When evaluating layer-1 (L1) blockchains, many elementary traders give attention to metrics comparable to price-to-earnings or price-to-sales ratios. Whereas these metrics are essential, they ignore the programmable facet of a blockchain’s token provide. As a result of a blockchain’s emissions schedule (i.e., when new tokens will enter circulation attributable to staking rewards and token unlocks) is understood, its price construction into the long run is actually often called properly.
The years-to-profitability (YTP) ratio is a helpful new metric for analyzing an L1’s profitability because it incorporates the blockchain’s ahead provide curve. It applies the normal finance (TradFi) ideas of breakeven evaluation and payback durations to crypto. The evaluation views an L1 blockchain via the lens of a enterprise that sells secured blockspace. Revenues are the charges that customers pay to report transactions on the chain, and bills are the prices wanted to safe the community. YTP calculates a blockchain’s profitability timeline by factoring within the protocol’s present income and price construction, a projected development charge (CAGR) and future provide dynamics.
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We discover YTP compelling as a result of it gives a complete framework for evaluating a person blockchain or evaluating a number of blockchains.
We begin our calculation with Token Terminal’s definition of L1 profitability:
It is very important observe that each one revenues and prices are denominated within the L1’s native token. And, whereas unlocks and staking rewards each improve the variety of tokens in circulation, the distinction between transaction charges and the portion of these charges paid to proof-of-stake validators is what’s used to burn or cut back the variety of tokens in circulation. On this sense, YTP measures the purpose at which an L1’s circulating provide stabilizes at 0% inflation. Some broad assumptions we make are:
In evaluating YTP throughout blockchains, it’s useful to group the L1s by whether or not they have an inflationary tokenomic mannequin or a max provide mannequin, as a result of with the latter, an L1 may “break even” just because the chain’s fastened provide was reached (as modeled for SUI or ADA). Right here’s an evaluation for a number of blockchains, with Ethereum and Binance Good Chain excluded as a result of they’re already worthwhile:
Then, by utilizing the identical set of development charge assumptions for every chain (we calculated future CAGRs of 30%, 40% and 50%), we will make comparisons throughout chains and discover extra deeply what drives YTP. For instance, whereas APT has a excessive YTP, that is partially as a result of the chain is comparatively new and subsequently its revenues are smaller than these of different extra established chains. SOL has modest inflationary schedules in comparison with blockchains like NEAR or ICP. In all examples, a blockchain’s potential to burn tokens (and supply some form of offset to new emissions) is useful for managing YTP.
In conclusion, YTP serves as an important metric in evaluating the profitability and sustainability of L1 blockchains. By fastidiously designing tokenomics (inflationary or max provide), balancing provide dynamics and incorporating burn mechanics, L1 blockchains can purpose to scale back YTP and construct a extra sustainable blockchain financial system.