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State of L1s Q2 2023

Jul 20, 2023 ⋅  29 min read

Inclusion Criteria

This report aggregates and compares the financial, network, and ecosystem performances of the fifteen Layer-1 (L1) smart-contract platforms covered by Messari through our Protocol Services’ engagements. These L1s include: Avalanche, BNB Chain, Cardano, EOS, Fantom, Hedera, NEAR, Polkadot, Polygon, SKALE, Solana, Stacks, Tezos, TRON, and WAX. We also include Ethereum as a benchmark.

Key Insights

  • Driven by protocol (Shapella upgrade), ecosystem (meme coins), and regulatory (SEC complaints, ETF filings) catalysts, ETH outperformed alt-L1 tokens in Q2’23. ETH’s market cap increased 3% QoQ, compared to an average decline of 23% for other featured L1s.
  • Liquid staking protocols and the downstream use of their liquid staking tokens (LSTs) in DeFi have gained significant attention in 2023. LSTs are replacing native tokens as the prime form of DeFi collateral, as well as leading to innovation in restaking protocols, LST-backed stablecoins, interest-rate derivatives, and more.
  • Cardano led featured L1s in QoQ growth rates of DeFi TVL, DEX volume, and stablecoin market cap. Of the three metrics, Cardano’s stablecoin market cap has the furthest to still go to catch up to other networks, having ended the quarter at $14 million.
  • Avalanche C-Chain outpaced featured L1s in QoQ growth rates of transactions, active addresses, new addresses, and total transaction fees. The surge in network activity was primarily driven by usage of the cross-chain messaging protocol LayerZero.

ETH Outperforms Alt-L1 Tokens

The crypto market in Q2’23 can be broken down into four waves driven by:

  • Ethereum’s Shapella upgrade
  • Meme coin mania
  • SEC complaints against Binance and Coinbase
  • BTC ETF filings by BlackRock and other firms

Each wave was a relative positive for Ethereum, which ended the quarter with a 3% increase in market cap compared to an average 23% decline for other featured L1s.

On April 12, the milestone Shapella upgrade marked Ethereum's successful transition to Proof-of-Stake and de-risked staking by enabling withdrawals. Despite concerns about the potential sell pressure from withdrawn stake, ETH experienced a 10% rally in the days following the upgrade. This bullish price action had a positive spillover effect on alt-L1 networks, albeit to a lesser extent.

The second half of April into early May featured a meme coin craze led by PEPE. Despite the high gas fees, most of the activity remained on Ethereum, as it features the most liquidity (and whales). When PEPE reached its peak price on May 5, ETH spiked around 5%. After PEPE’s top, all L1 tokens sold off as the speculative activity waned.

After a period of relative calm, the SEC’s regulatory complaints against Binance and Coinbase negatively shocked the market in early June. The native tokens of five of the featured L1s were alleged to be securities in the complaints: ADA, BNB, MATIC, NEAR, and SOL. From June 5 to June 15, these five tokens witnessed an average decline of 29%, while ETH decreased by 13% and other featured L1s dropped by 21% on average. Robinhood’s subsequent announcement to delist ADA, MATIC, and SOL by June 27 exacerbated the downward pressure. Notably, after the initial drop, SOL rallied stronger than the other four tokens named as securities, finishing the quarter only down 9%.

On June 15, BlackRock filed for a spot BTC ETF, prompting many other firms to follow suit. Once again, ETH performed the strongest after this news, given that ETH is the next most likely candidate for a spot ETF. Although SEC Chair Gensler refused to clarify ETH’s security status during April hearings, its exclusion from the recent SEC complaints and the recently released Hinman emails suggest that Ethereum enjoys a relatively secure regulatory standing.

Zooming out, BTC dominance reached 50% at the end of the quarter, a level not seen since April 2021. Historically, BTC dominance precedes market rallies.

Update: The recent XRP ruling was a regulatory win for crypto, although it’s not a closed case. Following the news, alt-L1 tokens generally outperformed ETH, especially the ones previously alleged as securities. BTC dominance has dipped from its high of over 52% near the end of Q2’23 back to around 50% following the ruling. For more on XRP and the ruling, see Red’sState of XRP Ledger Q2 2023” and the Enterprise team’s weekly recap.

Liquid Staking and LSTfi

Liquid staking protocols and the downstream use of their liquid staking tokens (LSTs) in DeFi have gained significant attention in 2023, particularly within the Ethereum ecosystem. By the end of the quarter, over half of ETH stake was in liquid form, including Coinbase’s cbETH, a 25% year-to-date (YTD) increase. This surge coincided with a rise in ETH staking, driven by the Shapella upgrade, which reduced the risk of staking by enabling withdrawals.

On Ethereum, liquid staking generally offers two advantages:

  1. It allows tokenholders to stake without running their own validator, which requires 32 ETH and technical expertise. The other popular workaround is staking through centralized exchanges. Comparatively, liquid staking protocols typically charge lower fees, are community-governed, and are generally more committed to increasing validator decentralization.
  2. It allows stakeholders to maintain liquidity, creating more opportunities in DeFi.

In contrast, most other L1s employ a mechanism that allows tokenholders to delegate tokens to a validator and earn a share of rewards. As a result, the first advantage is not applicable to these blockchains. Therefore, users typically choose to liquid stake on these networks in order to unlock liquidity to participate in DeFi. Given the less developed nature of alt-L1 DeFi ecosystems, many tokenholders are willing to stake their tokens in illiquid form. Doing so avoids additional smart contract risk (both from liquid staking and DeFi protocols), slightly lower rewards, and potentially different tax implications.

To determine how tokenholders perceive this tradeoff, we measured the percent of tokens that are not staked in illiquid form. We categorized these tokens as “free-flowing,” i.e., any token that is either liquid staked or not staked in system contracts.

Ethereum led with 91.5% of free-flowing supply, but as mentioned above, there are compelling reasons to liquid stake ETH besides using LSTs in DeFi. Although BNB Chain has a low liquid stake rate, it also has a low overall stake rate, leaving it with around 85% of free-flowing supply. BNB’s high figure is likely driven by the token’s various use cases on the Binance exchange. Comparatively, Solana, Avalanche, and NEAR have high stake rates and low liquid stake rates, leaving 31%, 40%, and 55% of supply free-flowing, respectively. For these networks and others like it, LSTfi offers an opportunity to increase participation in DeFi, leading to a more robust ecosystem.

For the first time ever, LSTs enable DeFi applications to leverage predictable, low-risk, and crypto-native real yield. The rapid innovation from existing and new protocols targeting this emerging opportunity has spawned a distinct category of DeFi known as LST finance (LSTfi). At its most basic, LSTfi entails the replacement of native tokens with LSTs as collateral across DeFi. On the leading lending protocols of Ethereum (Aave), Avalanche (Aave), Solana (Solend), and NEAR (Burrow), the amount of LSTs deposited has surpassed that of native tokens, and this trend continues to expand.

Beyond replacing native tokens as collateral in lending protocols, innovation in LSTfi has included restaking protocols, LST-backed stablecoins, yield optimizers, interest-rate derivates, and more.

For more on liquid staking and LSTfi, see Kunal’s report “Ethereum’s Ecosystem is Staking Up.”

Cardano’s DeFi Growth Rate Continues to Lead Pack

Cardano has now been in the top two of featured L1s for QoQ growth of DeFi TVL, Stablecoin Market Cap, and DEX volume in back-to-back quarters. This quarter, Cardano swept all three categories and also finished second in DeFi Diversity growth. While growth rates slowed this quarter, market conditions were much less favorable, with ADA down 27% QoQ.

AMM-based DEX Minswap is Cardano’s predominant DeFi protocol. However, Q2’23 DeFi growth was driven moreso by newer protocols, leading to eight protocols making up the top 90% of DeFi TVL, an above-average figure compared to other featured L1s. After Minswap, the protocols ranked 2nd-5th in TVL all launched in or after Q4’22. These protocols are the synthetic asset issuer Indigo, stablecoin issuer Djed, lending protocol Liqwid Finance, and mult-headed platform VyFinance.

The SEC complaints against Binance and Coinbase presented an early stress-test of Cardano CDPs/lending protocols and their liquidation mechanisms. In the days following the SEC news, ADA’s price fell around 30%.

Cardano’s architecture, namely its concurrency limitations and lack of a fee market, creates a unique liquidation process with several downsides compared to other chains. Specifically, these architectural factors can lead to long liquidation queues. Long queues give users more time to deposit additional collateral to avoid being liquidated. At the same time, they allow for existing collateral value to fall further and potentially create bad debt. Long liquidation queues were mainly experienced on Indigo, which totaled the most liquidation volume among Cardano protocols in Q2’23 at $3.6 million.

In the end, Indigo processed liquidations without any significant depegging on its overcollateralized assets. The Indigo team plans to enable transaction chaining for the liquidation bot to address queue times. In the meantime, the protocol has a stability pool as a preventative measure against bad debt. Additionally, Input Output Global (IOG) is working with the team of lending protocol MELD to address this risk of bad debt. MELD previously postponed its deployment due to concerns over the liquidation process on Cardano.

While its growth has been strong, Cardano’s DeFi ecosystem is furthest behind other featured L1s in the area of stablecoin market cap. Without native USDC or USDT integrations, its success rests on native protocols such as Indigo and Djed. For these protocols to stay healthy, the long liquidation queues and roadblocks caused by high minimum reserve ratios will need to be ironed out.

For more on Cardano’s DeFi ecosystem, keep an eye out for Red’s upcoming report “State of Cardano Q2 2023.”

Avalanche C-Chain Activity Increase Tied to LayerZero

In Q2’23, Avalanche C-Chain experienced a surge in network activity, outperforming other featured L1s in QoQ growth rate of average daily transactions (162%), active addresses (142%), new addresses (235%), and transaction fees (166%).

This network usage growth was tightly coupled with increased LayerZero activity on Avalanche. LayerZero is a lightweight, generalized cross-chain messaging protocol. To showcase its use cases, LayerZero Labs also developed Stargate, a bridge built on top of LayerZero. Stargate avoids using wrapped tokens, enhancing user experience, capital efficiency, and mitigating attack vectors. Transactions with LayerZero or Stargate (LZ/SG) contracts in the event longs accounted for 45-60% of Avalanche’s total figure for each of the four metrics by the end of the quarter.

LayerZero’s increased usage has not been exclusive to Avalanche. After LayerZero announced its $120 million Series B fundraise on April 4, activity skyrocketed on many of its supported networks. By June, Polygon, BNB Chain, and Avalanche were each hosting 200,000-250,000 LZ/SG daily transactions and 50,000-60,000 daily unique addresses from those transactions.

However, this trend has not occurred on Ethereum, which averaged around 5,000 LZ/SG daily transactions and 2,000 LZ/SG daily active addresses. This discrepancy indicates that much of LZ/SG’s growth is driven by airdrop farming, which is less attractive on Ethereum due to higher gas fees. Nevertheless, the excitement about LayerZero (or at least its potential token) is impressive.

Furthermore, it’s not only end users driving activity but also developers leveraging core LayerZero infrastructure and Stargate liquidity. Notable integrations between LayerZero and other projects on Avalanche include:

  • BTC.b: In June 2022, Ava Labs added support for native BTC bridging on the Avalanche Bridge. Then in November, BTC.b, the token representing bridged BTC on Avalanche, was turned into an Omnichain Fungible Token (OFT). OFT is a multichain token standard created by LayerZero Labs that is interoperable with fungible token standards across various chains (ERC-20, BEP-20, etc.). As an OFT, BTC.b is composable across networks supported by LayerZero.
  • Trader Joe: Similarly, Avalanche’s predominant DEX Trader Joe partnered with LayerZero in February 2023 to convert its native token JOE into an OFT.
  • WOOFi: WOOFi is a cross-chain DEX that has launched cross-chain swaps and staking powered by LayerZero and Stargate.
  • Holograph: Holograph builds on top of LayerZero to enable minting of natively multichain NFTs.

Among unique Q2’23 Avalanche transactions with LayerZero’s Ultra Light Node V2 contract in the event logs, 12% also included BTC.b-related contracts, 7% WOOFi-related contracts, 4% Holograph-related contracts, and 2% Trader Joe-related contracts.

For more on Avalanche and LayerZero’s growth, see Jim’s report “State of Avalanche Q2 2023” and Chase’s report “Inside LayerZero's $120M Series B Raise: How the Cross-Chain Protocol is Driving Growth”.

Chartbook

Financial Analysis

Market Cap

The combined market cap of featured L1s decreased 6% QoQ to $306 billion. Alt-L1 tokens tended to decrease more than ETH due to SEC’s regulatory complaints, as detailed above. ETH’s market share among featured L1s increased from 66% to 73% during the quarter.

TRX and ETH were the only native tokens of featured L1s whose market cap increased QoQ. SOL finished the quarter strong after falling around 30% following the two SEC complaints alleging SOL to be a security. SOL’s market cap ended the quarter only down 9% QoQ. WAX’s market cap decreased 8%, largely due to a reclassification of tokens that had long vested as circulating. WAX’s price decreased 33%, more in line with other alt-L1 tokens.

Revenue

Ethereum and TRON accounted for 93% of the total revenue generated by featured L1s in Q2’23. Both saw noticeable QoQ increases in revenue, at 85% and 22%, respectively. Ethereum revenue spiked in late April and early May, with meme coin trading raising gas prices. At its peak, Ethereum generated over $32 million in revenue on May 5, the same day that PEPE topped. Following the meme coin craze, Ethereum’s revenue returned back to Q1’23 levels. TRON’s QoQ revenue increased more steadily and was not driven by any significant spiked periods.

At 166%, Avalanche led featured L1s in QoQ revenue growth (denominated in each network’s native token rather than USD). As noted above, a lot of the increase in revenue could be attributed to higher activity stemming from LayerZero. Additionally, the spike in revenue from late April into early May was driven by XEN Crypto, a free-to-mint token known for consuming gas on many networks. The spikes in Fantom and Polygon’s revenue during that same period was likely also caused by XEN. Hedera’s revenue increased 99% QoQ and 3,315% YoY, driven by an increase in the usage of its Consensus Service, which enables the verifiable time-stamping and ordering of events for Web2 and Web3 applications.

A P/S ratio shows the relative price of a network’s token compared to its revenue. While it can be a helpful gauge, network tokens are new assets that likely require new valuation models, such as the Expected Demand for Security Model.

That said, TRON led featured L1s with a P/S ratio of 15x, followed by Ethereum (66x), Polygon (127x), BNB Chain (173x), and Fantom (207x).

In Q1’23, most networks’ P/S ratios increased, but this quarter, most networks’ native tokens became cheaper relative to their revenue. Notably, Avalanche’s 22% reduction in market cap paired with its 148% increase in revenue led to a 69% decrease in its P/S ratio to 241x.

Inflation

Inflation from PoS reward issuance is a wealth transfer from holders to stakers. The higher the inflation, the more it helps to be a staker and hurts to be a holder, and vice versa.

BNB led featured L1s with a 5.9% deflation rate at the end of the quarter. Its deflationary pressure comes from BNB Chain burning a portion of collected transaction fees and the Binance team burning tokens every quarter. TRON burns all of the fees it collects, which led to a 2.8% deflation rate at the end of Q2. While ETH was deflationary during the meme coin mania of late April to early May, the decrease in activity led ETH to be slightly inflationary over the last month of the quarter.

Inflationary pressure can also come from genesis supply unlocks. Genesis Supply Liquid measures the percentage of genesis tokens that have been unlocked, excluding staking rewards.

The majority of networks have fully vested initial distributions. The networks with remaining supply unlocks include:

  • Stacks: 96.5% of its original distribution has vested, with another 0.7% unlocking in Q3’23 to its treasury.
  • NEAR: 81.6% of its original distribution has vested, with another 2.9% unlocking in Q3’23 to grants, core contributors, and investors.
  • SKALE: 76.7% of its original distribution has vested, with another 1.9% unlocking in Q3’23 to its core contributors.
  • Avalanche: 76.0% of its original distribution has vested, with another 2.6% unlocking in Q3’23 to its core contributors, strategic partners, foundation, and community.
  • Hedera: 64.5% of its original distribution has vested, with another 3.7% unlocking in Q3’23 to ecosystem programs, investors, and core contributors.

Staking Yield

The rate of PoS reward issuance usually depends on the percent of supply staked and/or the number of validators. Networks rely on different equations to set the relationships that determine where the inflation rate, staking yield, and percent of supply staked will settle.

Tokens with low inflation like BNB, ETH, and STX allow holders to freely use the token without being penalized by opportunity costs for not staking, hence the lower stake rates. On the other hand, tokens with higher inflation rates optimize for higher stake rates. Although liquid staking can allow staked tokens to also participate in the ecosystem, LSTs often introduce worse liquidity, smart contract risk, and different tax implications. Additionally, Cardano and Tezos both have liquid staking enabled at the protocol level. However, there are still some additional complexities surrounding the participation of liquid-staked tokens in DeFi and other ecosystem applications.

Network Analysis

Usage

User activity is difficult to compare across different systems (e.g., EVM vs. SVM vs. Antelope). Each architecture has a unique way of processing and logging transactions and address activity. Additionally, addresses are not 1:1 with users. Thus, we briefly cover the percentage change of user activity, which is more viable for comparing networks than absolute figures. For comparing user activity based on absolute figures, see the Ecosystem Analysis section below.

Avalanche C-Chain led featured L1s in QoQ transaction growth rate at 162%. As noted above, this increase was largely driven by LayerZero activity. Due to the growth of subnets, which have attracted activity away from the C-Chain, the YoY growth of Avalanche C-Chain transactions is down 27%. After Avalanche followed TRON (29%), BNB Chain (24%), Solana (24%), and Cardano (2%).

QoQ growth rate of daily active addresses featured the same ranking of the top-four featured L1s as transactions. Once again, Avalanche C-Chain led by a wide margin at 142%, driven by LayerZero activity. Polygon took Cardano’s place to round out the top five.

Avalanche C-Chain new addresses spiked in late April, driven by XEN Crypto. This resulted in a 621% QoQ increase in average daily new addresses. Note that this figure for Avalanche differs from the one used in the Avalanche/LayerZero section, which only includes transacting new addresses. Solana new addresses spiked in May, driven by an anomalous unknown program. The program also drove the spike in active addresses seen in the previous chart. Polygon witnessed steadier new address growth, partly driven by the hype around the zkEVM launch, increasing 256% QoQ. Fantom also experienced a gradual uptick in new addresses, increasing 146% QoQ.

The average transaction fee on Ethereum increased 84% QoQ to $8.89. Gas price in Gwei increased 53% QoQ to 47, driven by the meme coin craze. After a large dropoff, BNB Chain had the second highest average transaction fee at $0.14. During Q2, BNB Chain validators voted to reduce gas fees by 40%, from 5 to 3 Gwei. The action led to a 26% QoQ decrease in average transaction fee.

SKALE has a unique model where gas fees are subsidized. It instead generates revenue from subscription fees paid by developers to launch their own SKALE dapp chain. Excluding SKALE, Solana remained the network with lowest average fees at $0.002.

Security and Decentralization

The amount of ETH tokens staked grew 15% QoQ to over 20 million ETH ($38 billion). SOL staked increased 4% QoQ to 388 million SOL ($7 billion), flipping Cardano for second place. WAX led featured L1s in QoQ growth of native tokens staked at 22%. The increase largely came from the WAX team staking tokens they had accumulated over the years but never staked.

As with users, validator counts are not perfectly standardized across networks. While it’s easy to track the number of validators, it’s more difficult to track the number of validator operators. The ratio of validators per operator varies across networks, largely depending on the stake-weight mechanism. The figures in the above table aim to standardize and account for these fluctuations wherever possible. We used either physical node figures in the case of Ethereum or did not double count validators from the same entity in the case of Cardano, Polkadot, and SKALE (based on the validator’s name on explorers).

That said, Ethereum led featured L1s in validator count at 5,407, a 54% QoQ increase. In second was Cardano at 1,921, followed closely by Solana at 1,841.

The Nakamoto coefficient measures the number of validators that could cause a network halt. A Nakamoto coefficient of one or two is often cited for Ethereum, mainly due to the concentration of stake from Lido. However, when considering the individual node operators within Lido, the figure is much greater than this. Cardano led other featured L1s with a Nakamoto coefficient of 34, just ahead of Solana at 33. Cardano’s coefficient is calculated by the top 50% of stake, rather than 33% for Solana and most other networks, which contributes to its high score.

While the Nakomoto coefficient measures the distribution of voting power among validators, there are several other important factors that impact the resilience of a validator set, including:

  • Geographic distribution: Too many nodes in the same location could jeopardize the health of a network due to geopolitical risks, regulations, natural disasters, and other events.
  • Hosting provider distribution: Too many nodes using the same hosting providers could jeopardize the health of a network due to outages or crypto node operator bans (see Hetzner and Solana). Although validator nodes can self-host, it becomes more difficult as hardware requirements increase. The Ethereum community hangs its decentralization hat on how many home-stakers it has. Although the numbers are not exact, Ethereum likely has more self-hosted validator operators than what many networks have in total validator operators.
  • Delegator distribution: A high concentration of the total stake from one delegator can destabilize a network should that delegator unstake. Additionally, the foundations of many networks currently delegate a significant portion of tokens to subsidize minimum validator requirements and spread out voting power.
  • Client diversity: Most networks rely on one validator client, making the system susceptible to client bugs or attacks. Jump’s Firedancer client will make Solana the only multi-client network besides Ethereum (excluding clients that are forks of each other).

For more on validator decentralization, check out Steph’s report “Evaluation Validator Decentralization: Geographic and Infrastructure Distribution in Proof-of-Stake Networks.”

Notes: We excluded Hedera from the analysis here as its validator set is permissioned. As with the user activity analysis, only Avalanche C-Chain validator figures were included. Each subnet can use anywhere from three to all validators from the global set. At the end of Q2’23, launched subnets had from 4 to 14 validators.

Ecosystem Analysis

DeFi

As is expected in a down market, DeFi TVL (USD) decreased for most networks in Q2’23. Combined DeFi TVL of featured L1s fell 7% QoQ to $42.7 billion. As the only networks whose native token grew QoQ, Ethereum’s and TRON’s DeFi TVL also outperformed most other networks in the quarter. Their combined market share of TVL grew from 82% to 85%.

Cardano and TRON were the only featured L1s with positive QoQ DeFi TVL growth. Cardano grew 14% QoQ, driven by activity in newer protocols Indigo, Liqwid, and VyFinance, which launched in Q4’22, Q1’23, and Q2’23, respectively. TRON grew 7% QoQ and is now up 48% YoY. This longer-term growth is likely driven by the surge in USDT supply, as noted below.

On July 1, 2022, Ethereum accounted for 62% of stablecoin market cap among featured L1s and TRON 21%. The gap slowly tightened throughout the year, and by June 30, 2023, Ethereum stood at 56% and TRON at 35%.

During the same time period, USDT total supply increased by 25% to 83 billion, and USDC total supply decreased 51% to 27 billion. Of all featured L1s, TRON has benefitted most from this, as one of the network’s primary use cases has become holding and transferring USDT.

These shifts can be attributed to several factors, including Operation Choke Point 2.0 and USDC’s temporary depeg in March. Additionally, the U.S. 1 year treasury rate doubled in this time span. USDC holders are generally more likely to have access to U.S. treasuries than USDT holders.

Several stablecoin issuers and third-party protocols have begun bringing this yield on-chain. Notably, in mid-June Coinbase raised its offered USDC yield from 2% to 4%, and MakerDAO increased the Dai Savings Rate from 1% to 3.49%. Regardless, neither event had an immediate impact on reversing the downward trend of USDC and DAI supply.

For more on bringing U.S. treasuries on-chain, see Chase’s report “U.S. Treasuries Fuel Real World Asset Growth.”

Cardano does not have any USDT, USDC, or other multichain stablecoin. Instead, Cardano’s ecosystem has been building several native stablecoin projects. Cardano’s top two stablecoins by market cap, IUSD and DJED, launched in Q4’22 and Q1’23, respectively. Their supply continued to grow this quarter, up 35% QoQ. However, at a $14 million stablecoin market cap, the ecosystem has a ways to go to catch up to other networks.

Avalanche’s stablecoin market cap grew 7% QoQ to $1.3 billion. Going against USDC’s overall downward trend, USDC on Avalanche increased 21% to 590 million. Ava Labs and Circle have formed a strong partnership, with two notable launches on Avalanche in Q2’23. At the end of Q2’23, Circle launched its long-awaited cross-chain transfer protocol (CCTP) on Ethereum and Avalanche. A month later, Circle launched its euro-backed stablecoin Euro Coin (EUROC) on Avalanche, making it the second network to support the stablecoin after Ethereum. EUROC ended the quarter with a $1.73 million market cap. With both native USDC and EUROC, FX trading could serve as a catalyst for Avalanche.

Combined averaged daily DEX volume of featured L1s declined 32% QoQ to $1.8 billion. BNB Chain was a significant outlier, increasing its average daily DEX volume 62% to $471 million. The increase was driven by a surge of volume in May, peaking at $2.2 billion on May 22. On several days in May, BNB Chain’s DEX volume overtook Ethereum’s. By the end of the quarter, BNB’s volume had subsided, and Ethereum regained a more comfortable lead as the top network by DEX volume.

Ahead of BNB Chain, Cardano experienced the greatest QoQ increase in average daily DEX volume, growing 182% to $6 million. Stacks also experienced a notable increase in DEX volume, increasing 53% QoQ to 824,000. Volumes surged in mid-May following ALEX’s launch of ALEX B20, the first decentralized order book for BRC-20s.

DeFi Diversity measures the number of protocols that constitute the top 90% of DeFi TVL. A greater distribution of TVL across protocols reduces the risk of widespread ecosystem contagion resulting from adverse events like exploits or protocol migrations.

Ethereum continued to outscore other networks in DeFi Diversity at 21, followed by Solana (19), BNB Chain (16), and Polygon (15). Polygon’s figure decreased 17% QoQ, causing its rank to fall from second to fourth. The overall ranking is roughly similar to that of TVL, with a notable exception being TRON. TRON had the second-highest TVL ($5.8 billion), but over 68% of it was in JustLend. Furthermore, JustLend TVL was dominated by three addresses.

NFTs

Daily NFT volume fell to yearly lows in Q2’23. The combined average daily NFT volume of featured L1s decreased 45% QoQ to $17.5 million. The most notable event came right at the end of the quarter, when Azuki launched its derivative PFP collection “Elementals.” After raising $38 million in a mint that sold out in 15 minutes, the project faced widespread backlash when the revealed artwork turned out to be very similar to the original Azukis, effectively diluting original holders. Azuki’s floor price followed suit, decreasing 38% from Elementals mint to the end of quarter.

Azuki was not the only Ethereum-based PFP project whose floor declined significantly in the last month of the quarter. While some have blamed trading platform Blur for the decline in PFP collection floors, one could argue that Blur merely accelerated the inevitable by increasing NFT liquidity. Instead, the onus should be on PFP collections to find new ways to monetize their brand.

Average daily unique NFT buyers have gradually declined since the beginning of the year, reaching yearly lows in Q2. Ethereum and Solana were the top featured networks by NFT buyers, both witnessing significant QoQ decreases, at 54% and 42%, respectively. Against the overall trend, average daily NFT buyers on WAX grew for a second straight quarter up to 4,200, ranking it third among featured L1s. The growth has largely been driven by NFTs from P2E game Alien Worlds.

Developers

Developer data is always imperfect, but Electric Capital’s Developer Report sets a foundational standard for measuring developer activity. It measures developers as authors who contribute original, open-source code to an ecosystem and full-time developers as those who do so 10+ days in a month.

Combined full-time developers across featured networks decreased for a second straight quarter, this time down 12% to 3,876. Ethereum had the fifth-best growth rate of featured networks, only decreasing 7% and remaining the leader by a significant margin at 1,901 full-time developers. Ethereum’s full-time developer count was almost equal to all other featured networks combined. TRON and EOS were the only featured networks to experience positive QoQ growth, increasing 20% to 12 and 8% to 39, respectively.

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Peter is a Research Analyst in Protocol Services focused on Layer-1s. He recently graduated from Boston College where he studied economics and computer science and led the school's blockchain club.

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Peter is a Research Analyst in Protocol Services focused on Layer-1s. He recently graduated from Boston College where he studied economics and computer science and led the school's blockchain club.