GM DOers! 😎
"Blockchain has no REAL use cases," is what they've been saying. 🧐
"Nothing drives any real profit; it's just speculation and gambling."
And while they're right that much of this industry IS about speculating and gambling (unfortunately 🙁)...
There are still some REAL, sustainable businesses and industries being born on the backbone of blockchains. Most people just aren't paying attention. 🚀
It turns out that value can be created atop "permissionless, open, and global databases" (a.k.a blockchains).
And guess what? It's already happening! ✅
Web3 and blockchain may not be used by the mainstream, but there are "real use cases" generating millions of dollars per year already.
In today's report, I'm going to share three blockchain use cases that not only make the internet experience better but are doing so with profitable and sustainable business models. 💼
At the end, I'll also share how you can capitalize on this and join in on the upside of these markets by understanding how value grows in web3.
But before we jump in, keep in mind that this report is only scratching the surface on 'how blockchains become sustainable and how they accrue value'.
However, this is perhaps the most important thing to understand as an investor in web3.
Before allocating any capital, into any asset, you need to analyze whether or not that asset can grow sustainably, and doesn't fully rely on hype.
While this report will be your stepping stone, we're diving deep into this concept, and teaching you how to successfully invest in web3, in our Web3 Investing Masterclass, which we just released.
We truly believe that this is the #1 investing resource in web3 and our community members are already sharing positive feedback:
As an early Web3 Academy supporter, you get a 33% discount, while:
PRO Members get 50% Off
Founding Members get the masterclass for FREE
All you need to do to claim your discount, is follow the button below & connect your wallet.
P.S- As a PRO/Founding member, your PRO/Founders Pass will unlock your discounts. If you haven't claimed your Pass, you can head to this report (sent as an email) to claim your discount.
Let's start this report with a bit of a curveball: NFTs... 🎨
You've likely seen many charts about the NFT market plummeting to zero. In terms of those high-priced profile picture (PFP) NFTs on Ethereum, it sure seems that way.
Here's one chart showing the decline in NFT transfers on Ethereum 📉
And another highlighting the drop in active wallets trading NFTs on Ethereum 📉
As a result, the fees on Ethereum (a.k.a. Ethereum Revenues) from NFTs are also taking a nosedive 📉
This doesn't paint a rosy picture for NFTs, does it? 🥀
But as we've been stressing for over a year now: "High-priced, PFP art projects are not the future of NFTs and web3 tech."
They were an obvious hype cycle. Plus, minting them on Ethereum's Layer 1, costing $20-$100+ to mint and transfer, makes no sense. 🤷
What does make sense? NFTs on Layer 2s, which cost nearly nothing to mint or transfer.
What makes even MORE sense? NFTs on Layer 2s that cost near $0 to mint or transfer and offer ownership, interoperability, and resale value to in-game items like skins, equipment, avatars, awards, and more. 🎮✨
Combine NFTs with affordable blockchain space and real utility, and what do you get? This 👇
No bear market… just consistent use! The chart above shows the NFT transaction numbers on Immutable (an Ethereum Layer 2) during this so-called "NFT bear market."
Transactions and fees are steady, and in fact, fees on Immutable are up year to date – the complete opposite of Ethereum.
What does this mean? Games are earning revenue by selling in-game items (as they did pre-blockchain), but now players can resell them to other gamers, generating secondary revenue.
Thanks to a small gas fee with every transfer, the protocol also earns revenue.
From the chart above, we see that Immutable is raking in more than $100,000 per week in 2023 – that's $5.2 million per year! 🤑
Part of this goes to $IMX holders that stake their tokens ($IMX is Immutable's native token), rather than value only accruing to the game or the platform (ie. Xbox, Playstation)
Now, value accrues to the game, the players, the tech platform, and the gaming community (token holders) – how cool is that? 😎
Need another example to see that NFTs aren’t dead and value is being created?
Here are the numbers for Reddit Avatars minted weekly – more than 800,000 per week! 🚀
NFTs minted and unique users are increasing... 800,000 new users in just one week! What NFT bear market are you talking about? 🐻❌
While exact revenue numbers from Reddit Avatar NFTs are unclear, Reddit and over 100 artists who created these avatars have shared millions in revenue over the past year.
Additionally, Reddit activity has generated 75,000+ MATIC in fee revenue for the Polygon protocol. Some is burned, and the rest goes to those staking MATIC, once again accruing value to the platform community (a.k.a. token holders).
This, my friends, is what happens when NFTs move to a suitable tech stack (like Polygon, where it costs $0 to mint) and provide an experience or utility beyond mere gambling. 🎉
When we examine the most significant use case of blockchains by market cap (excluding speculation and gambling), stablecoins take the lead by a wide margin, and it's not even close.
Currently, there's a staggering $125 Billion worth of stablecoins on blockchains. 💰
Utilized by millions of users every month…
Centralized stablecoin providers like Tether and Circle are raking in a whopping $250+ million per month, all by offering US dollars on crypto rails. 💸
Why is this useful? Simple. It’s US dollars without borders or fees which settle instantly. The application is extremely useful and valuable to people and businesses all over the world who struggle with time delays or extremely high costs when trying to send digital dollars over the internet.
I mean, I could literally fly to Africa with $10,000 cash in hand faster and cheaper than if I tried to send it through my bank. Can you believe that's still a thing in 2023? 🤦
Stablecoins are going mainstream and I couldn’t be anymore convinced now that PayPal, the largest fintech company in the USA, has just launched their own Stablecoin on top of Ethereum.
We wrote extensively about PayPal’s stablecoin here.
But let's not forget, stablecoins aren't just cash cows for big companies like PayPal, Tether, and Circle.
They also generate heaps of fee revenue and even burn fees on Ethereum. This, in turn, funnels value back to $ETH holders and stakers. 🎉
In fact, Tether and Circle rank 5th and 9th respectively in all-time $ETH burning across any application on Ethereum.
Together, they have removed more than 200,000 $ETH from its circulating supply, which also pays out more than that to $ETH stakers.
In web3, everyone can benefit from companies succeeding on blockchain! 💥
We broke down Coinbase’s Q1 revenues here.
Layer 2s provide a new type of product.
A product which has never existed before. It’s called “Inexpensive Decentralized Blockspace With Settlement Guarantees”.
Uhhh.. Kyle, wtf is that?
Stay with me…
We’ve had the ability to purchase “decentralized blockspace with settlement guarantees” for years with Bitcoin and Ethereum.
And we know that that product has done very well, considering Ethereum has generated more than $16.4 Billion since launching in 2015.
We’ve also had the ability to purchase “inexpensive blockspace” albeit not “decentralized” or with “settlement guarantees” for the last few years with blockchains like Solana or Flow.
Since launching in November, 2020, Solana has generated more than $13 million in revenue (though not sustainably since they have paid out significantly more than that in expenses to validators, which we wrote about in our Solana Tokenomics PRO Report).
However, what we haven’t had for long is the combination of the two. 🔗
And that’s what Layer 2s offer to the world. Decentralized blockspace that is inexpensive & guarantees that transactions will settle.
Coinbase just launched this product with an L2 blockchain called Base. We can see that within its first month, it has already generated more than $2 million in revenue.
What’s even more exciting is that unlike Solana or other “inexpensive blockchains” Base has generated that revenue while remaining profitable, with more than $1.4 million in profit in less than 1 month.
All L2s work this way since they don’t have to subsidize security through inflating their own currencies.
Instead, they simply take a % of their fee revenue and give it to Ethereum to settle the transaction for them.
This model gives the web3 industry its first dose of a profitable business model for inexpensive blockspace.
And in fact, business is pretty good, considering that Arbitrum & Optimism have raked in over $10 millions in profits, each, during times of bear market, when L2 activity wasn’t particularly high (it’s still very early on.)
The numbers I’m about to share below are expected to grow immensely in the bull market as retail investors join the markets & FOMO increases.
Here’s Arbitrum’s profit since launching in September 2021: $15 million…
And Optimism’s: $9.4 million …
You might be asking, “where are these revenues coming from on the L2 blockchains?”
These revenues are coming from anyone paying to use their blockspace. It could be the NFT use cases or Stablecoin providers and users mentioned above or it could be the many other use cases and industries forming on blockchains right now.
Layer 2s offer blockspace that can and will be used by everyone around the world and it’s offering that blockspace while generating real, sustainable profit.
Anyone can get direct exposure to these profits by simply holding the native currency of each L2 – $ARB for Arbiturm and $OP for Optimism.
Value accrual is an extremely important concept to understand in web3, so let's finish this report off with a quick explanation to help you understand how that works with the 3 use cases mentioned above.
When exploring blockchains, it's best to think of the space as a triple-layered cake 🍰: the Application Layer, Execution Layer, and Settlement Layer.
The Application layer 📱 consists of real use cases that require blockspace to function. Think of these like any business that requires the internet, except these ones require blockspace (ex. Stablecoins, Reddit Avatars, in-game items, DeFi, etc.).
Each of these businesses must find a way to become profitable in order to be a sustainable business, regardless of a token or anything web3 related.
They simply need a business model that affords them to stay alive, just like Tether and Circle mentioned above. 🌱
The Execution Layer consists of layer 2s which provide inexpensive blockspace for the companies/use cases on the application layer.
The execution layer only has expenses (payment to settlement layer) when it generates revenues (fees from application layer), as it simply passes through all the activity on the application layer down to the settlement later, albeit in a more optimal form (which is where its profit comes from).
All activity and success in the application layer drives profit to the execution layer. If the Layer 2 has a token and the value accrues to token holders (via staking or other means) then that value is shared permissionlessly to anyone holding or staking the tokens of those L2s.
The Settlement Layer consists of Layer 1s which provide secure and decentralized settlement guarantees (Ethereum, Solana etc…). In order for the settlement layer to pay its expenses (validators staking their tokens to secure the network), it uses its revenues (fees from use cases and L2s), as well as inflating its native token, to pay the validators.
To pay its bills, a settlement layer must find a sustainable business model through generating enough fees and/or burning enough of its token through various mechanisms to counteract the inflation.
Here’s a graphic that might help you visualize the triple-layered cake 🍰 better:
Now why is this important to understand?
Because not every application on the blockchain offers you a slice of the pie. For instance, buying USDC won't make you rich since its only goal is to mirror the dollar. You can't share the upside unless you were a private investor in Circle.
With that said, all $USDC activity on top of Arbiturm for example, generates fees on Arbiturm and thus accrues value to $ARB holders, while also accruing value down to the settlement layer that Arbitrum uses 👉 Ethereum.
This means that if you want to share the upside of ANY application, use case or L2 within the Ethereum ecosystem, you can simply hold $ETH.
If you want to accrue an extra 4-6% upside every year then you can stake your $ETH too.
Additionally, if you want to find ways to share in additional upside, you can also hold the token of the layer 2 that you believe is generating or going to generate the most activity.
Though, it’s also important to understand how much of that activity will actually accrue value back to the token holder (this is where tokenomics come in).
Over the next 2 weeks, we will be releasing 2 PRO reports on the execution layer, breaking down the activity across the top L2s and then dissecting the tokenomics and value accrual of layer 2 tokens.
I believe that outside of $ETH, L2 tokens will be one of the greatest long term investments in the space, so we are going to dive deep into understanding which ones are currently or may be the best investments for our portfolio.
But in the meantime, you can spend the weekend diving deeper into our Web3 Investing Masterclass, which will help you understand what makes a token sustainable & a good investment.
By the time you read our upcoming PRO reports on Ethereum's layer 2s, you'll better understand how value accrual works & how you can spot valuable investment opportunities.
Oh, and remember that PROs and Founders get DISCOUNTS! 50% and 100% off respectively.
All you need to do to claim your discount is click the button below & connect your wallets (your PRO Pass will grant you access)
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
See you soon. ✌️
Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
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