Layer 1s Fall Back to Earth After Surge in Popularity

Fantom, Avalanche and Other EVM Networks Have Become DeFi Infrastructure Amid Falling Revenue

When it comes to Layer 1s there’s good news, and bad news. 

On the one hand these low-cost systems offering Ethereum Virtual Machine compatibility have surged in popularity and become an indelible fixture in the architecture of decentralized finance. Yet on the other hand, the activity on many of these chains is now just a fraction of the highs posted during the bull market that ended in May.

Downturn

Fantom, which produced daily transaction fees of $95,600 in January is now generating just $3,280, according to Crypto Fees. Avalanche’s revenue has fallen to $11,500 from $323,400 over the same period, and Solana’s fees slumped to $26,700 from $198,600. 

Polygon’s PoS chain, which has been on a nice run lately, also is suffering a downturn, with $28,500 in daily fees compared to $622,000 at the beginning of 2022.

Even the leading smart contract networks by fee revenues posted steep declines in activity this year. Ethereum’s fee revenue is currently at $1.6M, down from more than $500M eleven months ago, and Binance Smart Chain’s fees slipped to $575,000 after trending above $4M earlier this year.

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“In a bearish market where token prices have plunged, projects failed, and funds have closed, it’s not too surprising to see reduced activity,” said Nick Bishop, director of the web3 venture studio, NotCentralised.

Bishop said that much of the smart contract activity generated amid the bull market was from small or poorly-funded projects that were not well-equipped to survive the bear trend. “As those projects die, so does the on-chain compute usage.”

But the story may not be that simple for every chain.

Parachains

On Nov. 27, data showing that Polkadot’s relay chain had produced a meager $862 in daily fee revenue circulated widely on social media.

Cosmos is also lagging in fee revenue despite its coin, ATOM, ranking among the largest crypto assets by capitalization. Cosmos produced only $950 in revenue for the past 30 days, according to Token Terminal.

Both Polkadot and Cosmos are Layer 0 blockchain ecosystems, meaning that their main chains exclusively provide staking, asset transfers, and shared security for Layer 1 chains that build on top of their base-layer chains. Layer 1 chains built on Polkadot are called “parachains.”

“While I’m usually a fee-revenue maxi, $DOT is a good example of an asset that can’t be valued simply based on fees,” tweeted David Mihal of Crypto Fees. “The value prop of $DOT comes from being locked for Parachain slots. Users aren’t supposed to be transacting on the relay chain, they’re supposed to use Parachains.”

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Avalanche may be in a similar situation, with transaction volume across the Avalanche ecosystem surging to new highs last quarter as adoption of its “subnet”-based Layer 0 architecture grew despite fee revenue declining.

“The fee decline comes largely as a result of the move to subnets that scales transaction activity while keeping fees low,” Kevin McGrath, a representative for Avalanche, told The Defiant.