L3 Economic Dilemma: Unable to make a profit unless monthly transaction volume exceeds 50 million

Original title: The Economics of L3s

Author: Syndicate

Compiled by: Deep Wave TechFlow

As discussed earlier , L3s face practical challenges of economic sustainability.

While Base generated over $30M in revenue from sequencers alone in Q1 2024, what worked for a handful of L2s like Base, Arbitrum, OP Mainnet, and Polygon doesn’t work for L3. why?

Currently, L3 is becoming increasingly popular for its ability to significantly reduce fees for users and developers - opening up the possibility of building new fully on-chain applications, games and experiences. Just as cloud computing reduced the cost and time of building web applications thousands of times, L3 may do the same for Web3, enabling the new world web to be built thousands of times faster and cheaper. This is at least theoretical.

However, the thousands-fold reduction in fees also creates significant economic challenges for L3: the significant reduction in fees means that they cannot rely on sequencer fees as their main source of revenue, unless they have L2-like transaction volumes, which This is not feasible for almost all L3s. Additionally, to achieve the thousands-fold expense reduction, L3 operating costs would still need to decrease another 10x to 100x from today's levels. This will require a complete transformation of L3's infrastructure rather than incremental improvements.

This has created serious financial difficulties for L3. How does L3 hope to solve this problem?

Break-Even Analysis for L3

Through our work with the emerging L3 ecosystem, the Syndicate team has seen L3 attempt to address this challenge by increasing network fees to generate profit from its sequencers (or At least try to break even). So far, these efforts have not turned a profit.

A few months ago we ran economic scenario simulations of L3 - an analysis relative to L2 under various on-chain activity and fee levels - to understand their breakeven and path to profitability. The results are sobering.

If L3 is 10x (or more) cheaper than L2 today, L3 will never be profitable unless its monthly transaction volume exceeds 50 million. This equates to more than 50% of Base's activity or 75% of Arbitrum's activity.

Base and Arbitrum — Ethereum’s two most active L2s — typically have 50 million to 100 million transactions per month on their networks. But these are the biggest players. Over the past 30 days, Zora saw 3.8 million transactions, Mode saw 3.8 million transactions, and Redstone saw 1.1 million transactions.

To break even, an L3 with 5 million transactions per month needs to set its fees to within 3x of L2. This is a big challenge, especially if L3 competes primarily on lower fees. Merely being 3x cheaper than L2 is not enough to attract users and developers to adopt a new network. Therefore, L3 must be differentiated from L2 in other aspects such as scalability, customizability, and community ownership.

Only two L3s have exceeded 5 million transactions in the past 30 days, and they are both focused on gaming: Xai (275 million transactions) and Proof of Play Apex (69 million transactions). Xai's network fees are nearly 200 times lower than L2, which means it's likely running at a loss. Proof of Play Apex, on the other hand, has network fees that are 15 times higher than L2, which means it could be profitable depending on who's paying the fees.

But with all of this in mind, what is L3’s (and therefore L2’s) path to sustainability and long-term value?

Current arguments in favor of L3s

Today, L3 can be considered an “operational cost” or “cost center” designed to initiate the development of a new network so that it becomes valuable. Additionally, by running sequencers, setting network fees, and using custom gas tokens, L3 provides operators with new economic tools to dynamically manage their ecosystems, including users, through targeted gas subsidies and incentives , developers, applications and partners.

For example, consider a fully on-chain game on L2 and pay transaction fees for every on-chain operation. To improve user experience, game developers may want to sponsor many (or all) transactions on behalf of users, which can be very expensive as the game grows. Even with the low gas cost on today's popular L2, if a game has 50,000 daily active users (DAU) and players perform an average of 100 on-chain operations per day, the total sponsored gas cost per day exceeds $10,000 (or nearly 5 million per year USD gas costs). For many L2s, this number could grow to $25 million to $50 million per year! As a result, games built on their own L3 reduce these variable costs to near zero, making many new mainstream social, gaming, and consumer applications—i.e., on-chain applications—economically viable.

The future of on-chain games

“Completely on-chain” is also a major selling point for some games and applications. For example, Skyoneer is a fully on-chain game that exists on its L3 Gold, which focuses on strategy games. Pirates Nation, another fully on-chain game that exists on Proof of Play Apex L3, said: “When a game is on-chain, it means we don’t have any servers running. We can’t shut down the game, it will live on forever. ... On-chain gaming... guarantees permanence, interoperability and composability.” Lower costs are not a direct selling point here, but they are necessary to make the other benefits of gaming fully on-chain possible. condition.

The ultra-low fee also unlocks new usage scenarios that users may not otherwise engage in. Consider that Ham Chain recently enabled a new tipping and micro-transaction experience on its L3 by significantly reducing the cost of each transaction.

Thus, the main economic benefit of L3s is not revenue generation, but the value they provide to the applications built on them. By significantly reducing transaction costs, L3 enables new applications and business models that may not be economically viable on more expensive L1 or L2 networks, and they allow applications to retain more value at a lower cost.

L3 的未來經濟機會

雖然今天L3 可能被視為一個成本中心或可忽略的收入來源，但我們的團隊對L3 如何在未來變得越來越可持續和有價值有一個更清晰的願景。有一些新的模型即將出現，這將深刻重塑 L3 的經濟學，無論是對於開發者還是用戶。

最明顯的例子是優先費用。隨著越來越多的應用程式、用戶和交易逐漸遷移到 L3，我們可能會看到在遊戲、社交和金融領域的流行 L3 中出現優先費用市場。當然，優先費用市場只有在L3 上的活動增長到區塊空間不再像今天的以太坊L1 和流行的L2（如Base）那樣豐富時才會開放

然而，我們已經開始看到的一個更具創新性的模式是使用L3 的本地gas 或質押代幣。例如，Degen Chain使用 $DEGEN 作為其本地 gas 代幣，為 $DEGEN 創造了額外的實用性。正在開發的新 L3 不僅計劃使用自己的自訂 gas 代幣，還計劃使用自訂質押機制來幫助保護或共同營運網絡，從而賦予其代幣更多的實用性。透過使用本地代幣——而不是僅僅關注透過序列器利潤創造的價值——許多 L3 正在探索透過其本地代幣創造價值的方法。在某些情況下，如 Degen，這比序列器利潤更大的價值驅動因素和機會。

未來還有更大的經濟突破。我們的團隊深入研究了L3 的開發和問題，以爭取成長和長期永續性，透過這項工作，我們發現了與L3 的設計和運作方式相關的大問題（和機會），這些最終限制了它們今天的經濟自主權和潛力。然而，如果你能從根本上改變 L3 的設計和運作方式——你可以解鎖新的收入、新的市場和主要的結構優勢。這意味著在不久的將來，L3 不僅會便宜 1000 倍，還將能夠訪問今天不可能的新收入和價值生成機會。我們期待在未來幾週內分享我們在這一領域的研究和工作。

未來展望

隨著 L3 的不斷發展，我們將在價值創造和捕獲領域看到許多新的實驗，無論是從鏈運營商的角度，還是從開發者和用戶的角度。

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