The Pressure of Dilution on Layer 1 Valuations

The Pressure of Dilution on Layer 1 Valuations

As institutional access to cryptocurrency expands through ETFs and strengthened exchange regulation, market participants have focused increasingly on protocol revenue over the past year, yet most chains generating hundreds of millions in fees still lose money for token holders. Unlike traditional companies where earnings equal revenue minus operating expenses, blockchain protocols must account, for instance, for token dilution as a direct cost to holders. For most Layer 1s (L1s) in their current state, earnings equal annual revenue minus annual token dilution.

When a protocol issues new tokens to validators or stakers, it dilutes existing holders even if fee revenue appears high. This dilution represents a real economic transfer from holders to validators, making it the primary cost in evaluating true profitability.

Revenue for L1 protocols refers to the total value of fees collected by the protocol from network activity over a given period. This includes transaction fees paid by users to have their transactions included in blocks, comprising base fees and priority fees (tips).

Annual token dilution is the total market value of new tokens issued by the protocol to validators, stakers, or other network participants over a one-year period. This represents block rewards and staking rewards created from new issuance, measured in dollar terms by multiplying the number of new tokens issued by the average token price.

Looking at 2025 earnings data, Solana (SOL) recorded $4.15B in net losses while Ethereum (ETH) lost $1.62B. ETH posted $260M in revenue, SOL generated $170M in fees, and Tron (TRX) brought in $732M. However, only Tron’s revenue exceeded its dilution costs, achieving positive earnings and net token deflation.

This exposes an uncomfortable reality the market has largely ignored, most major blockchains operate as loss-making businesses for token holders, with only one traditional L1 achieving sustained profitability. While these protocols were never designed to run as traditional businesses, this matters increasingly for the investors, institutions, and retail traders who now hold these tokens. As L1 tokens are increasingly traded and analyzed as growth stocks, particularly following the approval of multiple ETFs, they should be evaluated using the same profitability metrics applied to equity investments.