Messari: A Comprehensive Analysis of Livepeer's Operating Mechanism and Development Status

Author: Mason Nystrom

Original Title: 《The State of Livepeer》

Compiled by: Hu Tao, Chain Catcher

Key Points

• In Q4 2021, Livepeer processed a record approximately 30 million minutes of transcoded video, a 37% increase from the previous quarter, marking a historical high.
• Today, most of the supplier revenue comes from staking rewards, with orchestrators generating $17 million in rewards in Q4 and nearly $40 million in 2021.
• Livepeer orchestrator transcoding fee revenue significantly increased throughout 2021, generating $154,000 in Q4, a 113% increase compared to the previous quarter.
• The acquisition of MistServer in Q4 will enable Livepeer to support video ingestion, content delivery, storage, and serve as the foundation for end-to-end live streaming infrastructure.

Introduction to Livepeer

Livepeer is a video transcoding network used by video service providers and application developers/streaming applications. Video transcoding—the process of reformatting raw video files into viewable files based on user bandwidth and devices—is a core internet service used by streaming providers and social networks like YouTube and Twitch.

Compared to existing single streaming services, Livepeer reduces the cost of real-time streaming services (transcoding, media servers, content delivery) by ten times. Unlike Amazon Web Services (AWS) or other transcoding providers, Livepeer offers transcoding pricing based on usage and server space.

There are several key stakeholders in the Livepeer network:

Video Miners - Orchestrators and Transcoders

Node operators—referred to as orchestrators in Livepeer—are responsible for receiving video from broadcasters and returning transcoded results. Orchestrators stake LPT to perform services on the Livepeer network. Transcoders are responsible for executing work on the Livepeer network, providing computing power to transcode video files for orchestrators.

Delegators

Delegators—individuals who own LPT tokens and stake their tokens with orchestrators in exchange for fees and a certain percentage of minted LPT tokens. Orchestrators with more LPT staked can perform more work on the Livepeer network. Additionally, orchestrators can stake their own funds or choose to accept funds from other delegators (but charge a certain percentage fee and stake rewards for their services).

Broadcasters/Applications

Applications (also known as broadcasters) are applications or services that require streaming or use live video in their functionality. Broadcasters pay orchestrators for transcoding service fees.

Livepeer -- Macro Overview

Growth of the Livepeer Network

The core function of the Livepeer network is to transcode video for streaming applications, making transcoding network usage an important metric for tracking the health and growth of the Livepeer protocol.

To date, the Livepeer network has transcoded over 73 million minutes of video, with 41% coming from Q4 2021. Throughout 2021, Livepeer's network usage set historical highs in each subsequent quarter, experiencing the most significant growth in Q2, with network usage increasing by approximately 170%.

In Q4 2021, Livepeer processed a record approximately 30 million minutes of transcoded video, a 37% increase from the previous quarter, marking a historical high.

The increasing adoption of Livepeer aligns with the accelerated growth of video applications utilizing the network, such as Korkuma (providing live shopping videos for companies) and PlayDJ (DJ streaming service). Gaming remains a core vertical for Livepeer.com—hosted services built on the public Livepeer protocol—partnering with Vimm, a streaming platform for gamers and creators supported by the Hive blockchain. While Livepeer supports various use cases, most usage comes from user-generated content applications (i.e., gaming, music, streaming), including popular verticals like sports, media, and events.

Growth of Video NFTs and Computing Services

So far, most video NFTs have experimented with relatively short durations (1-15 seconds). However, the potential for video NFTs (both pre-recorded and live) lasting from minutes to hours offers creators new types of content and monetization opportunities.

Livepeer has begun experimenting with video NFTs and is preparing to provide core infrastructure for live video NFTs.

In November 2021, Livepeer co-hosted COLLIDE with Glass Protocol, a live concert—digital and real-world—that captured and minted live video NFTs. Glass Protocol created a marketplace for creators to issue video NFTs with instant liquidity when bought and sold. Notably, the COLLIDE concert was the first to mint live video as NFTs.

In the context of the creator economy adopting Web3 primitives (such as NFTs), the continued growth of video NFTs and UGC applications may surge in the future. In 2022, Livepeer aims to further increase its protocol usage for 4K video and expand into other potential features, including AI-based smart video, AI-enhanced content moderation, object recognition, song title detection, and video fingerprinting.

Livepeer Network: Video Miners

While the demand side of the Livepeer network is driven by broadcasters (applications needing streaming), the supply side is operated by node operators (orchestrators).

The Livepeer network divides the orchestrator role into two specific parts—staking and transcoding. To provide transcoding services on the Livepeer network, LPT must be staked.

Given that not every video miner wishes to operate an orchestrator simultaneously, video miners can choose to allocate their computing resources to specific orchestrator pools (private or public). These mining pools—public and private—compete to execute transcoding work, with private video miner pools selecting the miners to join.

It is noteworthy that the mining process for video transcoding differs from Bitcoin or PoW mining. Using GPUs, transcoding processing is handled by specific chips on the video card, thus not requiring the same energy demands as ASIC miners (used for Bitcoin/Ethereum mining). Therefore, GPUs can allocate transcoding services to Livepeer while playing video games or performing other activities.

Anyone can connect their GPU video card to public mining pools for transcoding video (such as Livepool). In fact, Livepool currently ranks 8th in orchestrator fee revenue and 11th in total LPT staked.

Network Revenue

In 2021, Livepeer experienced a breakthrough year, with significant increases in revenue for orchestrators and stakers.

Notably, all revenue from the Livepeer network flows to supply-side participants (node operators, code converters, and delegators). Livepeer's supply-side revenue includes network usage revenue (e.g., transcoding service fees) and staking rewards.

Staking Reward Revenue

Today, most of the supplier revenue comes from staking rewards, with orchestrators generating $17 million in rewards in Q4 and nearly $40 million in 2021. Note that revenue is calculated based on the LPT price on the day it is earned, so the percentage of LPT rewards held may yield greater returns.

Although the net of LPT staking and rewards significantly decreased throughout 2021, the appreciation of LPT's price led to a substantial increase in LPT staking rewards calculated in USD.

Network Usage Revenue

Orchestrators can set transcoding fees on a per-pixel basis, meaning that transcoding services can be priced for different quality videos (e.g., 4K contains four times the pixels of 1080p and can be priced accordingly). Network usage revenue paid in ETH (e.g., transcoding services) accounts for only a small portion of orchestrator revenue.

Livepeer orchestrator transcoding fee revenue significantly increased throughout 2021, generating $154,000 in Q4, a 113% increase compared to the previous quarter.

The growth in fee revenue directly corresponds to the increase in usage, with the highest percentage growth in fee revenue occurring in Q1 of this year. Impressively, each subsequent quarter in 2021 witnessed positive percentage growth in service fee revenue.

Like many Web3 infrastructure protocols, the Livepeer network subsidizes node operators through LPT rewards until fee revenue increases to sustainable levels. This initial subsidy is central to Livepeer's economic model, enabling the protocol to compete with existing transcoding providers like Amazon and Google.

Livepeer Dynamic Rewards

Livepeer utilizes a dynamic mechanism to obtain rewards. As long as the network's staking participation rate remains above 50%, the inflation rate decreases by 0.00005% daily until it reaches zero. If at any time the participation rate (percentage of staked LPT) falls below 50%, staking rewards increase. Ideally, as the Livepeer network grows, LPT will become deflationary as network participants seek to acquire it to provide transcoding and computing services on the network.

In June 2021, the staking ratio of LPT began to reach equilibrium, fluctuating around the 50% threshold.

As a result, Livepeer's staking rewards were deflationary throughout 2021, except for a 7% increase in staking rewards in Q4 compared to Q3 2021.

Since fee revenue cannot generate sufficient cash flow, orchestrators are likely to either raise funds from external sources to subsidize operations or sell a portion of their LPT rewards to maintain operations. Notably, LPT staking also has a 7-day unbonding period, which, while a useful deterrent mechanism, can lead to capital inefficiencies for orchestrators, transcoders, and delegators. However, liquidity staking protocols for Web3 infrastructure tokens, such as Tenderize (set to launch in Q1 2022), may increase the liquidity of staked LPT.

Livepeer Ecosystem: Governance and Key Events

Fundraising and Capital Expenditure

In July 2021, Livepeer announced a $20 million Series B funding round aimed at expanding its video streaming platform, enhancing its technical capabilities, and supporting more blockchain networks. Subsequently, in January 2022, Livepeer announced a $20 million Series B extension to expand broadcaster capabilities, thereby increasing demand generation for video developers.

Acquisition of MistServer

In October 2021, Livepeer Inc. made its first acquisition: MistServer, a media toolkit that helps developers set up streaming servers. Given that Livepeer has been using MistServer for years and is the largest user of MistServer (running most instances globally), this acquisition is quite strategic. More specifically, MistServer performs another critical service during live streaming—container format conversion.

The easiest way to view conversion is as the reverse process of transcoding. Thus, while transcoding acquires data and processes it into different types of encoding, container format conversion acquires data and repackages it (without changing the content) so that it can be passed to different points.

Livepeer has utilized MistServer to build Livepeer.com, a hosted transcoding service operated by the Livepeer team. Additionally, Livepeer.com uses MistServer to receive streams in formats that cannot directly enter the public Livepeer network, set streams for transcoding, and forward the output to YouTube.

Governance and Protocol Improvements

LIP 73 and LIP 74: Confluence Upgrade

As Livepeer's staking smart contracts are built on Ethereum, Livepeer has been troubled by rising gas costs. More specifically, broadcasters must pay high transaction fees for transcoding services. Similarly, orchestrators and delegators pay high fees to receive their fees and staking rewards. This has reduced the economic viability for smaller video miners (orchestrators or transcoders) and delegators to participate in the network.

To help address these issues, the Livepeer team proposed the Confluence Upgrade, which will 1) migrate the Livepeer staking contract to Arbitrum, 2) support multiple delegators, and 3) enable participants to claim existing staked LPT rewards by bridging the Ethereum reward issue to Arbitrum. Due to significantly lower gas fees on Arbitrum, the Confluence upgrade will also increase profit margins for all network participants and allow more small participants to join the network favorably. The Confluence public testnet was deployed on January 13, 2022, and will continue to launch on Arbitrum after the audit process is completed (assuming the vote is approved).

Transcoding Verification Improvements

As part of the 2020 Streamflow network upgrade (which introduced GPU transcoding to the network), penalties were disabled to favor real-time statistical verification performed by broadcasters. However, this led to some issues, including increased latency of streams—because there is a delay in verifying before using transcoded video—and increased computational burden on broadcasters to verify transcoding. This year, the Livepeer team proposed and subsequently enabled fast and comprehensive verification, allowing broadcasters to receive and verify video segments in near real-time.

The Livepeer team achieved this by enabling broadcasters to insert video into their streams more quickly while creating an offline dispute resolution process that imposes significant economic penalties on malicious actors—penalties or freezing their ability to participate in the network. Additionally, this proposal aims to publicly broadcast when video miners act maliciously, thereby damaging the public reputation of that miner.

Conclusion

Only a few companies can provide real-time video transcoding at scale (i.e., Google, Amazon, Microsoft), and Livepeer offers a unique solution—based on cryptoeconomic primitives—to compete with these existing giants. In 2021, Livepeer's network began to show strong growth signs in network usage and supplier revenue. As the Livepeer network matures and shifts to Layer 2 scaling solutions, the promise of allocating GPU bandwidth for video transcoding becomes very attractive for newer individual miners and larger non-crypto-native players.

The acquisition of MistServer in Q4 can be considered Livepeer's most significant advancement in 2021, as this integration will ensure that Livepeer can support video ingestion, content delivery, storage, and serve as the foundation for end-to-end live streaming infrastructure. Coupled with the network's upcoming migration to the Arbitrum network—which will lower costs for existing video miners and allow more video miners to join the network—Livepeer is well-prepared for 2022.