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Author: Admin | 2025-04-27
I recently re-read three fantastic (and imo canonical) older crypto posts that shaped a lot of how people think about value capture in crypto (Fat Protocols, Thin Applications, and Crypto Tokens and the Coming Age of Protocol Innovation).via Power Laws & Normal Distribution in CryptoThe original fat protocol thesis is well understood in terms of L1 value accrual, but it also meant that you saw a more long-tail dynamic within Dapps, which meant less of a power law from a % chance of success perspective (i.e. many tokens will be worth *something* while few go to 0, as I wrote about previously).I might’ve deleted it but I tweeted how we’ll soon get to replay the alt L1 trade but with L2s and L3s added to the mix, except with higher starting valuations and maybe a little less degeneracyQuickly realizing I was correct on the 1st one but very, very wrong on the 2nd— knower (@knowerofmarkets) November 28, 2023What we see in bull markets (and perhaps crypto in general) is a shift of how people look at Expected Value. This leads us to a logical conclusion today where the majority of builders view the maximum EV thing to do is build new L1s or L2s instead of Dapps or application-centric protocols, leading to a world of further fragmentation and plentiful useless blockspace. They then take a step down and build abstractions to siphon off some the L1/L2 value in things like LSTs.Some may make the argument that this dynamic is because of the fee structures and “defensibility” of blockspace relative to Dapps in crypto. As shown in the data above, L1s and L2s make up the majority of cumulative economic value capture in crypto today. This, along with deeper analyses of the business models of blockspace, explains the massive FDVs for a variety of L1s like Ethereum (and more actually to this point, things like insert zombie L1 here)1I’m not naming names because I want all the readers who love cardano etc. to think I’m definitely not talking about their useless L1 and to a lesser extent dominant L2s like Arbitrum2Disclosure: Compound invested in the seed round of Offchain Labs, and also plays into the terminal network premium that crypto protocols get where speculators are willing to model network scale and penetration many years into the future and pay for that today, resulting in high multiples.That said, this is somewhat disproven
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