Infrastructure – Weekly fundamentals #71

A walkthrough of the most interesting charts and trends in crypto, with a focus on key business drivers and protocol fundamentals.

This week’s newsletter focuses on the infrastructure market sector, which has a designated dashboard on Token Terminal. Let’s dig in!

Infrastructure projects are smart contract-based protocols that provide support functionality for e.g. DeFi protocols and DAOs in general.

Introduction

• Infrastructure protocols provide support functionality for onchain applications via smart contracts. Infrastructure is a diverse market sector, including sub-sectors such as oracles, domain name registries, and more. Oracles bridge critical information from the real world to the blockchain, enabling new use-cases for DAOs. Similarly, onchain domain name registries replace complex hashes with human-readable names, improving the user experience for those transacting onchain.
• Without infrastructure protocols, features seen in onchain applications would be extremely limited. Protocols such as derivatives exchanges and prediction markets are heavily reliant on offchain data provided by oracles. This includes reliable asset prices aggregated from multiple offchain sources, or the outcomes of real-world events. Without oracles, the features supported by these protocols would be greatly limited.
• Infrastructure protocols are critical in ensuring the future growth of DeFi and DAOs in general. Aggregated user assets deposited into onchain applications are worth upwards of billions of dollars. Oracles and domain name registries play a crucial role in protecting these funds from smart contract exploits and manual mistakes when sending onchain transactions. Decentralized and secure infrastructure protocols are paramount for DeFi to mature into a credible industry.

Overview

The daily revenue over the past 180 days for the top projects in the infrastructure market sector are visualized below.

Scope of analysis

• Revenue across the infrastructure market sector has seen a decline over the past 365 days. Monthly revenue across the sector dropped from $7.8m in August 2022 to just $2.1m in June 2023, a decrease of over 70%.
• This is mainly due to broader market trends, as well as U.S. Treasury sanctions on asset mixer protocol Tornado Cash. Monthly revenue generated by Tornado Cash dropped from $1.1m in August 2022 to just $158.1k the next month, following U.S. Treasury sanctions on the protocol.
• Ethereum Name Service (ENS) is the current market leader based on revenue, with 60-70% total market share in revenue. ENS is an onchain domain name provider that generates revenue whenever users register or renew a domain name. In addition, ENS has one of the largest DAO treasuries, holding over $34.1m in ETH and $14.4m in USDC.

Ethereum Name Service

• More than 55% of fees for ENS since launch were from 3- and 4-character domain names. ENS generated $94.6m in fees since launch. 3- and 4-character domain names contributed $51.2m (54.2%) of the total fees collected. Despite this, 3- and 4-character domain names currently only make up ~2% of total active ENS names.
• 3- and 4-character domain names are more costly due to their scarcity. 3- and 4-character domain names are scarce by nature, due to there being fewer possible permutations. As a result, ENS charges $640, $160, and $5 in registration and renewal fees for 3, 4, and 5+ character names, respectively. Speculation over 3-character names spiked in 2022, with daily registration fees peaking at almost $1.9m on May 2nd, 2022. On July 3rd, 2022, 3-digit ENS name 000.eth was sold on OpenSea for 300 ETH, more than $321k at the time.
• We anticipate the proportion of fees coming from 3-character domain names to decline over time. The price of 3-character names on secondary markets has dropped since peak levels of speculation in 2022. As of July 12th, 2023, the 3-character domain name lkb.eth was listed for sale for just 0.03 ETH (~$56), despite costing $640 in annual renewal fees. Following the decline, we expect a larger proportion of ENS fees to be generated from 5+ character domain names, which are generally less speculative.

Instadapp

• Instadapp’s Lite product generated $733k in revenue over the past 180 days. Lite is an asset management product that uses smart contract-based vaults to help depositors generate optimized yield on their assets. Instadapp takes a withdrawal fee and a 20% cut from the profit generated by these vaults.
• Ethereum’s Shapella upgrade was one of the key drivers behind the growth of Lite’s ETH vault. The Shapella upgrade on April 12th, 2023 allowed ETH stakers to withdraw their staked assets, reducing the risks associated with ETH staking. As a result, the total value locked (TVL) of Lite v2’s staked ETH vault grew from $3.1m to $7.2m since April 12th. Read more on Ethereum staking in our previous newsletter.
• Instadapp has been building out features for their other revenue streams beyond Lite, including their flash loan aggregator and Avocado Wallet. Although Lite has been their largest revenue source over the past 180 days, Instadapp has been introducing other new product features. A prominent example is Avocado Multisig, an extension of Instadapp’s Avocado Wallet. Avocado Multisig will allow users to claim the same multisig address on all chains that Avocado supports, while also supporting gas payments in USDC. Instadapp has also been working on an oracleless lending protocol built on Uniswap v4 (read more about it in the other key highlights section).

Helium

• Helium has started to generate revenue from mobile data transfers following their Dynamic Coverage upgrade. Helium is a telecommunications platform that facilitates data transfers through wireless networks collectively operated by individual gateway operators. Helium has multiple revenue sources, including one-time gateway onboarding fees (paid by gateway operators) and ongoing data transfer fees (paid by network users).
• Generating sustainable revenue through wireless data transfers is Helium’s long-term business goal. During the first phase of Helium’s 5G network launch, they were fully reliant on T-Mobile’s infrastructure for mobile data transfers. They have since migrated a portion of data transfers to their own 5G network. This allows Helium to generate sustainable revenue from data transfers, as they charges network users for data transfers through their own infrastructure.
• Increasing ongoing data transfer fees represent a maturing business model for Helium. Although ~53% of fees generated by Helium in the past 30 days come from the one-time gateway onboarding fees, ongoing data transfer fees have been growing. In particular, data transfer fees are now between 35-50% of the total daily revenue generated by Helium, peaking at $2.2k on June 11th.

Other key highlights from the infrastructure market sector

Ethereum Name Service (ENS)

• ENS recently deployed NameWrapper, a smart contract upgrade that enable owners of ENS names to have more granular control of their names. NameWrapper introduces fuses, which enable features such as the permissionless selling of subdomains or immutable records. Fuses are applied to newly registered names by default, while existing domain names can opt-in by wrapping their name.
• ENS name owners can now distribute subdomains for free by fetching data from an offchain source. A prominent example of this is Coinbase, which are providing all Coinbase Wallet users with cb.id subdomains.
• ENS is currently working on introducing gasless DNSSEC (Domain Name System Security Extensions), which will allow any DNS name (i.e. .com or .xyz) owner to integrate their domain names with ENS. Although this is already possible today, it requires a large gas fee. Following the upgrade, the claiming process will become gas free by utilizing Chainlink to fetch data from DNS records.

Helium

• Helium recently completed a migration from their original L1 network to Solana. All Helium hotspots are now represented by an NFT on the Solana blockchain, with close to 1m NFTs minted during the move. Helium’s HIP-70 governance proposal attributes the migration mainly to Solana’s high scalability.
• In May 2023, engineering software services provider Oxit and the Helium Foundation partnered to launch the Oxtech Module. This enables the development of IoT devices that are compatible with both Helium and Amazon Sidewalk.
• In June 2023, Helium announced a collaboration with major telecommunications company Deutsche Telekom’s IoT Creators platform to promote the development and usage of IoT devices.

Instadapp

• On July 6th, 2023, Instadapp announced plans for their new oracleless lending protocol, to be built on top of Uniswap v4. This product introduces features such as flexible liquidation thresholds, zero liquidations penalties, and more. As this product will have no price oracles, it will be immune to exploits from oracle manipulation.

Kleros

• Kleros is working towards the launch of their v2. This will include an improved frontend UX, an experimental deployment on Arbitrum Orbit, and more.
• On May 30th, 2023, the Kleros team also announced Vea - an interoperability protocol unifying blockchains (L2) built on Ethereum. The motivation behind this bridge is to help resolve disputes that happen across multiple chains.

Livepeer

• Livepeer launched the Verifiable Video project to improve media content authenticity. The goal is to use blockchains to solve critical media authenticity challenges and ensure video creator monetization.
• In addition, a number of leading web3 apps have been adopting Livepeer to power video streaming. Partners include Lenster (a popular Lens Protocol frontend), Xeenon (decentralized streaming platform), and more.

Pocket Network

Pocket Network has generated $75k in revenue since activating their fee switch in May 2023.

• In May 2023, Pocket Network began to charge the gateway operators fees in POKT each time a RPC data transfer was sent. Collected fees are then burnt, which accrues value to the POKT token. Since fees were activated, Pocket Network has burnt over $75k in POKT.

Changelog

Recent updates and improvements to the infrastructure market sector on Token Terminal.

Video of the week

In this week's episode of the Fundamentals podcast, we're joined by Kain Warwick, the founder of Synthetix – a derivatives liquidity protocol providing the backbone for derivatives trading in DeFi.

Listen to the episode

Synthetix is built on Ethereum and OP Mainnnet. How it works is that synthetic assets, and associated products, are collateralized by stakers via the SNX token, which when locked in a staking contract enables the issuance of synthetic assets, called synths. This pooled collateral model allows users to perform conversions between synths directly with the smart contract, avoiding the need for counterparties.

In this episode with Kain, we discuss the initial vision behind Synthetix and how V3 aims to fulfill this goal, we cover the lessons learned along the way, recap the fundamentals of Synthetix’s economic model and discuss the state of revenues, inflation, SNX staking, and maintaining the general health of the protocol. We also speak about how Synthetix is currently positioned within the market and where they see the biggest opportunities, increasing demand for trading on Synthetix, how the current tech stack will scale, the core contributors behind the project, current drivers and challenges, and more.

Timestamps:
00:00 Introduction
02:30 The initial vision and goal behind founding Synthetix
03:58 The venture case for Synthetix
06:13 Lessons learned that have led to the development of V3
10:14 How V3 fulfils what Synthetix set out to achieve in the early days
13:45 The effects of evolving into a permissionless liquidity layer
18:24 Synthetix’s economic model
23:07 SNX staking: maintaining the health of the protocol
25:08 SNX staking: encouraging all SNX holders to stake their tokens
27:02 SNX staking: introducing new collateral assets
28:24 Synthetix’s current user base & attracting new traders
30:52 What assets does Synthetix have a competitive edge for?
35:33 Driving adoption: user experience vs. number of assets listed
36:52 Is an optimistic rollup’s performance enough?
39:17 Building liquidity infrastructure and user-facing products in parallell
43:03 The team behind Synthetix
45:56 Kain’s role at Synthetix
48:04 The current state of revenue generated on Synthetix & thoughts on how it will develop
52:04 What metrics and KPIs are best suited to measure/value derivatives exchanges?
55:30 Are token incentives an expense for Synthetix?
59:05 The biggest opportunities for Synthetix in the coming years

Product tip of the week

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