The Paradox of Blockchain Monetisation - TOKEN2049 London 2021

Hello everyone. Glad to be here. My name is Daniel Peled and I have been working in this industry for almost 10 years. I am the co-founder of Orbs, a public blockchain public blockchain infrastructure based on proof-of-stake. I am also the co-founder of Hexa Group, the largest blockchain investment group in Israel.

Our main thesis has been investing in infrastructure projects since meeting Vitalik in Tel Aviv in 2013 in Tel Aviv in 2013 . The topic of my speech today is the paradox of blockchain monetization. This topic is very close to my heart, as I am passionate about creating value that is sustainable and not based on hype. I have been trying to create a blockchain to create a blockchain project with successful monetization for a long time. And this is not such an easy task.

In this talk, I will show you why infrastructure monetization, in particular, is challenging. And how infrastructure can adapt to create additional revenue channels. Income is essential for the sustainable development of any business. This statement is quite understandable, especially for those who come from the traditional world. Every traditional company has to make money, or it will eventually run out of money.

The same applies to blockchain projects. A project without any revenue will eventually run out of money and close. To translate this into token language: if your tokenism doesn't have consistent organic demand, it will never be sustainable. In 2017 and 2018, hundreds of projects raised over $10 billion through ICOs, and most of them ran out of money and disappeared. But a company that generates revenue can exist forever.

So, let's take a look at some actual data from the last 90 days to get some perspective. This chart from Token Terminal shows the leaders among blockchain among blockchain protocols by revenue. Ethereum is the revenue. Ethereum is the undisputed leader, having received $1.4 billion in revenue in the last 3 months.

This income is generated from transaction fees paid by users for the operation of smart contracts. In second place, with revenue about half that, is the game Axie Infinity, which operates on the play-to-earn model. And on the third—OpenSea, a general- purpose NFT marketplace where you can trade CryptoPunks and other NFTs. So what can we learn from this graph? this graph?

First, we know that using blockchain is difficult. And many popular protocols have almost no real-world application. Generating income is an even more difficult task. And only a few " only a few " unicorns" have managed to handle it well handle it well . Secondly, it is clear that we are still very early in the game.

Traditional public companies will never succeed without generating revenue. However, in our industry, protocols can achieve very high valuations without demonstrating a profitable business profitable business model. I believe this will change over time as the market matures and revenue-generating projects become more visible. Third more visible. Third , if you look at this graph, say, in 18 months, it will probably show a completely different group of projects.

Most of these success stories are quite recent, and no one knows yet how things will play out . There is no clear method that consistently works for monetization. My final takeaway, and perhaps the most important one, is that most important one, is that value is shifting from the L1/L2 infrastructure layer to the application layer. 80 application layer. 80 % of the projects in the graph I showed you are actually applications.

And the most interesting of them, the most noteworthy project on this chart is number two chart is number two , Axie Infinity. This NFT game was launched in 2018, but has only recently begun to develop rapidly. The game has impressive figures: 1.2 million daily active users and 2 billion in total NFT sales. $250 million in gaming revenue.

Most of the protocol's revenue is generated within the game through a marketplace where players can buy and sell NFTs ( sell NFTs ( axes). Axie Infinity is an application. Typically, you would expect it to run on a specific infrastructure. And indeed, when the game launched in 2018 launched in 2018 , Axie smart contracts ran on the Ethereum mainnet. Since Ethereum’s high fees were an obvious obstacle for players, Sky Mavis, the core team behind Axie, planned to work on cheaper L2 on cheaper L2 solutions and seriously considered switching to Loom.

But at a certain point, it turned out to be easier to develop the entire infrastructure ourselves. Rather than relying on a third-party NFT third-party NFT marketplace, Sky Mavis decided to implement its own version directly into the game. And in 2020, they abandoned all plans to work on third-party L2 and simply created their own sidechain—Ronin, which is a semi-centralized fork of Ethereum. This turned out to be a great solution for them, and they reduced transaction fees for their users to zero. The technical investment was not too significant, as forking Ethereum is not that difficult.

This shows us that infrastructure is becoming a commodity . Most of the value, users, and revenue potential lies in applications. And applications do not have a strong dependence on the infrastructure level. If the fees are not negligible, they can always launch their own infrastructure. This brings us to the paradox of blockchain monetization.

Applications that require mass use, have millions of active users and millions of transactions, will only work on platforms where fees are practically zero. So platforms like Solana and Polygon are indeed attracting mass usage, but it is almost impossible for them to monetize that demand. They have to provide infrastructure for free. On the other hand, platforms with high commissions and large revenues have very limited usage. Take Ethereum for example.

Due to high commissions, it is mostly used only by large traders—“ large traders—“ whales.” So, how do we resolve this paradox? If revenue potential is shifting to the app level, we need to focus on helping apps create and capture more value. Today, we highlight three main categories of applications in cryptocurrency. DeFi cryptocurrency.

DeFi applications, NFTs and NFT games. Today, these applications are monetized regardless of infrastructure. Can the infrastructure protocol adapt to this reality? I think it can. By implementing a new layer of infrastructure on top of L2.

Let's call it L3. If the first infrastructure layer, L1, like Ethereum, is responsible for security, and the second, L2, like Polygon, is responsible for scalability, then the third layer, L3, is responsible for helping create and capture more value. This layer provides services to applications and allows them to increase the “pie,” and therefore get their share. I know this is a pretty abstract concept. So let me give you a few specific examples.

The first example will be from the world of DeFi. One of the most successful DeFi most successful DeFi applications is Yearn Finance. This application is a kind of decentralized hedge fund, where users deposit funds into vaults that manage their money and generate profits. Since the app directly generates revenue for users, it can take a commission on that revenue—that's how revenue is generated. Some repositories, like Harvest Finance, take up to 30% Harvest Finance, take up to 30% of profits as a commission.

In general, the strategies used by these repositories are quite simple. Because they are all implemented as EVM smart contracts, and the capabilities of EVM are very limited. Most vaults simply stake LP tokens for rewards, sell them, buy more LP them, buy more LP tokens, and continually reinvest. How can L3 infrastructure increase the “ pie” in this case? Thanks to the implementation of smarter storage.

Since the EVM is very limited and has access to a small amount of data for decision making, storage strategies need to be very simple. But imagine you have L3, which allows the storage developer to implement much smarter strategies. For example, automatically switch between multiple positions based on their APY. Or take out a loan to add leverage. This infrastructure will allow Yearn to generate better profitability for its users and therefore generate more revenue.

This additional revenue can be shared between the app and L3. Let's consider another example from the world of NFT example from the world of NFT applications. OpenSea is one of the most popular NFT of the most popular NFT applications. This is a marketplace where users can trade NFTs. One of the interesting features that OpenSea has added at the application level is the concept of royalties.

You can take a specific NFT and designate a wallet that will receive a deduction every time that NFT is sold. This can be used, for example, to pay royalties to the original author over a long period of time. What about moving this functionality from the application level to the infrastructure level and allowing royalties to be paid for any NFT on any marketplace? This would open the door to many interesting incentive models, such as affiliate programs, which are crucial for sustainable user engagement. I am one of the founders of Orbs, and Orbs is a blockchain blockchain infrastructure project.

I am very inspired by L3 and look forward to L3 projects in the areas of DeFi, NFT, and gaming. I am also very proud that Orbs recently announced its second grant competition and is offering grants and an investment fund worth up to $50 million for promising projects. Orbs is also part of the defi.org accelerator, which is co-funded by Binance. And we can really help accelerate the implementation of your ideas.

If you are passionate about creating value and believe you can build the infrastructure that will help grow the market, don't hesitate to apply. Thank you.