Where did Web3’s revenue go?

TLDR; Conclusion:

(1) Total revenue : The Web3 business model has developed greatly, the most powerful of which is still “selling block space”, followed by NFT trading platforms, DeFi, GameFi and infrastructure.

(2) Protocol revenue : Most of the revenue still comes from Supply-side Revenue created by roles such as Liquidity Providers and Lenders. The protocol revenue itself is still less profitable, and even less of it goes to Token Holders. Although users enjoy pledge income and governance rights, the core economic interests are still not guaranteed.

(3) There are audit loopholes in protocol revenue, which poses risks to Token Holders : The risk provision in Protocol Revenue is not reflected, protocol revenue data is often confused with token sales data, and some protocol revenue even hides the risk of Rug Pull.

1. Overview of Web3 Inc.’s Revenue

1.1 These Web3 companies (protocols) have the highest revenue

In almost all companies, revenue is one of the most important metrics. So are Web3 companies actually generating revenue? At present, the most credible data in the market comes from Token Terminal, and the Block, Messari and Web3 Index also provide some data. Unfortunately, none of the companies has complete statistics on the whole market; we combine the data of the four for analysis and output an exclusive analysis report. Due to the lack of data on some chains, individual information may be biased, and we will continue to improve it in the future.

(Figure 1) Top 17 agreements by total revenue in the past 180 days

Since Web3’s revenue is dependent on market volatility, we only count 180-day (not non-linear annualized) total revenue . The top 17 companies (protocols) collectively generated over 10 billion USD in total revenue.

  • The first gear : Ethereum and Opensea, Ethereum’s half-year total revenue is 4.6 billion USD, which is far ahead in the list; Opensea’s half-year total revenue is about 1.8 billion USD, which is also a crazy cash cow;
  • The second tier: Most of them are Defi protocols. The ones with the highest total revenue are Convex and Uniswap, whose half-year total revenue is about 600 million USD.
  • The third gear : The most representative is the king of tools – Metamask, with a total income of 81 million USD in half a year.

1.2 Does the business model determine the revenue ceiling?

We analyzed the composition of the above total revenue to see how big the impact of the business model is.

(Figure 2) Proportion of the top 18 protocols by total revenue in the past 180 days (Source: Token Terminal, curated by FutureMoney Research 2022 Q2)

As can be seen:

  • Layer1 ‘s revenue accounts for nearly half of the total revenue, and its business model is “selling block space”;
  • The revenue of the NFT trading platform accounted for 22%, and its business model is royalties;
  • Dex’s revenue accounts for 15%, and its business model is transaction fees and liquidity market-making revenue;
  • The staking income in Defi accounts for 8%, and its business model is the carry or spread of asset management;
  • Gamefi accounts for 5%, and its business model is royalties, transfer fees, sales of NFTs, etc.;
  • Lending ‘s revenue in Defi accounts for about 1%, and its business model is interest spread;
  • Tooling ‘s revenue accounts for about 1%, and its business model is service fees;

It’s not hard to see that the most powerful revenue machine is Ethereum, whose business model is “sell block space . ” His income far outstrips other projects. Similarly, in the L1 blockchain, the two-level differentiation of income is very obvious.

Secondly, it is the “NFT trading platform” that has a strong ability to generate income . In addition to the popularity of NFT itself, the platform’s royalties are extremely high (2-2.5%) – we can compare, usually Dex (such as TraderJoe) is only about 0.05%.

2. Agreement revenue competition

2.1 The value of the protocol itself: Protocol Revenue

Generally speaking, the revenue of the Web3 protocol consists of Supply-side Revenue and Protocol Revenue, of which Protocol Revenue is divided into Treasury and Token holders (as shown in the figure below).

(Figure 3) Distribution of Web 3 Protocol Total Revenue (curated by FutureMoney Research)

Explain this graph:

Total Revenue  =  Supply-side Revenue + Protocol Revenue

  • Supply-side Revenue : Refers to the roles generated by Suppliers (suppliers of funds), such as all liquidity providers in Defi, all borrowers in lending, and all contributors in Staking, who are deducting the principal subsequent gains. This part of the value is created by suppliers, and the income naturally belongs to them.
  • Protocol Revenue : Refers to the revenue that the protocol collects after providing services. This part is generally allocated to Treasury, and the rest is allocated to Token Holders.

According to our statistics, most of the 17 companies/products/protocols with the highest total revenue have a very low proportion of Protocl Revenue.

  • The supply-side revenue of Defi projects mostly accounts for more than **90%** of Total Revenue. Even more, such as Uniswap, although the cumulative total transaction volume reaches 1 trillion US dollars and the total revenue is as high as 600 million US dollars (six months), but there is no Protocol Revenue.
  • Centralized projects such as Opensea, Metamask, etc., because there is no Tokenomics, Protocol Revenue temporarily represents the value attributable to the company.

2.2 The top companies (protocols) in Protocol Revenue: their own profitability

(Figure 4) Ranking of companies (protocols) with a Protocol Revenue of more than 10 million USD in the past 180 days (Source: Token Terminal, the Block, curated by FutureMoney Research)

We can see that if the protocol revenue is used to measure the profitability of the protocol, the leaderboard is completely different from the measurement by Total Revenue. In the list, the proportion of Defi has plummeted, while the L1 public chain, NFT trading platform, and Gamefi projects remain unchanged.

Remarks: We marked some of the above items in yellow

  • Stepn is not included in mainstream websites, but it does have a lot of income. We have made estimates based on public information
  • Axie Infinity’s revenue has been too volatile, falling below 10% of its peak
  • Decentral Games is only included by Token Terminal, not by other websites, so the data may be inaccurate

So let’s be strict and ignore Governance Rights and continue to find which of the above protocols leave value to the token.

2.3 How much of Protocol Revenue goes to Token Revenue?

(Figure 5) Meme about UNI (curated by FutureMoney Research)

Protocol Revenue can pass value to Token Holders in the following three ways:

  1. Revenue Distribution : Direct distribution of money, less common due to compliance issues
  2. Real-Time Burn : Common in the L1 blockchain, automatically implemented in the contract
  3. Buyback and Burn : relatively centralized, the project party leads the buyback and burn

In the above-mentioned agreements with Protocol Revenue, we have made adjustments (hereby explain: we have added BSC, whose documents disclose detailed real-time destruction and repurchase plans, but are not included in Token Terminal), and found that there are a total of 8 agreements that satisfy “Token can capture revenue value” condition.

(Figure 6) Agreements with profit sharing or repurchase (curated by FutureMoney Research)

In terms of categories, the most mainstream method is Real-time-burn; among them, Ethereum has the most burning intensity, with a total of nearly 2.38 million ETHs burned; followed by BSC, with a total of 37 million BSCs repurchased and burned. In addition to these 8 protocols, the remaining 12 protocols in the top 20 of Protocol Revenue did not return value to Token Holders.

Not only that, Protocol Revenue has some common audit loopholes that, if not careful, may mislead us about the value of the protocol.

3. Common Audit Vulnerabilities in Protocol Revenue: Our View

3.1 Some income, but no risk accrual

In order to attract users, many staking platforms describe their core functions as providing “high yield” or “high liquidity”. We must understand that the core competitiveness of this business is not technology, but how to use financial leverage.

Taking Lido as an example, an ordinary user usually faces a long lock-up time when staking Ethereum, but if he pledges on the Lido platform, he can get stETH and can take it immediately, and also enjoy Staking benefits. The cost of the Lido protocol is to issue stETH that is accepted 1:1 with Staking ETH, and the income is to extract a 10% spread from the user’s ETH Staking.

(Figure 7) The schema of the Lido protocol (source: Lido, curated by FutureMoney Research)

Of course, there is no free lunch in the world. Lido holds a large amount of locked ETH, but issued a liquid stETH and promised to redeem it 1:1. Therefore, a large amount of funds should be prepared to deal with the withdrawal risk of stETH. Usually, this type of business performs very well in a credit expansion cycle, but in a credit contraction cycle, profits will decline and face great risks. Although Lido has an income of 16.6 million USD (within 180 days), this part of the income will be greatly reduced once the risk it undertakes breaks out. The primary defense target of the protocol must be stETH holders, not LDO token holders.

3.2 Some income is essentially Token Sale, which is very unstable

As defined by the Web3 Index, revenue can be divided into internal and external, which we extend as follows:

  • Explicit Revenue : The payment made by the user for the use of the service, a practical attribute;
  • Implicit Revenue : The user speculates on the arbitrage attribute in order to obtain the payment of the protocol Token.

This part of Implicit Revenue, commonly found in x-2-earn and Web3 infra. It is similar to Supply-side Revenue in Defi, but it is closer to Token Sale. Participants use this protocol in order to obtain speculative income from Token, and contribute “revenue” in the form of ETH or SOL, get Token and in the future Sell ​​at a profit.

(Figure 8) LooksRare's suspicious transaction statistics (source: hildobby, curated by FutureMoney Research)

Taking LooksRare as an example, Washtraders is the largest Implicit Revenue Generator on the platform . They paid a lot of transaction fees (ETH) to the platform to get LOOKS and sold them, and continued to make profits in this way of arbitrage trading. This is more like a Token Sale-driven financing income, rather than a business-driven income.

In addition, although LooksRare distributes Protocol Revenue to LOOKS token pledgers, this part of the ETH income is automatically sold into LOOKS, and the stakers are paid with LOOKS. This is also similar to a default token sale.

In the end, LooksRare made a staggering profit in this economy ($580 million in 180 days) , but other participants—whether it was Washtrader or Token Holders— ended up paying ETH and getting a bunch of LOOKS tokens. Who exactly captures the value? Is it a Treasury or a LOOKS holder?

3.3 Some income will never be disclosed, such as the additional issuance income in the dual currency system

In Gamefi2.0, there are many dual currency modes:

Governance Token: Rewarded to VCs/investors, with upper limit and with repurchase and destruction;

Utility Token: Rewarded to game players with no upper limit and no repurchase. The purpose is to maintain the stability of the game economic system and not be affected by investors. This design intent is good, but if done incorrectly, it will potentially drain the project of value throughout the economy.

(Figure 9) Exaggerated decline in SLP (source: hildobby, curated by FutureMoney Research)

On-chain analysts are prone to make a mistake. While we are cheering the growing “inbound/outbound” data in the game, in fact, Utility Tokens have been issued. The project party may repeatedly trade this part of the Utility Token through multiple addresses, thereby making huge profits without disclosing it to the community. Because according to the white paper, they only need to disclose the release rules of Governance Token.

Although the Governance Token is deflating and accumulating value, the additional issuance of Utility Tokens is profitable, allowing the project side to continuously withdraw the value of the game economy, similar to rug pulling the entire project, which is unfavorable to investors. At this time, we have no data to prove this part of the potential revenue, only speculation.

By 2022, we can see that Web3 companies already have a business model and the ability to generate huge revenue.

How to find a more valuable distribution method for the community, even the society, is a difficult task. Some agreements keep the income for themselves, some agreements keep it in the treasury and choose to wait and see, and some choose to give the income back to the community. Of course, there are also projects that choose to avoid disclosure, cover up their own interests in various ways, and let Token Holders take huge risks.

We hope to see more Web3-focused audit, financial, and regulatory functions emerge to complete the industry.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/where-did-web3s-revenue-go/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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