State of The Graph Q2 2023

Key Insights:

• As of Q2'23, 1,082 subgraphs have been published from The Graph’s hosted service to the decentralized network (mainnet), up 39% QoQ.
• The ongoing L2 migration of The Graph’s protocol smart contracts to Arbitrum aims to bring a seamless and gas-efficient decentralized data experience to The Graph’s users.
• In Q2'23, The Graph saw a 48% QoQ decrease in demand-side revenue in USD, driven by dapps optimizing query volumes and an overall reduction in usage from governance activities and decentralized infrastructure.
• Revenue from indexing rewards increased 3% QoQ to over 9 million USD in Q2’23. Delegators received 64% of the total indexing rewards distributed in Q2’23.
• Following the MIPs incentive program, The Graph's active Indexers decreased 29% QoQ, while Delegators and Curators grew 2% and 3%, respectively.

Primer on The Graph

The Graph is an indexing protocol that provides on-chain data to consumers from a wide spectrum of sources. It removes the need for data consumers (e.g., app developers) to build out complicated infrastructure to get on-chain data. Instead, data consumers pay to query APIs of on-chain data — called “subgraphs” — via the GraphQL API.

To ensure the protocol runs correctly and efficiently, The Graph network incentivizes several key roles within its ecosystem of both technical and non-technical participants:

• Indexers process and store on-chain data from subgraphs. They usually have advanced technical knowledge to operate nodes. In return, Indexers receive query fees from data consumers and indexing rewards from new token issuance.
• Curators are economically incentivized to analyze and signal which subgraphs are valuable to index. Curators earn a 10% portion of the query fees generated by particular subgraphs.
• Delegators do not employ resources to index on-chain data; instead, they delegate The Graph's native utility token GRT to Indexers. In return, Delegators earn a portion of query fees and indexing rewards without running nodes themselves.

As of Q2’23, seven networks are supported by The Graph's decentralized protocol and hosted service: Ethereum, Polygon, Arbitrum, Avalanche, Fantom, Gnosis Chain, and Celo. The L2 migration of The Graph’s protocol smart contracts to Arbitrum is ongoing.

Key Metrics

Performance Analysis

The Graph Network is based on the relationship between subgraph developers and data consumers (e.g., app developers) that pay to query subgraph data. The performance of the network can be measured by the growth of active subgraphs, the network's revenue in query fees, and the activity of Indexers, Delegators, and Curators.

Usage (Subgraphs)

To bootstrap The Graph, a hosted service was initially created. This service hosts subgraphs as the protocol gradually transitions to its decentralized network (mainnet). The hosted service is free (subsidized by The Graph ecosystem) and consists of indexing infrastructure run by Edge & Node, the initial team behind The Graph. The first subgraph launched on the mainnet in Q1'21. As of Q2'23, The Graph is a hybrid of its hosted service and mainnet.

Over the past five quarters, the number of subgraphs launched on mainnet has grown steadily. As of June 2023, there are 1,082 active subgraphs on mainnet, which is a 39% increase QoQ. Unlike the hosted service, The Graph Network requires data consumers to pay a fee per query to Indexers. These query fees are further distributed by Indexers to Delegators and Curators.

Source: The Graph Explorer

Curators are incentivized to signal subgraphs that are of a high quality. The Graph then indexes these subgraphs to earn a share of the query fees generated by subgraphs. The amount of GRT signaled toward a subgraph represents the market’s prediction for future query volume on a subgraph. Curators currently signal the highest amount of GRT toward the Premia, Livepeer, and RAI subgraphs.

Over the next several quarters, the number of deployed subgraphs on The Graph Mainnet is expected to increase. The Graph community aims to migrate all subgraphs from the hosted service to its mainnet, as more chains integrate with the decentralized network. During the migration, other key metrics on The Graph should also improve, ranging from ecosystem participation to the demand-side revenue generated from query fees.

Ecosystem Participation

Subgraphs provide an arena for both technical and non-technical ecosystem participants to interact symbiotically:

• Indexers operate Graph Nodes to process and store on-chain data. Data consumers can then query this data via GraphQL, an open-source language for The Graph’s APIs.
• Curators signal to Indexers which subgraphs are worth indexing. Curators also often act as subgraph developers.
• Delegators are ecosystem participants who may lack the technical know-how or resources to index; they may choose to delegate GRT to Indexers.

Staked GRT is required for indexing subgraphs. As Indexers receive more GRT via delegation, they increase their capacity to index a larger number of subgraphs on the network. Indexers monetize their indexing and query processing services on The Graph's query market by staking GRT. The minimum stake for an Indexer is currently set to 100,000 GRT (roughly $10,000 as of June 30, 2023). On top of this minimum, Indexers can also receive delegated stake from other ecosystem participants. Delegators can increase their total stake up to 16x an Indexer's personal stake.

Both Delegators and Curators saw 2% and 3% growth, respectively. However, Indexers actively staking GRT decreased for the first time in the past five quarters, down 29% to 328 at the end of Q2’23. This decrease can be attributed to the conclusion of The Graph’s Multi-Chain Incentivized Program (MIP) at the end of Q1’23 as well as to some Indexers simultaneously un-staking their GRT. This behavior hints at the potential dependency of Indexers on reward incentives as they seek to balance operating costs and accruing revenue from staking GRT and servicing queries on The Graph’s network.

At the end of Q2’23, there were 653 Indexers that either allocated or were continuing to allocate their own stake towards their subgraphs to earn staking rewards. That is, besides the 328 actively staking GRT (i.e., were active), 325 were inactive in Q2’23. It remains to be seen to what extent some of these inactive Indexers will start actively staking GRT again over the next quarters, anticipating the migration of more subgraphs to the mainnet. The migration would not only bring in more indexing opportunities but, in turn, also more revenue from indexing rewards.

Revenue

The GRT token follows the Stake-for-Access model, also known as a utility token model. Participants in The Graph's ecosystem earn revenue in GRT by performing work in the form of indexing and querying services on the mainnet. Both services require GRT to be staked. Indexers' stake comprises their own GRT tokens (i.e., self-stake) and GRT delegated toward them (i.e., delegated stake).

The two main sources of revenue for The Graph are indexing rewards and query fees paid by data consumers. Revenue from both indexing rewards and query fees is funneled through Indexers who then distribute it to Delegators and Curators.

Every Indexer is free to define their own individual cut of query fees and indexing rewards, based on the supply-and-demand dynamics of the open marketplace. According to this individual cut, each Indexer then distributes the revenue as follows: query fees are shared with Curators, whereas both indexing rewards and query fees are shared with Delegators.

Source: The Graph: Choosing Indexers

As per the above example, if an Indexer set the query fee cut to 13.96%, their Delegators would receive the remaining 86.04% of the fee revenue proportional to their stake. While Delegators' stake cannot be slashed, Delegators should still consider several factors when staking GRT with Indexers. These factors relate to:

• Indexer choice, i.e., choosing effective Indexers with the most optimal balance between reward payouts and “skin-in-the-game” from allocation of self-stake.
• Unbonding period, i.e., no GRT transfers or rewards are possible within a 28-day window after un-delegation.
• Delegation tax of 0.5%, i.e., calculating how long it takes to earn back the 0.5% tax on delegation.

Indexing Rewards

Indexing rewards come from a 3% annual inflation in the GRT supply, derived from the GRT issuance rate. Rewards are distributed to staked Indexers in return for providing indexing and querying services on The Graph’s open marketplace.

Indexing rewards grew 3% QoQ to approximately $9.1 million in Q2’23. In GRT terms, indexing rewards remained relatively stable, up 1% QoQ from 71 million GRT in Q1’23 to 72 million GRT in Q2’23. This stability is a consequence of the governance decision to set the protocol issuance rate back to The Graph’s original 3% prior to The Merge in September 2022. For context, following The Merge, the number of blocks created on Ethereum increased. As a result, the GRT rewards issued per block increased to 3.2% for approximately one month in Q4’22, which led the overall quarterly rewards to reach 80 million GRT in Q4’21, before decreasing ever since.

Over the past five quarters, Delegators received more GRT indexing rewards than Indexers themselves. In Q2'23 alone, Delegators were rewarded over 46 million GRT (roughly $5.7 million). This amounted to approximately 64% of the total indexing rewards distributed, up from 62% in Q1’23. Delegators may have received more rewards as Indexers focused on attracting more delegated stake by offering a more generous cut of indexing rewards to Delegators, thanks to rising GRT-USD prices in H1’23.

Query Fees (Network Usage Fees)

While the bulk of Indexer earnings come from rewards, the second source of network revenue comes from query fees. Data consumers (e.g., app developers) pay query fees for Indexers to fetch and organize data. Query fees are determined by market demand and distributed to Curators, Indexers, and Delegators.

Total revenue from query fees decreased 48% QoQ in USD terms, after reaching an all-time high in Q1’23. The lower accrued fees may have been driven by several concurring factors:

• Dapps optimizing query volumes after moving to the paid model of the decentralized network, coupled with the gas optimization from the ongoing L2 migration.
• A general reduction in usage from governance activities and decentralized infrastructure protocols across the board.
• The Graph’s Multi-Chain Incentivized Program (MIPs) leading to more accrual of fees over Q4'22 and Q1'23 as compared to other quarters.

For The Graph, the Q2’23 total revenue from query fees (approx. $47,000) made up less than 1% of the total revenue from indexing rewards (approx. $9.1 million). This distribution indicates that The Graph’s network participants still highly rely on indexing rewards for sustaining their day-to-day operations.

Qualitative Analysis

Key Events

Migration to Arbitrum

As of Q2’23, The Graph has completed phase 2 of its migration to Arbitrum, a Layer-2 scaling solution on Ethereum. The migration aims to bring a seamless and gas-efficient decentralized data experience to users. Following the approval of GIP 0021, 5% of indexing rewards are now available on Arbitrum. Over time, total indexing rewards on Arbitrum One will increase to 100% and will gradually move over from Ethereum Mainnet.

As a refresher, the migration to Arbitrum entails three phases:

• Phase 1 enables Arbitrum One on mainnet.
• Phase 2 enables indexing rewards on Arbitrum One.
• Phase 3 enables express migration to Arbitrum One.

Additionally, migration assistance is offered to all participants attempting to migrate.

Fantom and Polygon Support

The Graph’s decentralized network offers support for Polygon and Fantom via the MIPs program. Developers on Polygon and the Fantom Network can begin migrating subgraphs over to The Graph network. The Graph has previously supported Polygon on their hosted service.

Substreams-Powered Subgraphs

Substreams is a streaming-first system that transforms and processes blockchain data. Substreams-powered subgraphs bring composability and efficiency to The Graph Network — by combining the benefits of Substreams with subgraphs, developers can reduce syncing time by over 100x and improve overall performance.

Additionally, sync times for certain subgraphs reduced from 2 months to just 20 hours. Various real-world applications, like Uniswap v3, Lido, and DappLooker are currently using Substreams-powered subgraphs in offering optimized and up-to-date data. Developers can explore and apply for grants to build their own Substreams-powered subgraphs through The Graph Foundation.

A full list of The Graph events can be accessed via Messari Intel.

Key Governance Decisions

Update Feature Matrix Support (GGP 0026 and GGP 0022)

After successfully passing the voting process, the GGP 0026 proposal introduced an updated Feature Support Matrix, including the new Graph Node release 0.31.0. The proposal states that the new release is an update to the previously ratified matrix in GGP 0023. The Graph Node release 0.31.0 includes substreams-powered subgraphs, full-text search and additional filtering, and derived field loaders.

After a successful voting process, the GGP 0022 proposal updated the Subgraph API Feature Support Matrix, added support for new chains (Celo, Arbitrum, and Avalanche), introduced IPFS File Data Sources, released Graph Node v0.30.0, and ratified the updated matrix through a GGP. The proposal also highlights that no new Defender transaction will be required unless there is a need to revert the Feature Support Matrix, which has been proposed and already in-effect.

Timeline and Requirements to Increase Rewards in L2 (GIP 0052)

This preliminary discussion aims to establish a timeline to migrate 100% of indexing rewards to the L2 instance of The Graph. The proposal recommends the following steps:

• Bump rewards to 25% on L2 after releasing all migration helpers as described in GIP 0046.
• Bump to 50% on L2 after at least two weeks of L2 Transfer Tools working as expected and some increase in L2 participation.
• Bump to 95% on L2 two months after the previous step, as long as everything works as expected and there is a considerable increase in L2 participation.
• Bump to 100% on L2 a month after the previous step as long as a large percentage of subgraphs have migrated to L2.

A full list of The Graph governance proposals can be accessed via Messari Governor.

Closing Summary

The ongoing L2 migration aims to bring a seamless and gas-efficient decentralized data experience to The Graph’s users. In Q2'23, The Graph saw a 48% QoQ decrease in demand-side revenue in USD, driven by dapps optimizing query volumes, coupled with a general reduction in usage from governance activities and decentralized infrastructure protocols across the board.

Simultaneously, revenue from indexing rewards increased 3% QoQ to over 9 million USD in Q2’23. Following the end of the migration incentive program, The Graph's active Indexers decreased for the first time QoQ (-29%), while Delegators and Curators saw 2% and 3% growth, respectively.

Over the last year, The Graph has been focused on the migration from a hosted service to a decentralized network (mainnet). As of Q2'23, 1,082 subgraphs have been published from The Graph’s hosted service to the decentralized network (mainnet), up 39% QoQ. As more subgraphs are migrated to mainnet in the coming quarters, The Graph will continue to remove technical barriers for developers, ultimately leading to faster innovation across Web3.