Messari Daily Brief Feb. 9, 2021 - Sticky DeFi Fees vs. Gassy Layer1s

I’ve seen some analyses floating around recently that put ETH gas fees and DeFi application fees in the same bucket. That doesn’t make any sense.

High Layer 1 fees don’t represent sustainable network earnings power, so much as they highlight temporary throughput bottlenecks. Evidence that we’ll soon operate in a multichain universe with cross blockchain bridges that least cost route transactions between protocols.

In contrast, high DeFi network earnings (real earnings that is, netting out short-term farming rewards) usually indicate healthy, liquid marketplaces. A 25 bp fee to market makers plus 5 bps to the underlying protocol treasury is a logical decentralized exchange or asset management model. You're probably willing to pay those fees in return for non-custodial trading, deep liquidity, and broad asset availability, since the fees are variable based on trade size. Gas fees are a different animal, a fixed cost that eats into the economics of every single transaction, and prices out smaller market participants.

Some argue that EIP-1559, the network change that will burn gas fees to the benefit of ETH holders, should lead investors to value ETH more highly since you can extrapolate the net present value of those burns based on the Ethereum network’s growth. That seems like a compelling valuation model for ETH bulls given the Ethereum network is now generating $25-30 million in fees per day. But it also ignores the reality that Ethereum’s scaling plans explicitly call for pushing transactions off of the expensive, gas-guzzling main chain and onto roll-up chains (or competitive layer 1s).

That’s one reason Layer1’s like Cardano, Polkadot, Cosmos, Avalanche, Solana, Algorand, and NEAR, and Layer 2 chains like Matic, Skale, Loopring, and xDai have outperformed ETH so far this year.

Headlines that matter:

• INTEL: ALPHA, YFI, COMP, AVAX, AAVE, BAL, SOL, MKR, ATOM, PERP (+ 20 updates)
• St. Louis Fed features a DeFi research paper (St. Louis Fed)
• Chainbridge will bring DeFi to Avalanche; long live bridges (The Block)
• Speculation builds that Apple will be next to buy bitcoin (ZeroHedge)
• Bitwise files ETF application to track “crypto innovators” (The Block)
• Axie Land has record $1.5 million NFT sale (Decrypt)
• Binance drops its defamation suit against Forbes (The Block)
• Nic Carter’s Castle Island Ventures raises $50 million fund II (Blockworks)
• Daily Shade: What can I say, gas is expensive.