Author: taetaehoho

Compilation: Deep Tide TechFlow

There are mainly three sources of income for blockchains (paid to stakers and sorters):

  1. Base Fee - Set a non-dynamic base fee as the 'transaction cost' for validators, covering bandwidth, storage, and computational resources.

  2. Congestion Fee - Blockchains define the maximum block size based on the demand for full nodes and internal mechanisms of the protocol (such as committee consensus, signature aggregation, and propagation mechanisms). When block capacity reaches its limit, congestion fees are incurred. Dynamic base fees are essentially a manifestation of congestion fees and may exist in the form of direct rewards or destruction.

  3. MEV (Miner Extractable Value) - Revenue obtained by selling my proposal rights to 're-orderers', such as tips from Jito and MEV-Boost.

For all blockchains, many of these revenue sources will gradually decrease over time.

  1. Competition among high-throughput chains is fierce. The example of Solana shows that the costs for node operators can be offset by higher initial inflation and startup support, as long as high levels of usage can ultimately be achieved. The base fees across the industry are declining as various chains adopt a 'loss-leading' strategy.

  2. Decentralized applications (Dapps) that generate valuable states realize that their MEV revenues are being lost to stakers and sorters, so they are looking for ways to sort their own transactions and achieve profitability. This drives demand and maturity for application chain infrastructure, as well as the development of ASS infrastructure. Although the costs of third-party integration remain high, as mentioned by @AndreCronjeTech, these costs are gradually decreasing with the emergence of participants like @hyperlane and @RelayProtocol.

These incentive mechanisms apply to all blockchains. So how should we respond next?

In response, L2 (Layer 2 solutions) expanded their product lines and pooled the profits generated from these operations into the DAO (Decentralized Autonomous Organization), promising that future token holders will be responsible for capital allocation.

  1. Rollup Framework - Participating in Optimism Collective means you need to allocate 15% of sorter profits or 2.5% of revenue to the collective (DAO treasury).

  2. Shared Validity Framework - Users either pay higher fees for cross-domain transactions or choose to join those that incur B2B costs. It is still unclear how to channel these revenues back to Protocol Ownership Equity (POL).

  3. Shared Sorters - Create a third-party service that allows atomic-level interoperability between different domains. Charge a portion of the cross-domain surplus fees, funneling it into the DAO (currently no rollup team has achieved this).

L1 validators are providing additional services to earn extra income, and if they do not do so, they will need to continue to maintain their annual percentage yield (APY).

  • Sorting

  • Pre-confirmation

  • Sorting-based transactions

  • Gas-free transaction sponsorship

Of course, validators have other functions in their network participation, such as validating blocks and propagating transactions.

So what would a world look like where validators sell additional services?

If validators are unwilling to take on additional work (for example, if they do not want to participate in block building), centralized intermediaries may emerge to perform these operations on behalf of validators (e.g., gateway pre-confirmation), or the infrastructure may change to enable validators to easily provide these services (e.g., Eigenlayer's MEV-Boost++).

How will the valuation of protocols/apps change?

Just as application chains and Application Service Solutions (ASS) force blockchains to return value to decentralized applications (dapps), the surge of ASS-driven decentralized applications will also prompt these applications to return value to users.

As decentralized applications gain more sources of income and gradually mature, we will see more 'registration bonuses/startup balances', 'sponsored transactions', and customer acquisition costs (CAC) expenditures similar to Web2. This will drive a new wave of prosperity in application development within the crypto space.

It is still unclear how this change will affect existing blockchains. We cannot determine whether any L1 or L2 valuations are based on multiples of their revenues, and it is difficult to quantify and attribute to meme-ness and moneyness. L1 validators' revenue may decline—access to the value of controversial states is theoretically unlimited, while the value of other ancillary services remains unclear for now.