revenues that these blockchains actually keep. 

Note: Just as in TradFi, there are plenty of complicated ways to filter the earnings of various projects. For today's piece, we're keeping it simple, defining earnings as total revenue less token issuance (the amount of native tokens distributed to users) and less operational expenses (the costs of developing, maintaining, and upgrading the protocol) 

Which L1 Blockchains are Profitable?

Without further ado, let's take a look at the numbers.

▪️ Ethereum

In terms of revenue generated, Ethereum holds a significant lead over all other blockchains, both L1s and L2s, bringing in $2.22B over the past year. 

However, despite its substantial revenue, Ethereum recorded a net loss of $15M. How? This loss is primarily due to the issuance of new tokens outpacing its revenue, which has flipped its earnings negative so far this year after strong performance during the second half of 2023. This can be traced in large part to transaction activity shifting to L2s, reducing the fees paid directly to the world computer. Consequently, this migration has led to a drop in Ethereum's earnings despite its significant transaction volume and network activity.

▪️ Tron

The quiet giant, Tron stands in second place for overall revenue, bringing in $1.4B in revenue over the past year.

This success can be directly attributed to the network’s extensive stablecoin activity, ranking second for the network with the most stablecoins behind Ethereum, thanks to significant use by those in developing economies such as Argentina, Turkey, and various African countries where high inflation remains a consistent issue. While some may call it a one-trick pony, this “trick” translates to $271M in earnings over the past year, making it by far the most profitable blockchain. 

▪️ Solana

As one might expect, Solana also ranks among the top protocols by revenue generation, bringing in $157M in revenue over the past year. 

Its popularity as a memecoin hub, capital growth from airdrops, tech upgrades to address spam issues, and support for leading trends like AI all contribute to its prominent mindshare and strong revenues this cycle. However, this growth has not translated to earnings. When considering token issuance to stakers and operational costs, Solana sits at a substantial net loss of $2.53B over the past four complete quarters, completely erasing its revenue and landing it deep in the red. 

▪️ Avalanche

The L1 with its own memecoin fund, Avalanche, ranks in fourth place, with $69M in revenue generated over the past year. 

Known for its subnet scaling solution and a focus on gaming, Avalanche has a big upgrade coming up called ACP-77 which would improve the experience of deploying and managing subnets, making them more affordable and thus potentially increasing revenues. While considering this, the chain will still have a long ways to go as it faced a net loss of $860.6M over the past year due to token issuance and operational costs.

Which L2 Blockchains are Profitable?

▪️ Base

Despite being less than a year old, Base, Coinbase’s L2 launched with the OP Stack, has quickly made a mark by generating $66.6M in revenue since inception. 

Notably, Base managed to retain 63% of this revenue, netting $42M in earnings during this same period. This success can be attributed to two key factors.

• First, Base has significantly reduced costs by implementing blobs via EIP-4844, which slashed these costs from $9.34M in Q1 2024 to just $699K in Q2 2024.
• Second, Base's lack of a native token makes it even more competitive, sidestepping distribution-related expenses that other L2s incur.

▪️ Arbitrum

Arbitrum, the largest L2 by TVL with $17.2B locked, generated $61.14M in revenue over the past year. 

A hub for DeFi, leading DeFi protocols like GMX and Pendle call Arbitrum home, while its SDK serves as the primary infrastructure for L3s like Sanko, Degen chain, and Xai. While still not reaching the revenue levels of Base, Arbitrum achieved earnings of $21.8M in the past year with stand-out performance in Q2 when its expenses dropped to just $613K, compared with $20M in Q1.

▪️ zkSync Era

zkSync Era, one of the leading ZK-based L2s, brought in $53.3M in revenue over the past year.

Following its airdrop in June 2023, the network saw a significant spike in TVL as ZK added ~$850M to the chain, though this has gradually declined as users sold their airdropped tokens. The chain remains profitable though, netting $15.3M in earnings over the past year – $17.5M over the past four complete quarters. This crowns zkSync as the third most-profitable L2, despite being the eighth-largest.

▪️ OP Mainnet

Optimism, the center of the Superchain, raked in $44.6M in revenue over the past year from sequencer fees on its main chain, as well as from those in its network like Zora and Base.

In Q2 2024, Optimism hit record network activity. The average daily active addresses surged to 121.6K, increasing 37% quarter-over-quarter (QoQ) despite the market’s slump, and daily transactions rose to 601K — a 28% QoQ increase. As for other L2s, EIP-4844 contributed significantly to this growth, leading to a reduction in fees which increased network activity, boosting Optimism's net profitability by over 150% as a result.

Despite this growth, Optimism still lies deep within the red, facing a net loss of $239M over the past year from retroactive airdrops, incentive programs, and operational costs.

Narratives and Fundamentals

As you look through these numbers, remember that, just as in TradFi, profitability only tells part of the story. Nobody is betting trillions on Nvidia's current financials; it's the narrative that is powering its growth.

Narrative-driven investing is often the default for crypto buyers who are making risky plays with hopes of outsized rewards, but it's still important to remember that there are still networks building substantial businesses off of the activity taking place today.

Diving deeper into the revenue and earnings of top L1s and L2s, we can get a stronger sense of the fundamental health of these networks and their place in the competitive landscape.