Author: Mihai Grigore
Key insights
l As of Q2 2023, the number of subgraphs published from The Graph’s managed service to the decentralized network (mainnet) grew 39% to 1,082.
l The Graph’s protocol smart contracts continue to migrate to Layer 2 (L2) with the goal of providing a seamless and low-gas decentralized data experience for The Graph’s users.
l The Graph’s demand-side revenue in U.S. dollars decreased 48% quarter-over-quarter in the second quarter of 2023, driven by decentralized application optimization query volume and a decrease in governance activities and overall usage of decentralized infrastructure.
Index reward revenue increased 3% quarter-over-quarter to exceed $9 million in Q2 2023. During the quarter, agents received 64% of total index rewards.
l After the MIPs incentive program, The Graph’s active Indexers decreased by 29% month-on-month, while Delegators and Curators increased by 2% and 3%, respectively.
Introduction to The Graph
A Primer on The Graph The Graph is an indexing protocol that provides on-chain data to consumers from a variety of data sources. It eliminates the need for data consumers (such as application developers) to build complex infrastructure to obtain on-chain data. Instead, data consumers pay a fee to query the API for on-chain data through the GraphQL API, called a "subgraph".
To ensure the protocol operates properly and efficiently, The Graph Network provides incentives for several key roles for both technical and non-technical participants in its ecosystem:
l 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 receive indexing rewards from new token issuance.
Curators have a financial incentive to analyze and signal which subgraphs are valuable to index. Curators receive a 10% share of the query fees generated for a particular subgraph.
Instead of using resources to index on-chain data, Agents delegate GRT, The Graph’s native utility token, to Indexers. In return, Agents receive a portion of query fees and indexing rewards without having to run a node themselves.
As of Q2 2023, The Graph’s decentralized protocol and hosting services support seven networks: Ethereum, Polygon, Arbitrum, Avalanche, Fantom, Gnosis Chain, and Celo. Work is underway to migrate The Graph’s protocol smart contracts to Arbitrum.
Key indicators
Performance Analysis
The Graph network is based on the relationship between subgraph developers and data consumers (such as application developers), who need to pay fees to query subgraph data. The performance of the network can be measured by the growth of active subgraphs, query fee revenue, and the activity of indexers, agents, and curators.
Usage (sub-graph)
To bootstrap The Graph, a hosting service was initially established. This service hosts subgraphs as the protocol gradually transitions to a decentralized network (mainnet). The hosting service is free (subsidized by The Graph ecosystem) and consists of indexing infrastructure run by The Graph's founding team, Edge & Node. The first subgraph went live on mainnet in Q1 2021. As of Q2 2023, The Graph is a hybrid of its hosting service and mainnet.
The number of subgraphs published on the mainnet has grown steadily over the past five quarters. As of June 2023, there are 1,082 active subgraphs on the mainnet, up 39% from the previous quarter. Unlike custodial services, The Graph network requires data consumers to pay Indexers for each query. These query fees are further distributed by Indexers to Delegates and Curators.
Curators signal which subgraphs are of high quality. The Graph then indexes these subgraphs and earns a share of the query fees generated by the subgraphs. The amount of GRT signals directed to a subgraph represents the market's prediction of future query volume for that subgraph. Currently, curators have the highest amount of GRT signals for Premia, Livepeer, and RAI subgraphs.
Over the next few quarters, we expect the number of subgraphs deployed on The Graph Mainnet to increase. As more chains integrate with the decentralized web, The Graph community aims to migrate all subgraphs from the managed service to the mainnet. During the migration, other key metrics of The Graph should also improve, from ecosystem participation to demand-side revenue generated from query fees.
Ecosystem Participation
Subgraphs provide a platform for technical and non-technical ecosystem players to interact symbiotically:
l Indexers process and store on-chain data by running Graph nodes. Data consumers can then query this data through GraphQL, the open source language of The Graph’s API.
Curators signal to indexers which subgraphs are worth indexing. Curators often also act as subgraph developers.
l Delegators are ecosystem participants who may lack the technical knowledge or resources to perform indexing and who may choose to delegate GRT to Indexers.
In order to index a subgraph, GRT needs to be staked. As Indexers earn more GRT through delegation, they can increase their ability to index more subgraphs. Indexers commercialize their indexing and query processing services on The Graph's query market by staking GRT. Currently, the minimum stake for an Indexer is 100,000 GRT (equivalent to approximately $10,000 as of June 30, 2023). In addition to this minimum stake, Indexers can also obtain delegated stakes from other ecosystem participants. Delegates can increase the total stake up to 16 times the Indexer's personal stake.
Delegators and Curators saw growth of 2% and 3%, respectively. However, Indexers actively staked GRT declined for the first time in the past five quarters, falling 29% to 328 at the end of Q2’23. This decline can be attributed to The Graph’s Multichain Incentive Program (MIP) ending at the end of Q1’23, as well as some Indexers unstacking their GRT at the same time. This behavior hints at Indexers’ reliance on reward incentives as they seek to balance operating costs and staking revenue on The Graph’s network.
At the end of Q2'23, there were 653 Indexers who had allocated or continued to allocate their shares to their subgraphs to receive staking rewards. That is, in addition to the 328 who were actively staking GRT (i.e., active indexers), there were 325 who were inactive in Q2'23. It remains to be seen how many of these inactive indexers will resume actively staking GRT in the following quarters in anticipation of more subgraphs migrating to the mainnet. This migration will not only bring more indexing opportunities, but also more indexing reward income.
income
The GRT token follows the Stake-for-Access model, also known as the utility token model. Participants in The Graph ecosystem earn GRT revenue by performing indexing and query services on the mainnet. These services require staking GRT. Indexers' staking includes their own GRT tokens (i.e. self-staking) and GRT tokens pledged to them (i.e. delegated staking).
The Graph's revenue mainly comes from indexing rewards and query fees paid by data consumers. The revenue from indexing rewards and query fees is passed on to agents and curators through indexers.
Each indexer can customize its own query fee and indexing reward ratio based on the supply and demand dynamics of the open market. Based on this ratio, each indexer distributes the income as follows: query fees are shared with curators, while indexing rewards and query fees are shared with agents.
Based on the example above, if an Indexer sets the query fee ratio to 13.96%, then their Delegates will receive the remaining 86.04% of the fee income, proportional to their stake ratio. Although Delegates’ stake cannot be reduced, Delegates should still consider several factors when staking GRT with Indexers. These factors are related to the following:
l Select indexers, that is, select efficient indexers with the best balance between optimizing staking reward payments and investing their own staking.
l During the release period, GRT cannot be transferred or rewards cannot be obtained within 28 days after the release of delegation.
l The mortgage tax is 0.5%, which means calculating how long it takes to earn back the 0.5% tax of the entrustment.
Index Rewards
Indexing rewards come from an annual inflation rate of 3% on the GRT supply, derived from the GRT issuance rate. Rewards are distributed to staked indexers in return for providing indexing and query services on The Graph’s open market.
Indexing rewards grew by 3% in Q2'23 to approximately $9.1M. Indexing rewards, measured in GRT, remained relatively stable, growing by 1% from 71M GRT in Q1'23 to 72M GRT in Q2'23. This stability is due to a governance decision to set the protocol issuance rate to 3% prior to The Graph's September 2022 merge. Following the merge, the number of blocks created on Ethereum increased. As a result, the rate of GRT rewards issued per block increased to 3.2% in one month in Q4'22, resulting in a total of 80M GRT for the entire quarter, before starting to decline.
Over the past five quarters, Delegators have received more GRT indexing rewards than Indexers themselves. In Q2'23 alone, Delegators received over 46M GRT (~$5.7M) in rewards. This is roughly 64% of the total indexing rewards distributed, up from 62% in Q1'23. Delegators likely received more rewards because Indexers focused on attracting more delegated collateral by offering more generous indexing reward ratios to Delegators, thanks to the H1'23 GRT-USD price rally.
Query fee (network usage fee)
While Indexers earn the majority of their income from rewards, a second source of network revenue comes from query fees. Data consumers (such as application developers) pay query fees for Indexers to fetch and organize their data. Query fees are determined by market demand and distributed among curators, indexers, and brokers.
Total revenue from query fees, measured in US dollars, fell 48% quarter-over-quarter, after reaching an all-time high in Q1'23. The lower fees were likely due to a combination of several factors:
l Move to a paid model for a distributed network after the application optimizes query volume, coupled with gas optimization for the ongoing layer 2 migration.
l Reduction in overall governance activity and decentralized infrastructure protocols.
l The Graph’s Multichain Incentive Program (MIP) resulted in more fee accumulation in Q4’22 and Q1’23 relative to other quarters.
For The Graph, total revenue from query fees in Q2’23 (~$47,000) was less than 1% of total indexing rewards (~$9.1 million). This distribution suggests that The Graph’s network participants are still highly dependent on indexing rewards to sustain their daily operations.
Qualitative analysis
Key Events
Migrate to Arbitrum
As of Q2'23, The Graph has completed the second phase of its migration to Arbitrum, a Layer-2 scaling solution on Ethereum. The migration is designed to provide users with a seamless, low-cost distributed data experience. Following the approval of GIP 0021, 5% of indexing rewards are now available on Arbitrum. Over time, the total indexing rewards on Arbitrum One will increase to 100% and gradually migrate from the Ethereum mainnet to Arbitrum.
As a reminder, migration to Arbitrum consists of three phases:
l The first phase will enable Arbitrum One on the Ethereum mainnet.
Phase 2 enables indexing rewards on Arbitrum One.
l The third phase enables rapid migration to Arbitrum One.
Additionally, migration assistance is provided to all participants attempting to migrate.
Fantom and Polygon support
The Graph’s distributed network supports Polygon and Fantom through the MIPs program. Developers on the Polygon and Fantom networks can begin migrating subgraphs to The Graph network. The Graph previously supported Polygon on its hosting service.
Subgraphs powered by Substreams
Substreams is a streaming-based system for transforming and processing blockchain data. Subgraphs powered by Substreams bring composability and efficiency to The Graph Network - by combining the advantages of Substreams and subgraphs, developers can reduce synchronization time by more than 100 times and improve overall performance.
Additionally, the sync time for some subgraphs has been reduced from 2 months to just 20 hours. Currently, various real-world applications such as Uniswap v3, Lido, and DappLooker are using Substreams-powered subgraphs to provide optimized and up-to-date data. Developers can explore and apply for funding to build their own Substreams-powered subgraphs through The Graph Foundation.
A full list of The Graph events is available via Messari Intel.
Key governance decisions
Updated feature support matrix (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 version 0.31.0. The proposal states that the new version is an update to the matrix previously approved in GGP 0023. Graph Node release version 0.31.0 includes subgraphs powered by Substreams, full-text search and additional filters and derived field loaders.
After a successful voting process, the GGP 0022 proposal updated the Subgraph API feature support matrix, provided support for new chains (Celo, Arbitrum, and Avalanche), introduced IPFS file data sources, released Graph Node v0.30.0, and approved the updated matrix through GGP. The proposal also emphasized that unless there is a proposal to roll back the feature support matrix, no new Defender transactions are required, as the proposal has been made and has taken effect.
Increase the timeline and requirements for L2 rewards (GIP 0052)
This initial discussion aims to establish a timeline for migrating 100% of indexing rewards to The Graph’s L2 instance. The proposal suggests the following steps:
Increase L2 rewards to 25% after all migration helpers described in GIP 0046 are released.
l Increase L2 rewards to 50% after the L2 transfer tool has been functioning properly for at least two weeks and L2 participation has increased.
l Two months after the previous step, increase the L2 reward to 95%, assuming everything is running as expected and there is a significant increase in L2 participation.
l Increase L2 rewards to 100% one month after the previous step, provided that the majority of subgraphs have been migrated to L2.
A full list of The Graph governance proposals is available through Messari Governor.
Summarize
The ongoing L2 migration is designed to bring a seamless and efficient decentralized data experience to The Graph’s users. In Q2 2023, The Graph’s demand-side revenue fell 48% year-over-year in USD terms, driven by dapps optimizing query volume, coupled with reduced governance activity and overall decentralized infrastructure protocol usage.
Meanwhile, revenue from indexing rewards grew 3% year-over-year to over $9 million in Q2. Following the end of the migration incentive program, The Graph saw its first year-over-year decline in active Indexers (-29%), while Delegators and Curators grew 2% and 3%, respectively.
Over the past year, The Graph has been working on migrating from hosting services to the decentralized network (mainnet). As of the second quarter of 2023, 1,082 subgraphs have been migrated from The Graph's hosting services to the decentralized network (mainnet), a year-on-year increase of 39%. As more subgraphs migrate to the mainnet in the coming quarters, The Graph will continue to remove technical barriers for developers and ultimately achieve faster innovation in Web3.
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