In assessing layer-1 (L1) blockchains, many traditional-minded investors rely heavily on metrics such as price-to-earnings or price-to-sales ratios. While these remain essential indicators, they do not fully account for the programmable element of a blockchain’s token supply. Taking into account a blockchain’s emissions schedule – the predetermined timescale for when new tokens enter circulation through staking and token unlocks – we can acquire a clear projection of the future cost structure.
Taking this a step further, we can look at the years-to-profitability (YTP) ratio – a fresh approach shedding light on L1’s profitability through the prism of the blockchain’s forward supply curve. By borrowing from traditional finance concepts of breakeven analysis and payback periods, YTP analysis views an L1 blockchain akin to a business that trades secured blockspace.
All revenues and costs are accounted for in the native L1 token. Notably, both transaction fees paid to proof-of-stake validators and the number of tokens in circulation are crucial to maintaining the circulating supply at 0% inflation – the end-goal when it comes to YTP.
Simultaneously, a few assumptions are made when calculating the YTPhese include the fact that the percentage of the transaction fee that is burned remains consistent and the foundation takes a decade to sell all its tokens. For drawing out revenues, the L1’s revenue for the preceding quarter is annualized.
It’s crucial to point out that when comparing YTP across different blockchains, we categorize L1’s by the tokenomic model – inflationary or max supply. The latter may break even at the point when the chain’s fixed supply limit is achieved.
In calculating future growth rates, constant assumptions are employed so that correlations can be drawn across chains and what exactly influences YTP can be further understood. One typical observation being newer chains like APT have a high YTP due to their smaller revenues in comparison to their more established counterparts.
Lastly, the YTP can serve as a critical tool when measuring the profitability and viability of L1 blockchains. By fine-tuning tokenomics balanced alongside supply dynamics and incorporating burn mechanisms, L1 blockchains can aim to curtail YTP, thereby paving a sustainable future for blockchain economy.
Source: Coindesk
