The Paradox of Blockchain Monetisation

Transcript

hi everyone it's great to be here my name is daniel pellet and i've been active in the industry for almost 10 years i'm the co-founder of orbs a public blockchain infrastructure based on proof of stake and i'm also the co-founder of hexagroup the largest blockchain investment group in israel main thesis was investing in infrastructure projects ever since meeting vitalik in tel aviv in 2013. the topic for my talk today is the paradox of blockchain monetization this topic is very close to my heart

because i'm very passionate about creating value that is sustainable and not based on hype i've been trying to build blockchain project with successful monetization for a long time and it's not such an easy task in this talk i'm going to show you why monetization of infrastructure in particular is difficult and how the infrastructure can adapt itself to create additional revenue channels revenue is essential for making a venture sustainable this sentence is very straightforward

especially if you're coming from the traditional world every traditional company has to make money or else it will eventually run out of money the same is also true for blockchain ventures a venture that doesn't have any revenue will eventually run out of money and shut down if we translate this to tokens if your token economy doesn't have constant organic demand the economy will never be sustainable in 2017 and 2018 hundreds of projects raised more than 10 billion dollars in icos

and the majority of which ran out of money and disappeared but a company that makes revenue can live forever so let's take a look at some actual data from the last 90 days to gain some perspective this graph comes from token terminal and shows the leaderboard for blockchain protocols in terms of revenue ethereum is the clear winner at the top with 1.4 billion dollars in revenue during the last three months this revenue comes from transaction fees

paid by users for running smart contracts number two with about half the revenue is the play to earn game axi infinity and number three is openc the general purpose nft marketplace where you can trade your crypto punks and other nfts so what can we learn from this graph first of all we know that usage on blockchain is difficult and many popular protocols have almost zero actual use generating revenue is even harder and

only a couple of unicorns manage to do it well second it's also clear that we're very early in the game traditional traded companies will never thrive without making any revenue yet in our industry protocols can reach very high valuations without demonstrating a positive business model i believe that this will change over time as the market matures and projects that generate revenue will stand out third if you look at this graph in let's say 18 months time it will probably show a different group

of projects most of these success stories are fairly recent and it's anyone's game at this point there isn't a clear method that consistently works for monetization my last conclusion and probably the most important one is that value is shifting from the l1 l2 infrastructure layer to the application layer eighty percent of the projects in the previous graph i showed you are actually applications and the most interesting one the most interesting project on that graph

was number two axi infinity this nft game launched in 2018 but only recently started exploding the game has impressive metrics like 1.2 million daily active users 2 billion total nft sales 250 million in-game revenues most of the protocol revenue is generated in game through the marketplace where players can buy and sell axes nfts axi infinity is an application

you would normally expect it to run on top of some infrastructure and indeed when it launched in 2018 axi contracts were running on ethereum mainland since high ethereum fees were obviously a barrier for players sky mavis the axi core team intended to run on a cheaper l2 and were quite serious about transitioning to loom but at some point it actually became simpler to develop all the infrastructure in-house sky mavic did not rely on a third-party

nft marketplace and chose to implement their own version right inside the game and in 2020 they dropped all plan to run on third party l2s and simply created their own sidechain ronin which is a semi-centralized ethereum fork this actually turned out pretty great for them and they reduced transaction fees for their users to zero and the tech investment wasn't too substantial since forking ethereum isn't very difficult this shows us that infrastructure is

becoming a commodity most of the value the users the revenue potential lies in the apps and apps don't have a strong dependency on the infrastructure layer if the fees aren't negligible they can always run their own this brings us to the paradox of blockchain monetization applications that require massive usage have millions of active users and millions of transactions will only run on platforms where the

fees are practically zero so platforms like solana and polygon do manage to attract massive usage but they find it almost impossible to monetize this usage they have to give the infrastructure for free on the other hand platforms that have high fees and generate high revenues are very limited in the amount of usage they can command take ethereum for example it is mostly used by well trading because of its high fees so how do we solve this paradox

if the revenue potential is shifting to the application layer we should focus on helping applications build and extract more value we recognize three primary categories of applications today in crypto defy apps nfts and nft gaming apps today these apps monetize independently from the infrastructure can infrastructure protocol adapt to this reality i believe they can

by introducing a new infrastructure layer on top of the l2 let's call it l3 if the first infrastructure layer l1 like ethereum is in charge of security and the second infrastructure layer l2 like polygon is in charge of scalability the third infrastructure layer l3 is in charge of helping apps build and extract more value this layer provides services to applications and allow them to make the pie bigger and thus receive a piece of the pie i know that this is pretty abstract

concept so let me give you a couple of concrete examples the first example will be in the world of defy one of the most successful defy apps is yearn finance this app is sort of a decentralized hedge fund where users can deposit funds inside volts and let the vaults manage their money and create yield since the app directly generates profits to its users it can allow itself to take a cut of the profits and that's how it generates revenues some vaults

like harvest harvest finance take as much as 30 percent of the profit as fees overall the strategies employed by these vaults are pretty simplistic since they are all implemented as evm smart contracts and the evm is very limited in its capabilities most vaults take lp tokens simply stake them to get rewards sell their rewards and buy more lp tokens and compound the investment repeatedly how can level 3 infrastructure increase the pie here

by implementing smarter vaults since the evm is very limited and has access to very little state to base decisions on vault strategies must be very simple but imagine that you had an l3 that would let the vault developer implement much smarter strategies for example hope automatically between multiple positions depending on their api or take a loan to add some leverage this infrastructure will allow urine to generate better yields for its users

and therefore generate more revenues this additional revenue can be shared between the application and the l3 let's show another example in the words of nft's applications openc is one of the most popular nft apps it's a marketplace where users can trade nfts one of the interesting features openc added in the app player is the concept of royalties you can take some nft and define a wallet that gets royalty every time this nft is traded this can be used for example for giving the original creator royalties over time but what if we move this feature from

the appler to the infrastructure layer and allow paying royalties for any nft in any marketplace this would open up the door for many exciting incentivization models like affiliate programs that are very important for sustainable user acquisition i'm one of the founders of orbs and orbs is a blockchain infrastructure project i'm very excited about l3 and looking forward to see l3 projects in d5 nft and gaming i'm also very proud to announce that orbs recently published its second call for grants and is offering grants an

investment fund of up to 50 million dollars for promising projects orbs is also part of dfi.org accelerator which is co-sponsored by binance and we can really help accelerate your ideas if you're passionate about value building and believe you can create infrastructure that help makes the pie bigger don't hesitate to submit a proposal thank you