L1 validators are providing additional services to earn additional income, and if they don’t, they will need to continue doing so in order to maintain their APY.

Author: taetaehoho

Compiled by: TechFlow

There are three main sources of blockchain revenue (paid to stakers and sequencers):

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

  2. Congestion Fees - The blockchain defines a maximum block size based on its full node requirements and protocol internal mechanisms such as committee consensus, signature aggregation, and propagation mechanisms. When the block capacity reaches the upper limit, congestion fees are incurred. The dynamic base fee is actually a manifestation of congestion fees, which may exist in the form of direct rewards or destruction.

  3. MEV (Miner Extracted Value) - income earned by selling my proposal rights to “reorderers”, such as Jito and MEV-Boost tips.

For all blockchains, many of these revenue streams will decline over time.

  1. Competition between high-throughput chains is fierce. The example of Solana shows that the costs of node operators can be offset by higher initial inflation and launch support, as long as high levels of usage are eventually achieved. Base fees are falling across the industry as chains adopt a "loss-leading" strategy.

  2. Decentralized applications (Dapps) that generate valuable state realize that their MEV revenue is lost to stakers and sorters, so they are looking for ways to sort their own transactions and realize profitability. This drives the need and maturity of application chain infrastructure, as well as the development of ASS infrastructure. Although the costs of third-party integrations are still high, as mentioned by @AndreCronjeTech, these costs are gradually decreasing with the emergence of players like @hyperlane and @RelayProtocol.

These incentives apply to all blockchains. So what’s next?

In response, L2s have expanded their product lines and funneled profits generated from the operation of these products into DAOs, promising that future token holders will be responsible for capital allocation.

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

  2. Shared validity framework - users either pay higher fees for cross-domain transactions or opt-in to bear B2B costs. It is unclear how these revenues will be remitted back to the protocol owner equity (POL).

  3. Shared orderer - Create a third-party service that allows atomic interoperability between different domains. Collect a portion of the cross-domain surplus fees and send it to the DAO (no rollup team has yet to implement this).

L1 validators are providing additional services to earn additional income, and if they don’t, they will need to continue doing so in order to maintain their APY.

  • Sorting

  • Pre-confirmation

  • Order-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 like where validators sold additional services look like?

If validators are unwilling to take on the extra work (e.g., they don’t want to participate in block construction), then a centralized intermediary may emerge to perform these operations on behalf of validators (e.g., gateway pre-confirmations), or the infrastructure may change to make it easy for validators to provide these services (e.g., Eigenlayer’s MEV-Boost++).

How will protocol/application valuations change?

Just as application chains and application chain services (ASS) force blockchains to return value to decentralized applications (dapps), the proliferation of ASS-powered dapps will also force these applications to return value to users.

As decentralized applications gain more revenue sources and mature, we will see more “signup bonuses/starting balances”, “sponsored transactions”, and customer acquisition cost (CAC) expenditures similar to Web2. This will drive a new round of boom in application development in the crypto space.

It is unclear how this change will impact existing blockchains. We cannot be sure if any L1 or L2 is valued at a multiple of its revenue, and memeability and moneyness are difficult to quantify and attribute. L1 validators may see a decline in revenue - the value of access to disputed state is theoretically infinite, and the value of other additional services is currently unclear.