Many fundamental investors use metrics like price-to earnings or price-to sales ratios to evaluate layer-1 (L1) Blockchains. These metrics are useful, but they do not take into account the fact that a blockchain can program its token supply. The cost structure of a blockchain is also known because the emissions schedule is known (i.e. when new tokens are released due to staking and token unlocking).

The years-to-profitability (YTP) ratio is a useful new metric for analyzing an L1’s profitability as it incorporates the blockchain’s forward supply curve. The traditional finance concepts (TradFi), such as breakeven analysis and return on investment periods, are applied to crypto. The analysis looks at an L1 Blockchain through the eyes of a company that sells secure blockspace. The fees users pay for recording transactions on the blockchain are revenue. Expenses are costs to secure the network. YTP determines a blockchain‚Äôs profitability timeline based on the current revenue and costs structure of the protocol, a projected CAGR and future supply dynamics.

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We find YTP appealing because it offers a comprehensive framework to evaluate an individual blockchain, or compare multiple blockchains.

To begin our calculations, we start with Token Terminal ‘s definition for L1 profitability.

(Token Terminal)

All revenues and costs will be denominated by the native token of L1. While unlocks and stake rewards increase tokens in the circulation, the difference in transaction fees and fees paid to validators of proof-of-stake is what is burned or used to reduce tokens. YTP is a measure of the point where an L1’s circulating stock stabilizes at 0%. We make some broad assumptions.

  • The transaction fee percentage remains constant.
  • It takes ten years for the foundation to sell its tokens.
  • We use the L1 revenue of the last quarter, annualized.

When comparing YTP between blockchains, it is helpful to group L1s according to whether they use an inflationary tokenomic or a maximum supply model. With the latter, a L1 could “break even” because the chain reached its fixed supply (as modeled in SUI or ADA). This is an analysis of multiple blockchains. Ethereum and Binance Smart Chain are excluded from the analysis because they’re already profitable.

We can then compare chains using the same growth assumptions (we calculated future CAGRs at 30%, 40%, and 50%) and better understand what drives YTP. APT, for example, has a relatively high YTP. This is partly because it is a new chain and its revenues are lower than other chains that are more established. SOL’s inflationary schedules are modest compared to other blockchains such as NEAR or ICP. The ability of a blockchain to burn tokens and provide some sort of offset for new emissions is useful in all examples.

In conclusion, YTP is a key metric for evaluating the sustainability and profitability of L1 Blockchains. By designing tokenomics (inflationary, max supply), balancing the supply dynamics, and incorporating burn mechanisms into L1 blockchains’ design, they can reduce YTP to build a sustainable blockchain economy.

Nick Baker is the editor.