Why L1 Blockchains are Valuable

Blockworks Analytics is officially live! We believe it is the industry’s best analytics platform for assessing the health, performance, growth, and profitability of the major protocols and ecosystems. We launched with coverage of L1s and L2s but will soon support the largest DeFi protocols as well, expanding our asset coverage over the coming months.

This report serves as a guide to help users better understand the insights they can glean from the financial metrics displayed on our dashboards. For L1 blockchains in particular, Blockspace Profitability and Value Flow are the two major financial metrics we track.

How L1s Derive Value 

The valuation framework in traditional finance is largely predicated on shareholders having a legal claim on a company’s assets (to a varying degree) and cash flows (in the form of dividends). Since companies trading on well-established public markets must abide by strict accounting and reporting standards, stockholders are assured that management will act in their best interests. As such, equity valuation is a relatively straightforward process.

This analysis focuses on general-purpose L1 blockchains, which do not have this luxury. In many ways, L1s should be viewed as an entirely new asset class more comparable to digital economies than traditional businesses. L1s are the core infrastructure enabling the creation of new-age businesses like onchain protocols.

While an L1 token is often the currency of its economy, it does not provide token holders with a legal claim on the cash flows of the blockchain. Therefore, valuation cannot solely rely on the traditional business valuation framework. Concepts like profitability can explain a portion of an L1 blockchain’s value, but it is critical to understand there are additional value drivers for a blockchain. For a non-exhaustive list, the token can derive value from some combination of being:

• A cash flow-generating asset (yield-bearing asset)