State of SKALE Q3 2023

Key Insights

• NFT hub Calypso’s average daily active addresses grew 20,500% QoQ to 20,000. The platform game Untitled Platformer was responsible for the growth.
• Gaming hub Nebula’s average daily new addresses increased 22,900% to 5,300. The surge was driven by the Play-to-Earn cricket game CricketFly and several other Q3 game launches including MotoDEX, 5stars, and StrayShot.
• Average daily transactions across all SKALE chains were up 241% QoQ to 719,000. Web3 protocol Exorde accounts for the majority share of SKALE transactions.
• On September 28, a governance proposal was posted to begin enacting chain pricing. If it passes, SKALE will transition out of its loss leadership phase and charge developers $3,200-$4,100 in SKL per SKALE chain per month.

Primer on SKALE

SKALE is a Layer-1 (L1) sidechain framework with pooled security. A set of Ethereum smart contracts manage several core network functions, including staking, validator orchestration, BLS key generation for each SKALE chain, and more. SKALE supports a network of configurable EVM-compatible, dapp, or general-purpose chains (SKALE chains). Each SKALE chain is secured by a rotating subset of SKALE’s pooled validator set. The SKALE V2 upgrade in Q2’22 brought interoperability between SKALE chains.

SKALE also differentiates itself by offering zero gas fees to end users. To generate fees, the protocol instead collects subscription fees from developers to create a new SKALE chain. SKALE contributors SKALE Labs and the Network of Decentralized Economics (N.O.D.E.) Foundation are specifically targeting gaming and other retail use cases via their development and growth efforts. At the end of Q2’23, SKL tokenholders passed a proposal to initiate token-based governance over protocol parameters using offchain governance platform Snapshot. For a full primer on SKALE, refer to our Initiation of Coverage report.

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Key Metrics

Financial Analysis

Q3’23 featured a largely quiet crypto market that overall traded sideways. The one major exception was a large selloff in mid-August. From August 15-18, SKL’s market cap fell 22%. QoQ the drop was less severe, decreasing 11% to $104 million. SKL’s market cap rank dropped from 173 to 181 QoQ.

The $SKL token has three primary use cases: SKALE chain subscription fees, network security (via validator staking), and, starting at the end of last quarter, governance.

Subscription Fees

SKALE has a unique revenue model because it subsidizes gas costs rather than charging the end user. SKALE still has a gas token (sFUEL) to combat network attacks like DDoS, but it does not have any monetary value, and users can receive it from token faucets. To generate fees, the protocol instead charges developers an SKL subscription fee for creating their own SKALE chain. This subscription fee is distributed to validators (and then passed on to delegators). On September 28, a governance proposal was posted on SKALE’s forum, breaking down SKALE’s subscription fee model into the following three phases:

• Phase 1 emphasizes growth over revenue. The network has been in this phase since its launch in October 2020. To incentivize growth in a loss leadership model, grants via the Protocol Development Fund have been utilized for the majority of chain payments. Rather than distributing these tokens to validators, they were instead paid to a growth pool and distributed to developers and builders. Thus far, revenue has only included ETH payments made by chain owners to cover the gas costs of running a SKALE chain.
• Phase 2 will introduce a temporary chain cost of $3,200-$4,100 per chain per month in SKL. This figure aims to increase the fees distributed to validators, which can offset inflationary pressure, without creating too high of a financial burden for developers. Phase 2 is expected to last 12-18 months.
• Phase 3 will introduce a fully dynamic chain cost. It targets a yearly cost at a certain network load, initially proposed at $1 million per chain per year in SKL with the network at a 70% load. Network load is defined here as the percentage of total validator resources being used across every SKALE chain. A higher network load leads to a higher cost and vice versa.

The aforementioned governance post proposes to transition SKALE from Phase 1 to Phase 2. The next steps include gathering feedback on the post, putting forth a detailed and technical specification, and then publishing it as a Snapshot proposal.

Network Security Costs and Incentives

SKALE validator operations, including staking and rotation, occur on Ethereum via the SKALE manager smart contract. The SKALE manager runs distributed key generation (DKG) to generate Boneh–Lynn–Shacham (BLS) keys for each node. In the past five quarters, this computational cost has outweighed revenue generated by around $50,000 to $11,000. However, this relationship should quickly flip if the above proposal passes.

Since launch, most validator rewards have come from inflation. SKL has a fixed total supply, with one-third allocated to validator rewards. So far, around 42% of this validator allocation has been distributed. At the end of Q3’23, SKL’s annualized inflation was at 5.9%. This rate will continue to decline until all tokens are liquid. The above proposal aims to replace inflation with subscription fees as the primary payment to validators. The proposal states that the goal is to have 90% of validator rewards come from fees, instead of inflation, by Q4 2027.

Beyond validator rewards, there is also inflationary pressure coming from token unlocks to other buckets of SKL’s initial distribution. Genesis supply liquid measures the percentage of tokens from the initial distribution that are liquid, excluding tokens for staking rewards. By the end of Q3’23, SKALE’s genesis supply liquid was at 78.6%, with another 5.4% unlocking in October to seed investors and core contributors.

While the vast majority of validator rewards currently come from inflation, SKL’s real yield has still been positive since not all tokens are staked. As of the end of Q3’23, SKL’s real yield was 5.1%.

Token-Based Governance

On the last day of Q2’23, a Snapshot vote to institute a proposed governance system passed, with 1.3 billion SKL voting affirmatively. Staked SKL can participate in governance votes, whose scope will initially include network economic parameters such as subscription fees, inflation, slashing penalties, minimum stake requirements, and more. Voting will occur on offchain voting platform Snapshot. In order to execute proposals onchain, the plan is to use SafeSnap, a Snapshot plugin that integrates Safe (formerly Gnosis Safe) with Snapshot. With SafeSnap, passed proposals will need to be executed onchain by the owners of the Safe multisig. The Safe owners will also have veto power over a passed proposal. For more details on this system, refer to the Q2 report.

Network Analysis

Usage

Daily transactions increased considerably in early July and largely maintained their growth throughout the quarter. In Q3, average daily transactions grew by 241% QoQ, up to 719,000. With the number of SKALE chains remaining constant QoQ, the increased activity was driven by more usage on existing chains — specifically on Web3 protocol Exorde, gaming hub Nebula, and NFT hub Calypso. See the Ecosystem Section below for more details.

Security and Decentralization

The number of SKALE validators has remained steady at 53 in the past year with a current total of 123 active nodes in the network. SKL rewards are split evenly among all validators assuming they meet the performance criteria. Splitting the rewards creates an incentive for entities to operate more than one validator. At the end of Q3, there were 32 entities running validators.

SKALE validator nodes are segmented into up to 128 virtualized subnodes via a containerized architecture. A validator can have its various subnodes acting as validators for up to eight SKALE chains. The pool of virtualized subnodes rotates among SKALE chains, with assignments set by the SKALE manager smart contract on Ethereum. After almost doubling last quarter, the number of node rotations fell back down in Q3’23, with the number of DKG transactions reducing by 57% QoQ.

Total $SKL staked increased 2% QoQ to 2.5 billion. Due to the fall in SKL’s price, total staked denominated in USD fell 13% QoQ to $56 million. At quarter end, four validators made up the top 33% of $SKL staked.

Upgrades and Roadmap

In Q3, SKALE developers worked on several initiatives, including finalizing the SKALE V2.2 release featuring memory optimizations, increased stability, and an improved node rotation mechanism. They also worked on the new Blockscout explorer version and the SKALE Bridge 2.0, featuring RainbowKit support and a faster, sleek UI.

The most significant upcoming release is Levitation and SKALE Ganymede (SKALE G), which were proposed in a SKALE Improvement Proposal last quarter. The Levitation protocol aims to enable ZK-rollups to connect to the SKALE Architecture with rollup connectivity to the Ethereum Mainnet. In addition, SKALE G will be a general-purpose ZK-rollup launched as a SKALE chain. These solutions will increase the amount of security on SKALE chains derived from Ethereum, further scaling capabilities, and introduce a different revenue model with gas fees. The mainnet launch is expected in Q4 2023 but is subject to change based on execution by contributors to the SKALE Project. The proposal is also dependent on a successful onchain vote to push the source code into production. For more details on Levitation and SKALE G, refer to the Q2 report.

Ecosystem Overview

Popular Chains

The growth in transactions across all SKALE chains was largely driven by Web3 protocol Exorde, whose average daily transactions grew 932% QoQ to 483,700. Exorde is an information platform that incentivizes users to collect and submit data from social networks. Exorde uses said data to create sentiment ratings, identify trends, and for other analytical tools.

CryptoBlades featured the second-highest transaction count among chains at 119,000, a 16% QoQ decrease. CryptoBlades is a multichain Play-to-Earn PVP game.

SKALE’s gaming and NFT Hubs, Nebula and Calypso, both saw significant growth. The SKALE network features both dapp-chains, like Exorde and CryptoBlades, and hubs. Hubs are chains that are shared by multiple applications, often from a similar sector.

Nebula continued its strong growth from last quarter, increasing average daily transactions by 276% QoQ to 56,300 after a 422% QoQ increase in Q2. The increase in usage was driven primarily by the Play-to-Earn cricket game CricketFly by Gamifly. CricketFly has over 1 million downloads on Google Play.

Calypso’s average daily transactions grew significantly, up almost 14,400% QoQ to 52,000. Calypso consists of NFT marketplace NFTrade as well as Untitled Platformer, which features Play-to-Earn platform games. Untitled Platformer drives the majority of transaction and address activity on Calypso. It’s one of the most popular dapps on the Calypso or Nebula Hub, growing notably in Q3 after its launch in Q2.

Calypso’s growth was even greater for average daily active addresses. Increasing 20,500% QoQ, the NFT hub took the top spot among SKALE chains, averaging 20,100 daily active addresses. As noted above, this growth was largely driven by activity on Untitled Platformer.

CryptoBlades’ average daily active address trend was similar to that of its transactions, decreasing 15% QoQ to 9,600 for second among SKALE chains.

Nebula’s average daily active addresses increased by 10,500% QoQ to 6,600. Nebula’s address count began rising significantly in mid-August. In the month of September, the gaming hub averaged 15,700 daily active addresses. On top of CricketFly, address growth was driven by the launches of several games in the second half of the quarter, including motorcycle Play-to-Earn game MotoDEX, fantasy football platform 5tars, and third-person shooter game StrayShot.

Calypso and Nebula vied for the top SKALE chain in terms of new addresses, with Calypso seeing most of its growth in the first half of the quarter and Nebula in the second half. With its 22,900% QoQ increase, Nebula surpassed Calypso in average daily new addresses at 5,300. In the month of September, Nebula averaged 12,400 daily new addresses. Calypso’s average daily new addresses grew 5,100% QoQ to 4,700.

NFTs and Gaming

Calypso and Nebula, SKALE’s hubs for NFTs and gaming, respectively, both experienced significant growth in usage, as detailed above. With zero-gas fees, SKALE is especially suited for retail-focused NFT and gaming use cases.

Beyond CricketFly, MotoDEX, 5stars, and StrayShot, other notable game launches included:

• Dungeon-based game Heroes whose NFT collection on Ethereum has over 1,600 ETH in trading volume,
• Fantasy sports platform STARZPLAY,
• Gaming platform NFTb,
• Casual game platform Booja.World,
• Social apartment building game Cryptopolis,
• Trading card game Spells of Genesis, and
• RPG Legends of Aurum.

Additionally, SKALE Labs partnered with clothing company Hurley, who are making their foray into Web3 with a Super Surfer game. The game, which is planned to launch soon, will be playable by holders of an NFT Hurley dropped in early September.

In July, SKALE Labs partnered with Elements, bringing its game development toolkit to the network. In August, SKALE Labs added an in-depth guide to its developer docs about how to create a “Dynamic NFT,” which uses SKALE’s onchain RNG and also stores all metadata onchain. Both developments will make it easier for developers to launch their own NFT and gaming projects.

DeFi

The Europa Hub aims to solve potential liquidity fragmentation problems that arise with app-chain ecosystems by providing a central DeFi liquidity hub. Europa development is led by the Ruby Exchange team, with plans to eventually transition to a community-owned Hub.

Ruby Exchange is an AMM-based DEX featuring a “4Pool” consisting of stablecoins USDP, DAI, USDT, and USDC. At the end of Q3, TVL in the 4Pool stood at $535,000, a 2% QoQ decrease. Note that while DefiLlama’s data begins in March 2023, Ruby has had TVL since June 2022.

SKALE does not currently support any native stablecoins; each of the four is bridged from Ethereum. The Europa bridge employs a multisig on top of the underlying IMA bridge. The IMA bridge is trustless, as it uses the same mechanisms for security as SKALE’s consensus protocol. As such, the multisig can introduce additional trust assumptions depending on the level of control the chain owner gives to the multisig. The Europa bridge uses a 3/5 multisig with the following signers:

• Ruby Exchange
• Impossible Finance, a launchpad not built on SKALE that facilitated the RUBY IDO on Binance Smart Chain
• Boot Finance, a DeFi protocol that planned to build on SKALE prior to a hack and that has not had any activity on its Twitter or Medium account since May 19
• 01Node and Stakin, both staking operators on SKALE

As noted above, the Ruby Exchange team plans to move chain control to a community-owned, onchain governance structure to minimize multisig-related attack vectors.

Beyond the 4Pool, Ruby Exchange also features pools that pair USDP with other tokens, including RUBY, SKL, ETH, and more. At the end of Q3, TVL in these pools stood at $373,000; however, DefiLlama classifies these pools in their Yield category so they are excluded to avoid double counting.

Since launch, Ruby Exchange has facilitated $13 million in trading volume. Near the end of June, Ruby Exchange announced an incentives campaign featuring 50,000 USDP and 1 million SKL for additional LP rewards over the subsequent month. At the end of July, Ruby launched a dollar-cost averaging (DCA) feature, allowing users to easily set up trades at specific price intervals and time frequencies.

At the beginning of the quarter, CoinSender joined Ruby Exchange as the second dapp on the Europa Hub. CoinSender is a token distribution and management platform, aiming to help enterprises tokenize assets, file taxes, automate payroll, create vesting schedules, airdrop tokens, and more.

Development and Growth

At the end of Q3, SKALE Labs launched the SKALE Ecosystem Accelerator Program (SEA Program) to help applications grow by leveraging infrastructure and content creator partnerships. Thus far, infrastructure partners include NFTb, which will help projects IDO, INO, and conduct free mints, and Magic Square, a crypto gaming app store. On the content side, SKALE Labs partnered with The Juice Team, who work as strategic collaborators with projects and also run their own Juice News site.

Gaming remains the growth area of focus for SKALE development and ecosystem teams. SKALE Labs published several blog posts this quarter highlighting aspects of SKALE’s technology stack that suit it well for gaming. These qualities include zero gas fees, scalability, and service flexibility. Another blog post highlighted potential use cases for enterprises, another potential growth vector. Beyond the SEA Program, ecosystem partnerships and growth will generally be spearheaded by the N.O.D.E. Foundation. The Foundation is still allocating from its $100 million ecosystem fund announced in February 2022 to attract new projects and partners.

Closing Summary

Q3 featured massive growth in the usage of SKALE chains. Total average daily transactions grew 241% QoQ to 719,000. The increase was driven by Web3 protocol Exorde’s 932% QoQ increase to 483,700 average daily transactions. After many game launches in Q2 and Q3, activity took off on NFT and gaming hubs Calypso and Nebula. Calypso’s average daily active addresses grew 20,500% QoQ to 20,000, mostly due to usage of the platform game Untitled Platformer. Nebula’s average daily new addresses were up 22,900% QoQ to 5,300. Nebula’s surge was driven by the Play-to-Earn cricket game CricketFly and several other Q3 game launches including MotoDEX, 5stars, and StrayShot.

As SKALE’s ecosystem gains momentum, its protocol also has several milestone updates ahead. On September 28, a governance proposal was posted to begin enacting chain pricing. If it passes, SKALE will transition out of its loss leadership phase and charge developers $3,200-$4,100 in $SKL per SKALE chain per month. This will serve as a transition phase, with the end target being $1 million in $SKL per year. The Levitation protocol is planned to launch in Q4, which enables individual SKALE chains to become Ethereum zk-rollups, and SKALE G, a general-purpose SKALE chain ZK-rollup. These upgrades, as well as growth initiatives like the recently launched SEA Program, will seek to capitalize on and continue SKALE’s impressive Q3 growth.