Strongblock launched its Nodes as a Service (NaaS) platform in late 2020. The idea behind it was unlike anything the DeFi space had seen before. Strongblock would let users create and deploy Ethereum nodes and reward them for running and maintaining their nodes.
People took to it almost immediately. By early 2021, it had become one of the most exciting projects in decentralized finance (DeFi). And naturally, it would also inspire a whole generation of forks. These include Thor Financial, Ring Financial, Wonderland, Olympus DAO, Project X, Atlas Cloud, and many more.
Many of these node projects enjoyed at least a modicum of success. NaaS was the hottest thing in town. But it didn’t last for long.
The current state of NaaS projects
Towards the end of last year, things in NaaS took a turn for the worse and haven’t recovered since. Today, 99% of node projects are either dead or dying. Even pioneers haven’t been spared from this precarious situation.
Take Strongblock for instance. The project’s token, Strong, was worth almost $1,200 in October 2021. By mid-December, it had dropped to $400 but recovered to around $700 over the following month. However, since then, the token has lost almost all its value. As of the writing of this article, it is worth $7.81.
Another good example is Thor. The protocols NaaS project was launched to help scale the THORChain network. It enjoyed great success for the better part of last year. During its best run, the value of the THORChain Rune rose from less than a dollar to around 20 dollars. But currently, the protocol’s NaaS project is pretty much dead, with the token sitting at 2 dollars.
This is the case with most node projects; the value peaked sometime last year only to drop and never reach the same levels again. Today, almost all NaaS projects’ tokens are sitting at pre-launch prices. What went wrong?
The downward path
The fall of node projects resulted from a combination of many factors. A lot of these are down to how the projects were set up. Some factors, however, like the crypto market falling into a bearish trend or smart contract exploits, can’t really be blamed on anyone.
Economics in a bear market
Most node projects didn’t have the best economics. For instance, once a user invested funds, they could no longer access them. The promise here was they would recover their money through the project’s insane APY, which only happened for early investors.
The success of these projects also relied on new investors coming in. Most had no clear way of generating income to reward users. They would use funds from new investors to reward existing investors.
Coincidentally, this is the same setup used by Ponzi schemes. Of course, many of these projects were legitimate and this is consistent with how crypto projects often attract initial funding.
However, without a clear strategy on how to generate income to pay rewards, a model like that doesn’t work well in the long run. For one, it makes it difficult to attract investors during a bearish market. This is pretty much what happened with many of these projects.
Flawed from the ground up
Another problem with such a model is that it relies on unsustainable strategies. In this case, node projects started offering unprecedented APYs to attract as many investors as possible. These APYs reached well into the thousands, like Olympus DAO, which was offering an APY of 7,100%.
Such a high APY, while attractive, has two problems;
- It’s only sustainable for a short time. Projects with insane APYs typically burn out within months.
- To avoid burning out, projects can slash rewards.
Many node projects opted for the latter. However, it only made things worse.
How?
Rewards are typically paid in the protocol’s native token. But, in a bearish market, the token’s value is dropping. So, when a project’s rewards are cut by half, investors get a small return on their investment. Combine that with the cost of maintaining nodes and you’re left with unhappy investors.
In many of these projects, the total cost of slashed rewards, devalued tokens, and maintenance was more than the rewards received. Thus, it became infeasible for projects to launch nodes. This is how many node projects died.
A pair of examples
Strongblock’s highest performance coincided with a period when crypto assets were on the rise. During this period, Strong’s value shot up. This meant higher returns which kept investors streaming into the project.
However, when the bearish trend started late last year, the value of the Strong token dropped. And dropped.
At the same time, some node projects collapsed due to malicious hacks. One such project was Ring Financial, which lost investor funds to a smart contract exploit just as it was growing in popularity.
Often, a project can recover from a problem like that. However, Ring Financial fell into a perfect storm. The hack happened just as the bear market was beginning. Coupled with miscommunication within the project and the problem became a disaster.
Naturally, in such situations, investors become skeptical. They aren’t so quick to invest in more speculative ventures, which has caused many NaaS projects to stumble.
Will NaaS Projects Make a Comeback?
Nodes as a Service is an innovative idea and an excellent investment opportunity. However, the first generation of DeFi protocols built around it had too many weaknesses to survive. As a result, most of them are dead.
We might see a resurgence in the future. However, this will depend on the willingness of the upcoming generation of NaaS projects to learn and improve on the failure of those that came before.