L1 & L2 Token Value Capture | Jon Charbonneau

Transcript

and that turned into a lot of the people who used to argue that staking U issuance is a cost with kind of no basis uh there is now like some argument that oh it's a cost um because of taxes let's say that we treat it as taxable income what this looks like is effectively like dividend income on equities in traditional finance and so ask yourself do Dividend payments uh and like the taxes on dividend payments do those reduce the earnings of a company and like reduce the profitability of the company like no they absolutely do not because they are not fundamental to the company they are not inherent to the shareholders that it's just like your choice as a holder who decides to hold this equity and like live in a place where you get taxed on it hey everyone this episode is brought to you by Supra

the vertically integrated L1 for super daps uh they have a very cool new product coming out called Supra container so head over to supra.com that's supra.com containers so if you're building on an L1 and it feels a little bit crowded or the complexity of L2 and l3s are getting you down just head over to Supra they'll get you sorted thank me later all right everyone this is a message from my d gen listeners out there if you are getting scalped paying expensive fees to per Dees I highly recommend that you check out index co-op's new leverage Suite now whenever it comes to leverage do your own research this is not Financial advice don't bet more than you can lose all that good stuff but if you are going to lever up you might as well not pay an arm and a leg for it you can get

leverage on BTC and E with built-in liquidation Perfection uh now available on Base main net and arbitrum so click the link in the bottom of the show notes and head over and check them out today and you'll hear more them later in the program all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-host today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode all right everyone welcome back to another episode of of bell curve

today I'm joined by blockworks very own Dan Smith and we got John charbono A friend of the pod on here fellas welcome morning appreciate it how's it going yeah all right guys this is going to be a very fun one um this is the podcast accompaniment to John's latest post on L1 token value capture this is kind of the debate that launched all many many crypto podcasts it's probably the longest standing debate in terms of blockworks history in terms of how you should think about valuation and uh how you should compare different metrics across different blockchains and uh John kind of took this on himself to answer this big thorny question for the industry so you know we're going to walk through the entire post here we'll link the we'll link it in the show notes um

this is a slightly shorter than average post for you John but it's still uh pretty lengthy and there's probably G to be more details in the post than there is on this podcast necessarily but can you first just before we get into some of the weeds here and walk through some of the metrics that you've outlined what was the what was the original motivation for creating this post yeah yeah sure yeah th this post I would say is like it's more it's like mostly a successor I would say to the one that I wrote like a year and a half or so ago on like ether's not ultrasound money on like protocol financials profitability like all of those kinds of things um I think I guess I would have like hoped by now people would like mostly agree on like basic financial terms for like

blockchains by now um but we are still not there um so mostly just decided to like revisit that um and get like a more updated version I feel like I focused more in the last one on saying why a lot of Frameworks are bad and not like necessarily providing like as more concretely like okay but like what are some numbers that we could like actually start to use and kind of rally around a little bit more um so that one I was trying to do more in this direction of okay like what what are some things that like are actually useful so we can get to some semblance of like what does trafi look like where we actually have some metrics that people agree on um because it was funny like like going into this I was checking like the different like the different like

Financial tools whether it's like you guys and token terminal and like other ones um and like people still don't agree on these things um and you could tell even at like kind of a subjective level like people argue of these things all the time like the toally and Justin pod like they're still arguing over these like same basic ideas um so wanted to kind of get like an updated like better more generalizable version of that to try to try to clear these up going forward yeah there's a lot of uh ships passing in the night in terms of debate around this stuff and you know you start to hear a lot of language like putting running a DCF on ethereum or the idea that salana isn't sustain able because of its inflation and things like that right and I think the the reason that I like your your post so much and a

lot of the ideas in there is it it allows you to create there are a couple of metrics that you can use to compare l1s l2s and other protocols um that's just very standardized right so you can stop that ships in the night idea and I want to start by just walking through some of the big ideas that you laid out in this post and you know I I think that one of the the Big Ideas that's going to it was it took a little while for me to wrap my head around this um but it's the idea that crypto networks are not companies and therefore it doesn't really make sense to just Jam a p&l on something like ethereum or salana so can you just walk us through that idea that crypto networks are not companies and how that lays the foundation for the

rest of this post yeah sure yeah it seems like such a I I think it like took people a while like when I like say stuff like this because it seems like such a like sort of obvious thing but like also seems sort of just like semantics and um like isn't entirely clear like the main thing that ends up mattering is like people keep talking about all these terms like profitability and like what is like is this a cost to the network and stuff like that without like taking a step back for a second like like what does that mean to be like a cost to the network it's this just like abstract idea in this case that just doesn't make sense it's like asking like what's the profitability of the internet and you can realize why like that is sort of like a nonsensical

question but you can obviously answer like okay but what's what's Apple's profitability you can see you know apple is clearly um this you know centralized entity that everyone works together you know income comes in they pay money out and like they have retained earnings at the end of the day um and those ideas just actually just don't map over at all to actually decentralized networks um and actually decentralized actually being a key part which we can go into of networks like Bitcoin ethereum salana like this actually just doesn't make sense um these are not entities that like are all working together and like retaining profits together um and and acting in the same kind of centralized manner um and this isn't some like magical thing about like putting stuff on chain like the simple example of like

we've talked about is like okay but like what if you were just a centralized company that runs everything on chain that doesn't make you like not a company that we could look at your profits and make you exempt from corporate taxes like if I have a company that has put my treasury on chain it's still a company and like you can track everything the same like money goes in like they retain earnings at the end of the day they're going to pay some corporate tax rate like all of those things um and uh so that's why I think that people need to just like before you can start to like Define the metrics is like okay like what are we talk like what we actually talking about um as far as like what those metrics apply to because stuff like income and expenses like they are

definitionally relative to something and we're make and we keep saying them relative to something that just like doesn't make any sense um and so what I end up thinking ends up making sense for these I would say like truly decentralized protocols which are not like even for Dows I think that you can actually make a more coherent argument in like many cases or centralized onchain stuff of like okay this is like it works together effectively as a company but for these more like actually centralized like L1 type networks whether it's like Bitcoin ethereum salana um the metrics that end up making sense when you were looking at like profitability type stuff ends up being for me looking at some specific set of stakeholders um and in particular token holders is like generally what we care about here um and then the important caveat to that being is people often

conflate that and like look at like different subsets of token holders like if you look at you know is issuance an expense is like the classic one like is it a cost that people talk about it's like if you are an unstaked holder unequivalently it it is an expense like this is a non-cash expense that you are strictly paying out but if you a Staker like this is income and it's also an expense um so so like which one is it um and I I think that both of those are actually logical income statements like which we can talk about later on it's like I think it's like valuable to look at like what is the income statement for uh stake tokens what is the income statement for unstake tokens um and then the Unison of those is obviously like what is the income statement and of all

tokens for a given chain um and that the metric that we end up with there of like what is effectively the income statement for all tokens for a given chain that ends up being I would say the most like broadly applicable and useful thing that we can actually apply Apples to Apples versus another chain like you can take the income statement of like all Soul holders and all eth holders and all Bitcoin holders and you can actually like very rationally compare those things to each other um whereas a lot of the other stuff if you try to compare them to Apples to Apples like they just don't make any sense um so this is like kind of the direction like I've been going of like what are some useful standardized things that we can actually use to Like Apples to Apples compare these things and get like a logical

answer so that that's kind of the flow that I go through with this yeah and I I want to just underline this concept for people because they're they're un undoubtedly if you are listening to this podcast you have seen especially the ethereum pnls right you said well wait a second ethereum generates fees right and I can you know kind of Jimmy it into this p&l structure that makes a lot of sense for me intuitively but I think the intuition I think John that you're describing here is you can just look at something like ethereum and it's clearly not a company right there are companies that coordinate around ethereum ethereum as a network is a great coordination layer in between these different entities that you could describe as companies but clearly something like apple and something like ethereum you just can't

onetoone compare and the existing sets of financial statements that we have p&l balance sheet cash flows that's meant to analyze a company you can't jam it into this coordinating layer and expect it to make sense what you can do is you can look at this through the lens of those different stakeholders and entities and the foundation like what's going to set up for a lot of the rest of this post is actually looking at this thing not through the example of okay here's a p&l for ethereum but you can look at different subsets of stakeholders that ethereum coordinates one of the major ones being token holders and actually start to build a p&l around that so can you describe you know when you're looking at this from the persp like why

is it more appropriate to look at this through the lens of a token holder p NL and we can get into the Nuance of Stak versus non-st uh token holders as like the appropriate lens of looking at this yeah yeah it it comes down to that fact of like when when you look at these networks like they it we taking the examples of like the truly decentralized once again like say like ethereum of these concept of like what is a company just fundamentally do that map over like you can do these for a company because you actually have a coherent centralized entity that is like pooling these funds you have people that are working together in a common Enterprise and then you have Equity shareholders who are on a common basis and who all own like an equal portion of those like earnings and profits and so on um effectively none of

those Concepts map over to ethereum there's no like there's no treasury that is like retaining any of these profits quote unquote like at the end of the day you don't have uh shareholders and participants who are acting together in any kind of common Enterprise like they're just completely distinct entities who are just operating in their own self-interest um and then you don't even have these like Equity holders who have actual kind of like governance rights or ownership of the network in any way like eth has absolutely no governance rights um it has rights if you use it in the right way to receive some proportion of like the the fees um and revenue or whatever you want to call it that are going through the network um but so none of those Concepts end up mapping over but what we can concretely do is like okay like literally look at

this asset and what are the rights in aggregate um for these tokens to receive some cash flows at the end of the day um because that is always going going to be the fundamental kind of Baseline value of any of these types of networks um and so I I think it's a fair point and like likely true for networks like ethereum um that that is in even in the long run like probably not going to be its only value that like a strict DCF is probably insufficient because you have these other ideas of like there is value that comes from the utility um that it provides in the utility and holding the asset and that like actually creates some real value um but fundamentally those are things that we need to like layer on top of the idea of okay but what are the fundamental Baseline values

from the cash flows of this thing um because in particular I mean the clear example would be like a lot of networks will not have a token that has any argument of like oh this has some monetary premium and is used in some utility like way it's going to be like no this is just a chain and a token and if you hold the token like you can get some profits you're going to run a DCF on the thing it's going to make toal sense um and the same Concepts apply for etherum and Sal it's just then a matter of okay how do we think about layering on on top of these like okay but the token also has utility in this calized Network and be kind of add that value on top of there one other way you described the um the rationale for viewing the uh

the net income of the aggregate token holders aggregate meaning both the stakers and the non- stakers collectively like although you can't really be one or the other you kind of have to break that out and to find your own individual p&l was to answer the question of like you know imagine some crazy scenario where someone was trying to buy every eth in circulation uh like what was the what should the rational price of that individual would pay for it and uh that that like really helped things click for me of like okay like yes I can be only a Staker or only a non- Staker uh but if I still wanted to like run these network-wide valuation ideas like you do kind of have to look at the aggregate of token holders and that's just like one piece I wanted to add because I thought that color you

provided right before the podcast was super super useful yeah exactly yeah that's always the like very easy thought experiment to run on any of these things is okay if you as a motivated private individual like if Elon Musk wanted to just like go buy all the tokens or like whoever I guess you need even more money um but like like what like what would they be willing to pay for this on like a strictly rational basis they're going to be able to pay if you know you provide no other values they're going to look at what are the future fees I can earn this thing what does it cost me to run this thing and then I'm just going to like run a DCF on that thing basically and just like apply some multiples to it you know value it however I want that's like the

fundamental value um and then you can add on top of these all these other things and like build from there of like okay how do we have utility in the network and blah blah blah and all of that from there but that that is always the fundamental Baseline is like all all the tokens together effectively like like what are the actual rights that they have cash flows all right so this is gonna this framing is very helpful because it starts to help us answer some of these questions that people have been debating since the dawn of uh crypto at least which is like is issuance a cost right and the question is is issuance a cost to who and I want to I want to uh do a little brief detour here to talk about taxes because you know some there are some people who are proponents of this

idea that taxes uh is a cost for issuance right um and so John you got a whole part of that that you've written up in this in this uh in this essay here can you just describe how you think about taxes and whether or not that's a cost to the network when it comes to issuance yeah this is everyone's favorite part of this um so yeah like the the general flow of this was like whenever people were starting to make this argument of like fees uh minus ISU or in other cases like burn minus issuance like that equals the profit um I like I was arguing back then like the e was ult not ultrasound money thing like no this doesn't make any sense for all these different reasons I was like oh but like a problem that like is real for issuance is taxes like that that is

effectively like leakage out of the system from these holders um and that turned into a lot of the people who used to argue that staking issuance is a cost with kind of no basis uh there is now like some argument that oh it's a cost um because of taxes um and uh this uh like debated like most recently i' would say rather loudly on like the the toy and Justin podcast um spoiler uh toally was right on that one um issuance is not a cost um and even for taxes uh this is kind of just like PE a lot of people keep making the same mistake of conflating this idea of like is like issuance feels like it's bad in some way um and like taxes feel like they're bad in some way so that means there are cost to the network um

and and those are just like different ideas like one is like a very concrete Financial term that we could say like yes this is like correct like this is correct accounting versus this other subjective idea of like ah this is like kind of a problem um and there are negative effects of issuance and one of them is directly that token holders may end up having to pay higher taxes for them um so like very directly what ends up happening is stakers in different jurisdictions depending on what jurisdiction you're in um the staking rewards that you get may be treated as income that is probably the case in a lot of places I mean this is still like subject to debate people argue that like you're creating proper it shouldn't be subject to taxes blah blah blah but for all in and purposes in a lot of

jurisdictions staking income is all treated as taxable income so you know you have to pay you know 30 40% on that like whatever it is depending on your jurisdiction um and so this supposedly creates like cell pressure and that's like a cost um which is not the case um like the the good analogy for this is that even if we treat this as fully taxable income which I think is illogical for a lot of reasons this actually looks more like a stock split it doesn't actually make sense um but like let's say that we treat it as income what this looks like is effectively like dividend income on equities in traditional finance and so ask yourself do Dividend payments uh and like the taxes on dividend payments do those reduce the earnings of a company and like reduce the profitability of the company like no they absolutely do not

because they are not fundamental to the company they are not inherent to the shareholders that is just like your choice as a holder who decides to hold this equity and like live in a place where you get taxed on it like the like I think the ridiculous example I put in there is like if I just like go beat up all my neighbors who have eth and like I take 40% of their eth if you like move in next to me does that like make eth less valuable like no that means you should just like move away from me and then your eth is like worth the actual value of the thing like you can picture the government like that in this scenario like the fundamental value of eth is not changed based on the idea that like maybe it gets taxed in some place that like has high issuance um

because you could just move to some like tax shelter place you know you get all the cash flows from this thing you don't pay the taxes like that is the fundamental value on the thing it's a very libertarian portrayal of government there John someone who you up and takes 40% of your stuff yeah like it's like pretty much what's going on here um and and there's a lot of fair arguments why like it particularly does not make sense for issuance because it actually makes sense in some ways to like tax dividends in the real world because this is like real income that the compan has generated and they're passing out to shareholders um that is like a fair comparison for when stakers get like fees and muv payments I think um but it really doesn't make sense for issuance um because this actually just looks

closer to a stock split and there's a reason that stock splits are not taxed in the real world is because like you didn't create any real economic value you just changed the denominators so I mean either just from logical tax basis like issuance either shouldn't be taxed or there should at least be like an offsetting deduction and for the peoples who are holders because this is a if if this is income to these people well then it's an expense to those people and they should have the equivalent write off um but yeah putting that aside of I think that people are what are maybe you're conflating this with which is an idea that is like more logical to impacting evaluation and this gets back to the crypto Network are not companies is looking at corporate taxes corporate taxes absolutely do reduce the bottom line of a company and therefore reduce

the amount of uh money that is there for shareholders and reduces if you want to look at like you know what what are the bottom line earnings that I put a PE multiple on this reduces that earnings and like will result in a lower valuation as a result of that because like this is a company that is based in a certain jurisdiction they have to pay out of those taxes and then you know Equity holders can't just like move to a different place and like get the money it's like no the company just p P that money out um and that idea of like ethereum paying corporate taxes is just completely not applicable here if there was you know the US government was taking you know programmed into the ethereum code like they're taking 40% of the fees that would be a problem that would like reduce the like earnings

quote unquote like of these holders um that that that would be the comparison but there is no comparison here there is no idea of like a corporate tax rate that's like reducing the earnings of the network um and all of this isn't even to say that I don't think again like I was I was saying at the beginning like that high isance is like in practice kind of negative in some ways for this in the same but it's in the same way that like a company should deliberate whether they want to do share buybox or dividends like different subsets of investor bases potentially will prefer one method of capital distribution back to them BuyBacks are good in the way that they potentially allow you to uh remove like take that taxable event as a holder and you can realize it when you want because

in theory it should just increase the share price and then you could pay capital gains when you sell the asset it's the same idea is like should you burn fees here and should you reduce issuance in practice like a lot of plenty of subsets of your investor base will probably prefer that like I I as a Staker of many of these tokens based in the US taking the conservative approach of paying taxes on a lot of these things I would prefer if a lot of these networks had lower issuance and didn't make me pay taxes conservatively on these things and they just burn the fees like I I think that would be beneficial in some ways um but that's beneficial in the way that like I would like a company to do share by back as opposed to dividends um and it's not analogous in

the way of you know this is reducing like the earnings of the company or fundamentally its value like if I decide to go move to the Cayman Islands or wherever else and like I wouldn't have to pay those taxes on that yeah I think that the intuition that a lot of people even though they might not explicitly Define it like this to themselves but they're looking at metrics and they're saying is the number going to go up you know and so much of so many metrics around crypto because different protocols optimize for different things is saying hey I like my bags to go up and I am going to look at this particular metric to tell me that my bags are going up and that's like a lot of crypto Twitter is people screaming at each other looking at different sets of metrics and trying to say this is going

to make my bags go up and I I want to um I've got one more question for you before we get into the met some of the metrics that we actually can use that are more objective and that we can use to compare across crypto networks but I I I think already we've answered a lot of these questions here like uh pnls do not make sense you know to just blatantly to just peanut butter spread and run across a network so say it one more time for the folks in the back if you looking at an ethereum p&l or a salon of pnl that is not a good way of viewing these networks issuance is not a cost to the network but it is a cost uh from it's a cost that non- stakers have to bear to stakers right it's a transfer value in between different subsets of

token holders and one question that I have for you on that is you know how would you how would you think about um I don't know just like intuitively it would make sense to me and there's a whole section here on sustainability so I don't want to front run that part of the conversation but it would make sense to me that actually the way that ethereum is set up it actually looks in a way with a with a much lower stake rate and essentially there's a much larger group of people that are subsidizing a smaller group of people that inherently kind of feels I'm not going to use this word sustainable it feels better than you could imagine the inverse right of something like a a network honestly salana looks a little bit more like this with a very large stake rate right so you have mostly

stakers that are being subsidized by a very small group of non-sters right so how would you intuitively kind of look at networks and say hey does this look better in one way or another if you have like yeah like how how would you think about that kind of relationship in terms of goodness you know for for the network or sustainability or what have you I don't think it matters that much um for for that specific point at least of particularly like you know how many people are taking um and therefore like subsidizing this whatever um I I think that that is it it doesn't matter or is at the very least completely very unrelated to the idea of like sustainability and Financial Health of the network I think it's important in the way that you know do you take the

subjective opinion that you know you don't want people to be pressured into using liquid staking tokens because it you know is more risky and reduces the moneyness of the asset like that's a that's an argument that a lot of ethereum people make as far as why we want a low stake rate I think it's a totally valued argument of like yeah that is like subjectively a thing if you want this to be money in some whatever sense of the word like you know you want people to hold like the real thing um I I think that that is like a a tangible thing but is unrelated to you know what is the financial sustainability of the network um whether you have 100% stake rate or a super low stake rate um you like you can have this issuance paid out that is effectively going out to operators what what will

always fundamentally um matter as far as the kind of like ability for the network to just kind of and we can get to the sustainability thing later in more detail but the fundamental idea is going to be like what are people willing to pay to use this network fees MV tips all of that and then what does it literally cost to run the boxes you know I got to run a bunch of miners I got to run validators blah blah blah um like like what what is that and then on top of that is if you know you don't have enough to cover subjectively the cost that you want to run the network because you want to be more secure more validators whatever or to do you have token holders who are willing to bear that cost for some reason whether that's because they believe in future profits

from holding this thing because it's going to eventually become more profitable or because they just derive a lot of utility from the token um that that's what we'll end up getting into with the sustainability thing later on um but it really just ends up coming down to mostly like those Baseline Financial metrics of like what are people willing to pay to use the thing what does it cost to run the thing if there's a mismatch in some like subjective way that you know for whatever you want is like is someone else willing to step in is like basically a pseudo Equity holder like as a token holder to bear that kind of cost hey everyone this episode is brought to to you by Supra the new blazing fast vertically integrated L1 which helps you scale your D if you are a builder you're probably dealing with some combination

of cost complexity and fragmentation of existing Solutions so if you're building over an eel 2 land everything's feeling a little bit fragmented at the moment and if you're building in salana everything is fast and on one layer but maybe you're limited in terms of what you can do with your app space so super is rolling out a new product called Supra containers you can head over to Supras s.com containers um to learn more they offer dedicated customizable app spaces running on suprus 500,000 TPS layer one blockchain that gives you complete control over gas tokens and fees so some cool things you can do you get the freedom to you can use your own token create local fee markets or even go gas lless whatever you want so this product isn't live yet but because you're a faithful listener of vurve you get

notified first so head over to supra.com Containers Thank Me Later hey everyone this episode is brought to you by index Co-op and their new product The Leverage site which I highly recommend that you check out click the link in the bottom of the show notes now disclaimer whenever it comes to leverage do your own research this is not Financial advice all that good stuff don't bet more than you can lose but if you are going to lever up you might as well not pay an arm and a leg and save a ton of money and use inex cops leverage Suite so the way that they actually achieve these savings is pretty cool they Leverage The Power of money Legos defi uh in this case Unis Swap and a so the cost of carry for this trade is actually based on the funding rate of a as

opposed to per dexes which tend to be much more variable and higher overall additionally per Dees will also charge you usually based on the entire uh open interest so the leverage exposure that you have as opposed to just the amount of money that you put in which is what index Co-op is doing here and the result of what you get is just an erc20 which gives you something like 2x e so you want to lever up and you want to save money doing it I highly recommend that you go check out the index Co-op leverage Suite very very cool thank you very much index Co-op for making this episode possible Dan I'm going to kick it over to you here in a second when we when we look at like what are some of these metrics um that we can use to apply like apply across different

networks um but again just to summarize uh you know these crypto networks are not companies PE peanut butter pnl does not necessarily make sense issuance is a transfer of value between one subset of uh you know token holders to another taxes are not a cost um so we've already covered an enormous amount of ground here so hopefully even if we ended this podcast now there would be some takeaways but I want to move on to this next section here which is what are some metrics that we can use to actually compare different l1s l2s Etc um so Dan I'll kick it over to you here because you kind of are leading this from the blockwork side maybe can introduce this concept of uh tev total economic value to uh you know introduce this concept yeah for sure so with that foundation in

mind John I want to run through this framework that you've built because I do agree that it kind of achieves that that overarching goal of you know what are some metrics that we can compare across and networks to reach some logical conclusion um about about these things and potentially their value so uh I really like how you've laid out the total economic value rolling down to real economic value and then ultimately um token holder net income so if you can like high level walk through each of those and then we'll kind of like deep dive each of the three of them that's probably a great way to go through the motions here yeah happy do and yeah that that was I would say a big part of it to your point of like make making some baseline things that I think we can compare kind of across networks and

across uh asset holders that are just useful things um so starting basis is uh just simple terminology before we even those is like I wanted also to be applicable for proof of work and proof of stake um the simple distinction that we will draw between those two is we can assume in a traditional proof Estate Network um the token holders in some shape have rights to receive um all of the uh fees M tips uh that's Network fees so we're not talking about to be clear like application fees you know fees charged by like a UI built on top of etherum those are unrelated Network fees mbv tips paid to validators and staking issuance um we can assume that uh POS token holders they all have

rights to receive those if they choose to stake and like get those rewards um so they effectively act as middlemen to the people who are physically running the network the kind of you know operators uh the INF that's so that's including like validator delegates uh core MV infrastructure operators you know like jto and the likes of them they kind of act as middleman effectively like negotiating the economics of okay we take in the money and then like we pay out some percent of it to you and if it's a surplus we get to keep that Surplus is effectively how it works um proof of work and traditional proof of work nice and simple token holders don't get like they they have no rights they have no expectations to get anything it is pretty much just all the money all the fees all the MV tips those

all go to miners um and then also uh presumably there is issuance which for example Bitcoin holders are going while there is at least issuance in Bitcoin um that all also goes to the miners as well Bitcoin ERS have no expectations of like earning any kind of income from the network of holding this asset um I will cave out that with this is not like at a technical level an entire distinction of you can in theory like imagine a proof of work Network that like decides to burn fees and if you did that then there would be some value capture return but we're going to take the simple in practice distinction here that like actually matters which is do the token holders have rights to receive the income that um is on this network um versus do the token holders have no rights to effectively receive it and

that's like proof of work at practice Bitcoin Etc um so with that in mind like we want to have metrics that don't just treat fees and stuff like that as Revenue um because that is that is part of the point why like taking these kind of more relative financial terms calling fees Revenue um doesn't entirely make sense at a network level if you're trying to compare these things because fees are definitely income to uh proof stake token holders but they're not any income to bitcoin token holders um so we want to kind of even step like a level back from that um and what are just like some completely highle Network level terms um and so the ones that I made here that we kind of end up working down from our total economic value um which is basically just like what's the size of

the pie of value that's moving around at the network level which is all Network fees um all M tips and then all issuance that's uh coming out from stakeholders so new token issuance and that's basically like the pie and then where we work from there is like okay where does all that money go um and uh take a step lower term you can call it real economic value is what I call that in there um is just very simply you know real versus nominal it's inflation adjusting so we're take we're kicking out the inflation here real economic value is just what are the total amount of network fees and mbv tips that are being paid on the network over some uh given period of time um so very simple kind of those two terms there um and then what we work down to from there is

okay now we can look at these tokens and what is the net income of these uh different kind of token holders and token holder subsets um so the traditional way to do net income is like uh income minus expenses uh I start by not doing that for that reason of what I explained of like income on a proof of Works Network and a proof of stake Network are actually just different calculations so it's not as as easy to compare um what it always ends up working out too is that simple calculation in the beginning of what is like what are users willing to pay for this thing that's rev so that's all the user Network fees me um tips that are being paid to validators minus what is the cost to run the boxes that is like always fundamentally what the

calculation is going to be um cost to run the boxes here I call them operator payments and we can dig into that more detail but that is always fundamentally what it is going to be um is like that is the net income due um to token holders at the end of the day um is what are users willing to pay what do we have to pay out to the operators in this thing um so improve of work that ends up being operator payments are everything so you end up with it's basically rev minus r minus issuance so the r cancels out and like this makes sense intuitively what are we left with what is the net income of a of a Bitcoin holder it's negative issuance they strictly pay an expense of issuance that's it like that that makes sense they they're effectively losing 1% a

year as like a non-cash expense that they are paying out to all these operators because the operators get everything they put for work so makes sense nice and simple um and then looking over at proof State networks um we have the the same general idea there um it just ends up being I would say like a more complicated calculation because again token holders effectively like acting as more of this like kind of middleman where uh they are in do all of they have rights to receive like all of this um kind of economic value that's going through the network and then they effectively like negotiate with stakers of like okay I'm gonna get all the isin I'm gonna get all these fees I'm GNA get all these MV tips you know I don't want to do this work this requires real work that requires some like real world cost

I'll give you like 5% um and that's effectively how proof of State works today is you have all that money coming through and like you know there's five to 10% commissions from validator delegates you know from jto running the me auction that like takes a little bit off the top we take some of that value and then the token hold do get back um that kind of 95% um and that also makes it clear in this calculation like the part of issuance and part of any of this that is like a cost effectively is not like that Topline number it is what are you literally paying out to operators so that 10% of issuance that a Staker has to pay to their validator delegate that is totally in expense to them they like that is very literally it costs money to run this thing I need to take a portion

of my money and give it to you because you got to pay your real world expenses and that like that is real expense from their perspective um and then what you end up at the end of this is what is that difference between those two is the real value doe um to the actual like proof of stake token holders at the end of the day um and you end up noticing you can also like play with the issuance numbers here like I have one example in here of um you know you could like imagine like holding the the amount of RV constant and the amount of operators payments that's holding that constant and then you could imagine like having the same level of issuance like a very low amount of issuance where like all of it goes to the operators or you could imagine like a ton of issuance where

like a very small percent of it goes to the operators at the end of the day the token holders are still left with the actual same exact net income uh they get the what is the RV that users paying into this network minus the like amount of money that I pay out to The Operators the other issuance that's like going from token holders back to me is just like moving numbers around it doesn't actually uh result in any kind of like net inflow or outflow um the other important part of this to point out is in that kind of bucket that we call like operator payments um in traditional proof of work and traditional proof of stake networks that that term is what it sounds like it is you know it is miners it is validators it is core M infrastructure like perhaps like goo or

like flash Bots or people like that if they decided to take a fee off of like running this core infrastructure that's required to like literally run the network and they take a portion of the teev um and that's all that it encompasses in these traditional networks but from the perspective of token holders all that matters is are we giving out money to someone and it's like it's not going to me so what also ends up following in this bucket and looks exactly the same from their perspective is is your chain printing a bunch of tokens and like paying it to a c Dev team or are you printing a bunch of tokens and like taking it out of your Treasury and giving it to applications that are like building on your rollup and incentivizing all them to build there all of that is absolutely a

non-cash expense like that would reduce your net income um all of this like effectively it ends up looking like stock based compensation whatever you're printing tokens and like giving it away to other people um and when it is going to people who are not token holders who do not have rights as token holders to receive it it's always an expense whether that's being paid out to a validator or being paid out for my treasure to people who are like building on my chain it looks the same I'm paying out an expense that is going to so the people that is essential kind of the functioning of the network okay lots to unpacked there and so if we start just to kind of like redefine the high level terms here so we have total economic value being you know you called it the uh the total of the

pie I love how you included these sanki diagrams in here because I think it's is a really useful way to visualize why tev matters um because if you look at these sank diagrams right that's that left-hand column which is the total sum of both like the internal and external value created by this network uh internal being kind of that like issuance component external being all user paid fees and so that's Network fees as you call them in in this um uh in this report and to give a clear example like if we look at let's say ethereum that's going to be your base fees plus your priority fees uh plus any me boost bids that have moved through the system and additionally plus any blob fees that have been paid um and so you have this like four fee component that creates rev right again that's like

that so if you remove that internal piece and you're left with just the external value creation or those total user paid fees coming into the system that's going to be with this rev metric cap captures or that real economic value uh and real meaning you know inflation adjusted coming down one level from Total economic value um and so when we get down to the removing the operator cost piece and um kind of getting down to this net income metric I I really want to like deep dive into operator cost because I think even in this report you called it messy and it's the reality of of trying to do this this math on this network-wide calculation because if you think about let's say a solo Staker right if you're a solo ethereum uh Staker you know it does cost something

to run that validator right that's it's going to be like less than keeping your fridge on but there is a cost there so it's not like a perfect Ono one but then if you move uh you know a good chunk of the network is stake through liquid liquid staky providers right so Lio for example takes 10% of the total fees that move through or the total uh issuance Plus network fees that move through its uh stake and that is that kind of that like real cost that that kind of seeps out of the system but if you can just like hammer down on why that cost that gets pulled out of the system is ultimately the the component that is the cost to the Token holder yeah yeah th this like operator payments bucket is definitely the messiest part this is the part where you know if you are trying to

like think of like what is a real income statement going to look like this is the part that has a bunch of footnotes like per Gap accounting rules like I made these assumptions and blah blah blah um because there there are a few reasonable things you could do here um um so in in a traditional Network i' would say most of this looks very clear it is you know hey I have stake I delegate it to coinbase they take 10% of this very easy we could see on chain that you know 10% of tev like those are the operator payments you know they're taking out 10% of the issuance 10% of the network fees 10% of the mpb like that looks super super clear and simple um the parts where this starts to get messy are uh on the edge case scenarios of one is like realistically it's when

whenever any of this is not super visible on chain of like what are the real expenses being born is like where this ends up being tricky um and sometimes the very simple onchain par can look misleading which is the case of let's say that you're you know you're a big fund you run all your own validators because you know we don't need to delegate to coinbase pay 10% like we'll do it ourselves we could do it cheaper um very often what these look like if you just look at it naively on chain is they look like 100% commissions and so if you look at the like super naively you could say like oh that's that's a cost uh like this this is being paid out as uh commissions like this is going to the validators um while in reality I mean they are the validators they're keeping 100% of the

money what is the real cost to them and what is like their rational calculation that they're doing as an investor is how much money am I going to receive in staking income and then what am I paying to run all these validators and that what am I paying to run all these validators is the analogous to coinbase Charing 10% um it's just that embedded in the you also have the idea of like what are the real word costs and then plus or minus what is the profit of these operators so coinbase presumably is making a profit on all of these you know they charge you 10% you know maybe they take in X you know million dollars per year but you know they're actually paying out you know x minus whatever and expenses they're they're booking that profit um so when you're looking at these ones that are like say 100%

commission or just running their own stake um I I think there's a couple of areas that are like reasonable assumptions you can apply to them I think the thing that you definitely should not do is apply you know consider this like 100% cost um because it doesn't match reality in practice like you know 95 99% of this or whatever is value that's going back to the capital holder and then you know 1% 5% whatever is paying out the like literal real world expenses um so the decision is you know do you just treat this as like a 0 per cost do you take you know what is the average validator commission of others um on the network and you know let's say it's 5% do we assume that like that's probably matches the real world expenses are and we can apply a number like that you can try to estimate you

know what are very literally like the costs of running you know X hardware and paying for voting fees blah blah blah you can try to apply that um and then you know apply that to however many validators are running this um you'll get the right order of magnitude answer like whatever path you kind of do on those it it does end up being a little bit messy but you will always get like the right order of magnitude answer there it's definitely not the 100% it's you know what what is the cost of this guy to run the boxes and in practice like most of it's not that expensive so you know you pay an employee you know he spend some hours they run some validators on the thing um and then the other part of it um which is maybe uh like Messier to think about but like

actually easier to track um is that point of when we're talking about like okay but what if you're paying out tokens to any arbitrary thing um that's very easy to track on chain it just looks very different than what we're paying out to operators but it looks the same from the token holders perspective is like what if my chain is just printing a bunch of tokens and giving this out as free money you know incentives for application Builders to come on the chain for users to come use this chain um like those are acquisition costs those are expenses that you are paying out very directly that is you issuing more shares that is an expense that is like duding your ownership and being paid out to other people um so from the token holders perspective I mean you don't care if there's you know a bunch of tokens being printed and

they're going to coinbase or they're going to some application from your perspective it's the same it's a pure expense um and so then it's up for you to obviously matter your expenses and like use them in the rational way to get a lot of activity um but from the token holders perspective like any issuance any TV that's going to someone who isn't you that you don't have rights to it all looks the same it's all an expense how I I got a couple follow-ups on that um joh one what I want to build to here is this idea of um subsidization which is invisible on chain but could end up being very meaningful the one thing that I want to sort of pick your brain on as well is how appropriate from a mental model perspective do you think when you're model modeling out operator cost to think of this from like

a solo Staker uh versus thinking of it as like staking companies and the reason that I ask that is you know we've had um Xavier Megan on this podcast a number of times you know and he was a CIO at course one for a number of years and you know a lot of people and especially like research will sort of the way that it it makes it seem is that a lot of the cost here is there's the cost of running the box right which is uh why you know people are very zeroed in on the hardware requirements and with requirements for validators but the much larger cost bucket actually is the uh Personnel like line item cost when you're thinking about this like it's Engineers right Engineers are very expensive and they've got to be on on the clock like 247 in some instances

because you know if there's ever downtime you could potentially get slashed depending on the network Salon doesn't doesn't do slashing but for ethereum or Cosmos chains or whatever it is like you can get slashed quite a bit and so I guess more of an observation like if I was a staking company I'd be like oh boy that maybe my margins are going to get compressed over time because there's a lot of uh you know I think staking margins are are pretty fat um and everyone's pretty okay with paying stakers less and less like even if you just look at what's going on with ethereum or any of these Cosmos chains when you look at the MV value chain like everyone was like those proposal should get paid quite a bit what if we took some of that money some of that internet money um but how do how do you think

about from a mental model perspective is it important to think about this from the standpoint of Solo stakers versus taking companies or does that matter at all in the calculus it definitely ends up mattering in practice to the the the calculus of like what like what are literally the costs today um because I mean there definitely are returns to scale obviously to this I mean the cheapest way to run the network is you put it all in one box um and the the difficult part of this is always you know how do you expect what the future costs of this thing are going to be it's hard to project it out because I mean the fundamental cost of running ethereum is that it's we just give all the stake to one guy who runs all the validators and like who you get returns to scale I

mean the same thing Sal you just give all the Stak to one guy like they run it I mean that's the fundamental cost to run the network and so like where do we want the network to end up and think about what it's going to cost long term are are we okay with a thousand validators and like a lot of them are corporates some of them are home stakers or do we want 10,000 and like they're all home stakers well those give you like drastically different operate expenses um and the difficult part is obviously that's like subjective like what are you happy with and where is it going to end up with um in practice they definitely do change the bottom line of what is it going to like literally cost to the network um to run the thing um and then to your point of the subsidies

um that that is an important thing to call out um I would just like try to make sure that people like think about it in the right way and like I think the good way to think about it is it is important to keep subsidies in mind but that is still different than what the expenses being paid out at the moment are um the simple example I use is like like imagine a company that you know I think I put in here of like imagine like you have a company that's like making widgets and like they sell them for a million dollars a year and they have a manufacturer that sells them to them for a million dollars a year so they're just reselling them and like great they're just break even this kind of resaler um the fact that let's say that manufacturer is operating at like a

heavy loss doesn't actually change the the what is the income statement of this company that is reselling them you know they're paying a million dollars a year like that's their expense like this is what they're paying for the thing um and that's not to say like if if you're an investor in that company like you obviously want to make sure like you will care about the fact that you know the supplier that they're totally reliant on is like operating a loss and like that's probably not sustainable in the long term um but that is different than like what are you literally paying out today what are what are your literal expenses today is what are you paying out to these people whether they're making a profit or loss this is a separate issue that like you want to understand um but is different um and

the other very literal point where that ends up being important is to your point a lot of these staking margins are pretty wide today um if you start to run the calculus on this as a token holder and you look okay we're paying out you know let's say $100 million a year to all of these validators and staking Dows and blah blah blah you know hundred million is like ballpark like that's the number that's going to all these people all uh throughout the year and then I do the back of the envelope math of um how like how much does it cost to run a thousand validators and different entities how many employees do I need and you know you do the math I'm like hm like it only costs $20 million like what are all these people doing that like that's a number that you do care about

you know $100 million is still your real expense but you want to understand obviously like you know the service providers that you're relying upon what are the what are the real costs because then from there you can derive what their margins are and then figure out like like I should probably push them to kind of lower their prices like I bet they could do this at a six% commission not a 7% commission like kind of go from there um so definitely still like super important to understand like what are the very literal real world payments of these people um and then being willing to accept that from a network level like is is this a cost that I'm willing to pay you know what is the price of DEC centralization that I care about am I am am I okay with you know it cost another

$20 million a year for there to be more solo stakers and you know more validators and blah blah blah um so like understanding those trade-offs um you kind of like need to get into the low level numbers like understand what's going on there awesome all right I've got um some of these questions are going to bleed into the sustainability and security sector so I want to just listeners like just keep that in your mind uh this idea of subsidization so I want to unpack some real world examples that people love to talk about in crypto but before we before we go on to the next section here I want to just actually return to the metrics that we defined uh here which is teev Rev and net income and like let's just put ourselves in the shoes here of a relatively sophisticated kind of trafi

investor right and they're like hey I'm coming into this world of crypto and I don't know what any of these crazy networks uh really do and what metric should I look at and okay I just listened to this podcast and I heard these guys johnan and Mike say that hey I should be looking at teev rev and netet like token holder net income just could we just redefine like for an investor what do these metrics tell you like what does tev tell you versus R versus Net Income so tev I would say is the main one that I would say it is more useful for kind of just setting the stage for these other terms as opposed to a metric that I think is inherently useful like you know you could have a high TV on a chain because it is as high inflation you know another chain could

have high TV because they have high fees I don't think that number means a whole lot I think it's just useful studying the stage of like all right what's P that we're working with um rev I think is a super valuable metric to compare across these chains because I mean particularly for proof of stake networks uh this is what you can think of as effectively like Revenue you know if you're trying to think of like what is the number that is the comparable idea for me to like you know I want to put an AR multiple on this thing this is what users are willing to pay to use the thing like that that is a fundamentally super important number um to understand um and then even in proof of work um where it is not going to token holders um it is still super important to

understand at the network level for the financial health of the network which is why these are network level statistics T and RV they're not token holder specific statistics they are network level um is this gets to that still the fundamental point of you know what is the balance of being able to run this network you know I got real money coming in that's reev users want to use this thing and I gotta pay operators like rev is the thing that you fundamentally need and if there's a mismatch between those things you need some person to subsidize that and traditionally that's token holders um and they may be willing to do that or they may not be willing to do that if you don't want to rely on token holders or some other entity to be subsidizing these costs for you which is you know like where Bitcoin wants to go in the

long term if we have no more inflation well then you need rev to be in excess of what you deem to be like reasonable operator payments so that number is super important um and then particular in per St you can think of that as like effectively like the revenue um kind of number um and then net income it's like it's net income that that that Maps pretty well to tr five like if you're trying to look at you know what what is the basine profitability um and income generating ability of this asset minus expenses this is the number you know like if I were to buy all of the Soul on the network your net income is this it is you know how much are people going to pay me and network fees and me and then what do I have to pay to run all the

boxes you know that is the net income that you're going to earn at the end of the year um this is the type of number you know you put a p multiple on this like that that Maps over pretty well again um all of the kind of issuance going in and out that effective like detail that's layered on top of there to like incentivize different network participants but it is separate from you know what it like what is the fundamental value of this thing so all right so net income it's exactly that's the easiest one right it's exactly what it sounds like it's a profitability metric uh right and again the the thought is if you were to buy all these boxes yourself and start operating the network how much profit would you be generating right so profitability metric re U and I'll editorialize here a little

bit and think of it like it's the kind of measure of or organic growth and demand for the network right it's like okay how many actually like exogenously generated fees is this network generating it's kind of like your ARR number right it's like okay it's is it growing really fast or not it's an indication of do people really want this are they willing to pay Etc doesn't really tell you anything other than it's more of a Topline metric less of a bottom line metric right which is the profitability metric and then te I uh Dan knows this a little bit of a hobby horse of mine but I I push back just like a tiny bit um and I introduce an analogy here which is when you start to Reason by analogies I know it's actively wrong kyani just sat up a little bit straighter somewhere but like even when

you look at metrics like GDP or something like that um I don't know I feel like people end up gravitating towards more of like Topline noisy metrics because they're simpler like even if you look at something like GDP versus real GDP you know most like smart money and investors like kind of know that you should be paying attention to real GDP uh because GDP includes the noisy the noisiness of inflation right and if you're actually trying to get a real sense of how the economy is growing you should be looking at that but guess what the Atlanta fed reports on GDP because it includes all of these different metrics in in the same thing and then you can kind of parse it out from there and that's at least the way that I sort of think about teev it's this kind of noisy Topline metric and

it's noisy right now because inflation is so high relative to the Rev that a lot of these networks are generating but I would imagine over time you know the inflation portion is going to shrink um and then ultimately it'll be like kind of a noisier but overall kind of Topline sort of metric like what do you think about that push back yeah I I would think that's a reasonable analy yeah the in practice that that difference between the real world and here that matters a lot which is why I don't think it's useful really at all today is that in practice most of this is issuance on most networks so you know it doesn't make a whole lot of difference when like 98% of this thing is issuance you know comparing it between two Cosmos chains like Whoever has higher inflation has a higher TV versus in the real world yeah

I mean the inflation is you know some nominal amount of um the real amount um so yeah presumably if you get to a long run state where like inflation is a small percent of like the real economic value that's the real value that's going through the system then it makes more sense like yeah it could be a useful a more useful metric code then yeah I think that's a good point John because I be Mike because uh nominal GDP is kind of simpler is the same reason why I think rev is a more useful metric because I do feel like it's simpler uh because it's easier to wrap your mind around like get you call them the exogenous value capture here rather than like because I feel like people kind of get the inflation thing is is internal and it's like yeah we kind of get it but we kind of don't um

and it's like harder to wrap your mind around so that's kind of personally why I'm more intrigued about the Rev metric and again like knowing what users are willing to pay to interact and use your chain is an incredibly important number to me um so I do kind of like really view it from that lens as well whereas tev just has those like again those like noisier elements to it I completely agree um all right so all right now we've laid out our metrics here um and what they sort of tell us and I I want to get into um how like what I think we've kind of already explained this a little bit uh but maybe it would be helpful to walk through like an actual valuation example right like we've kind of danced around that and alluded to it

but John maybe you could uh uh T us up here exactly like okay this is the question that we've been talking about this entire time right which is how would you do how would you do evaluation on something like uh an L1 so can you just briefly walk through an example of what that might look like in practice and then we can get uh to sustainability and security which people love to talk about as well yeah true yeah it it ends up looking quite simple because you end up like when you think of the the so buyer you're it basically lets you cut out you know thinking of all the noise of the inflation going from one holder into the other holder because like you're you're the same holder so the income expenses like the Deb out they're all even for you so I mean the simple

example like imagine a Network that has has let's say 10 million a year of rev that users are paying for uh mix of network fees and MV tips that are going to whoever's running it and let's say it costs $1 million a year to run all the boxes whatever is the defined level of centralization and like operations that these people like so you know maybe it's 100 geod distributed nodes like that's what the People Want it costs a million dollars a year um so holding all L SQL like you can go buy the thing you know what what like what are the earnings that you're going to get for buying the thing is you're going to make $10 million a year that people are paying you um in network fees and mbv because like they want to use this thing and it cost you a million dollars a year so

your net income is $9 million a year like if you wanted to throw value on that thing I mean that's the kind of thing that you throw a p multiple on you know if you want like a 10xp you know okay this is worth $90 million um ends ends up looking like honestly pretty clean from that perspective awesome I think if people even just remember like one sound bite from this I would remember that particular sound bite because it's so once you approach things from that mental model it's so simple right like what if I bought all these boxes and ran it myself okay I can easily discount inflation there because I'm just transferring value from myself to myself so that's very silly okay we ignore that there's a metric which is like okay this is how many like exogenously generated fees and I kind of

get a sense of demand and then I want to know the profitability which is the net income like super super simple right like that's how we would do it um in practice that's not really how it works today and these networks are decentralized um and so there are these other questions outside of like okay strictly what you'd build into something that like financial statements there are these kind of questions around all right where this is crypto right uh I want to make sure that these are there's sustainability here and that's a little bit of the like subsidization piece that we were alluding to before in the operator payments section and then there's the like security right which is hey uh this is something that gets debated frankly mostly around Bitcoin right which is H the security budget uh and there's a lot of security budget

truthers out there right who are very concerned about this when it comes to to bitcoin so why don't we why don't we actually start there right like all of these different things um you know they they end up mattering right like the amount of inflation ends up mattering for something like the network so how how do how do you just think about the concept from a high level of the security of this of networks and how it pertains to everything else that we've discussed so far yeah makes sense um yeah and and the one other point I guess I would make too on the on the first part of that as far as like this is a real world you know to decentralize it has these different parties um and while I do simplify it in that valuation example like this is what it looks like

if you buy the tokens which is completely relevant um I I do also call out in here that you you can do an income statement for all stakers and all holders and both of those are important um like if I am staking I do care about what the income statement of stakers is um and the simple test is like okay but even in the complicated case you care about the simple one that I gave for the simple example of like imagine that you're a Staker and you know oh my income statement looks great because I have a let's say there's a high issuance and like nobody's sing like wow I make a ton of income every year um but you don't look at the fact that oh this is probably not going to be sustainable because oh like if I look at the total one for the whole network uh

nobody's paying to use this thing it's like super unsustainable on a financial level and that means the token's probably G to go down and the Network's not going to do super well well like oh wow I base my income statement as a Staker on like oh the token's doing good and I'm getting a bunch of issuance but if you fail to like if you just fail to look at what is the network level then you're missing the bigger picture and it's like completely useless um and that gets to that kind of like sustainability point of uh it ends up looking like I would say the first part in there's like I would say there's a simple reframing that I think that people need to do to start this question where similar to the like oh what's Network profit I think that's just like kind of the wrong

question and people ask like oh is this network sustainable like is is ethereum sustainable if it has like high issuance or salana has high issuance like is the network sustainable like can that work um what I think we like actually care about is like what are the sustain abilities of specific properties of the network um and in particular uh security and then like asset profitability are the two things that we're going to get into that like this is tangibly what you actually care about so like looking at uh Bitcoin like we say like ah like it's unsustainable um like what what happens if all the issuance goes away tomorrow users are still paying some level of rev they're paying Network fees and issuance to use the network and what happens if all the issuance goes away and the minor adjust like they reduce their operating

cost that's the whole point of this system is it's a permissionless system permissionless operators they're going to come in they're going to reduce their cost they're going to lower the hash rate and they're going to reduce it to like what's the level of income that they're getting now minus the issu they're just getting the RV the network keeps operating like it works completely fine it self adjusts like we saw this a couple years ago um you know when the price nuked same idea like you know and all the all the China miners had to go offline the network adjusts like they just change their operating cost the Hat rate goes down they adjust they move around whatever um same thing here um that that is the fundamental idea is like the network will always adjust now the fair question you could ask after that is like oh but they reduced their

hash rate is this secure enough I don't know like like that's up for you to decide like there is this subjective level of security is what like you're actually optimizing for if there's more value it's more secure in this kind of like cryptoeconomic sense of that's the assumption that you're making like like what is that level I don't like I what what is bitcoin secure at to you you know that that's dependent upon the person um so that does tangibly matter like the sustainability of a given amount of security May unsustainable in your view um the the same kind of idea is like you know what is the amount of money that we have in excessive security budget is the profitability and so this is where you get into like more of like proof of stake same ideas map over to proof of stake or any other chain of

like all right let's say that you know Sal has whatever like people say that salana is unsustainable because it has high issuance blah blah blah um okay we have x per issuance today whatever it is 5% 6% something like that what like people who say that's unsustainable what would happen if want to cut their inflation rate in half tomorrow or even cut it to zero like it would be fine all of the operators would adjust their commission percents you know if you cut it in half they'll raise their commission percents from like 5% to like 9% or whatever they're just like going to keep a larger part of the pie and you reduce the issues it works fine if your reev is well in excessive operator payments you could make this really simple and just completely get rid of issuance you know if there's rev of a a

billion dollars a year and it costs them $100 million a year they'll take 10% 90% will go to the other token holders like you didn't even need the issuance like it's super simple um where issuance comes in is you end up assuming okay like if you assume that these systems they're not actually generating enough user demand and revenue right now for these operators um and so we kind of need to like subsidize that early on um and this is like role of any Equity holder in a traditional company is all right we don't have enough money coming in right now but we think this thing is going to grow so I as a token holder I'm willing to pay those expenses I as an equity holder I'm willing to pay those expenses and like eat this loss for now because I I think this is going to be

super profitable in the future um and you can argue that like oh that's not going to change in the future and blah blah blah this will go down and that's fine and again it's the same idea of like the network will just adjust like operators will reduce their payments maybe some of the validators go offline you have less validators blah blah blah all like all of that still works the other thing that may change if you play around with these numbers is the dollar value of uh St assets may also change and again like is is this secure to you if so goes from I don't know $50 billion stake today to like $40 billion stake tomorrow because they reduced the issuance and maybe some people said ah like that's not enough for me I don't know like that that seems secure to me

that seems perfectly sustainable to me like Sonic could cut their inflation rate in half low or whatever it would be like it' be fine people would just like the free market would adjust all the permissions operators here um so those end up really being the variables that we like are concretely talking about when we talking about like is this sustainable um is what is the security that you are getting out of this and then what is the excess kind of profitability that you have left over after that um is like what you're at left at the end of the day like that's what token holders have and that's that that is like a reasonable and valuable question to me um and you know you can map that over looking at the extreme example of uh people who have like their operator payments or just printing a

bunch of money and giving it to application developers users blah blah blah like let's say that we have a an L2 that's just printing like a billion dollars a year and they're just throwing at appli ations they throw get to users you know whatever and they also have an rev of like ah $100 million a year like this is great I think you can make a very reasonable statement that that is probably not sustainable income that they are taking in because yeah they're giving away a billion dollars a year and they're taking in $100 million doll a year like no users are going to use the chain like that's very reasonable thing to say that's an unsustainable profitable metric um but that's not to say like if that goes away you know the network just disappears overnight like the network these are permissionless networks like they can continue to

operate so long as people want to pay anything to use them then people will run the thing um it's like what what are we talking about as far as like a some subjective level of security and profitability like that we wanted as sufficient that may be sustainable or unsustainable by the way you know what that actually describes I mean it that description actually matches up with reality which is chains almost never die you know they're like people ask this every now and again they're like why haven't These Chains died like why who's still running like eth classic is probably the best example of this or Bitcoin cash it's like at you know all of those metrics that you just mentioned adjusted fewer people are involved with these networks but guess what they still run and they actually never or very rarely get 51% intact either so it might

be worth looking at this thing from a slightly more critical lens because uh yeah there's some very Hardline um you know ideas around this and I think it's more wishy-washy than people might uh and and actually life lines up with um the reality actually matches that that description the one other interesting point I would make on that too is uh this is something that you probably don't want to assume for most networks um but this gets into like this question which is I would say aside from the cash flows and the fundamental value capture but like the you know some of these assets clearly have value in excess of the cash flows like what is that thing and this kind of pokes at that if Bitcoin had 1% inflation forever I would bet that most Bitcoin holders are totally fine with that they would still

hold their Bitcoin forever you know they're not banking on the fact that like if that's how it was made from the start like it's different if you change it today but like if it was Bitcoin was made from the start you know there's a 1% tail inflation I I would be willing to bet like most token holders are like yeah that's fine like I'll eat 1% inflation a year and the reason that they are willing to like subsidize or pay that cost operators is because they derive some utility from the network from holding this asset in excess of what is the literal just like bottom line earnings that I'm getting um so that's where you get into like interesting part of like there there actually is utility value in some of these things potentially um and it's not just this like oh unsustainable subsidization like there's real utility

value being provided in excessive cash flows um that's not the case case for like most things I don't think that's the case for you know like some random L2 token that like no one gives a about like no one's keeping you know rollup token XYZ number 42 as like a store value in the long run that they're like willing to eat issuance on um but that does factor into some of these bigger chains where like obviously Bitcoin holders are not holding this thing in expectation of future profits they're holding it in expectation of future losses because I think it's a good store of value and good utility and how do you think about like the Valu like the the next level valuation there right like do you think the you know utility value monetary premium commodity value whatever we want to call it do you think that's just like

how does that look like in practice and when it comes to like the valuation side of things is that just like an additional multiple on on you know like let's say net income so I think the example we talked about earlier was uh the chain that ultimately boiled down to 9 million in net income and then you know you slap a 10x uh multiple on that for you know traditional valuation and then is it just like adding an additional multiple there like how do you conceptualize what this uh you know sort of handwavy you know money factor is like I I agree it's real and I agree that there's these exogenous reasons why people want to touch and interact and hold these assets U but again just like driving down on the valuation side of that how do you think about it uh short answer I think it's it's

difficult and unsatisfying um I I think there there are like some reasonable ones when you look at utility of the classic kind of like uh MV equals PQ you know like how how much do people like literally need to hold this token because they want to transfer x amount of value and like what's the velocity the money um in practice I I tend to find that's probably not a lot of value from that for like most things at least High Velocity to these things at least in the longer term not necessarily the case today um so that's like something you could try to like reasonably calculate um th this idea of and a lot of people do this is like oh do we put like a a a higher multiple on top of the uh cash flows because it's like money um I think that's like incredibly

incredibly silly I think it makes any sense um and I think that like you can just like play this out logically of like if I am holding you know etherum because quote unquote it's money like I'm not I like I don't I'm not looking at like what is the net income of this thing like if the net income of this thing doubles do like do I think that my money is worth like twice as much it now goes from a 200 multiple to like a 400 multiple like it doesn't make sense um and just logically you know if you have the warm buffets of the world who are like who are holding this thing because like they think that this is the right rate of return based on the strict cash flows of this thing they're not holding it anymore when it's valued you know 20x

higher than it should be or even like 10x higher or twox high or whatever like they're just not holding that thing anymore um it's not to say that those cash flows aren't useful um but yeah the the just like Oh Real World ARR you know is a is a 10 here so like I'm gonna say it's 100x ARR because monetary premium um I I don't think ends up working in practice I think it's like really hard to put a number on those things in the way that like it's hard to put a number on like what is gold worth right it's difficult can I give you guys an example actually of where I hadn't really thought about this until we were recording here but the the way that people talk about monetary premium is kind of similar to the accounting version of Goodwill so Goodwill is

something that appears on a balance sheet when you acquire a company uh that's far in excess of its uh you know fair market value and there actually are examples of this like very durable um you know Goodwill that it's like actually like Coca-Cola it's like a brand that you if you were to look at uh the financials of Coca-Cola you'd see a lot of Goodwill there um you'd also see it in like fashion you know goods and uh luxury goods and that type of thing and the way the reason I actually I know it's my own thing here but I actually kind of like that is because it's it's sort of actually intuitively fits what Bitcoin is it's like a vbl good right I mean it is this kind of meme luxury thing believe there is some real utility there and the way that actually shows up

in accounting is this concept of Goodwill doesn't mean it's not real there are lots of investors that prefer not to treat that because it's more wishy-washy and it's not cash flow oriented but it is a real thing that people recognize that exists in the world that actually fits into Gap accounting so just as a concept for people crypto people just have a lot of Goodwill apparently I wish I asked these questions in Reverse John but if you were to like Define what that term means of you know the additional value that you like what how do you define the moneyness of an asset um is it just like any you know have uh demand created to hold Buy Buy and Hold an asset outside of any of its capital

qualities right like the fact that it earns cash flows or you know returns those back to token holders is it is it just any additional demand beyond that justification yeah I I think it's generally you can chalk it up to that you know like people always argue about like ah like all of these things are money and none of these things are money and like like yeah like that's true realistically I think what we mean by like monetary premium is what is empirically like that value that we see on this thing that is in excess of what you can very rationally derive of like I run a DCF on this thing and it tells me the thing is worth a billion dollars but it's worth you know a trillion dollars I guess this is like $999 billion dollars of you know Goodwill on this thing um I

I think that's like that's what really people are getting at um and I I think that also applies like if you wanted to do like you can do utility value calculations that would apply the same like you know maybe my uh estimates based on the amount of payments this thing is doing and the velocity of it you know it should be worth 10 billion but it's worth 100 billion like same idea there but it's really that kind of like fuzzy idea of you know what is the Goodwill of this thing basically like what is it in excess of what I think it should be strictly worth do you think in the end State the like winning handful of l1s will exhibit a continuous monetary premium I think that certainly at least some of them will um I think that will be very topheavy I see no reason why crypto should not be

significantly more topheavy in terms of like popular monetary assets than the real world I mean the the reason that we have like most currencies in the world and not the US dollar in most places is because like those countries in large part like keep their people from using the US dollar when like a lot of people would prefer the US dollar like there's a reason why we put this stuff on crypto rails it's like 99% USD stable coins and not you know the whatever Zimbabwe like you know like people like people just don't want that um I think that there's going to be like a pretty high um pretty concentrated Distribution on like what are the monetary assets that people really want to hold in you know 10 years from now I don't think there's going to be a monetary premium on like the latest

L1 that launches in like 15 years that says like we have a little bit faster block times like I I don't think that's going to probably play out um I think this is gonna be a fair argument for like a small handful of them to have something like that like I think Bitcoin is definitely going to have something like that um and uh like I I think the one of the better Arguments for why Bitcoin will never be displaced is if you think that that will be more distributed kind of like what that tale of kind of competitors is is like I I think the best argument for Bitcoin being surpassed by something um is if you really just have like one chain kind of that like rules them all in this like monetary um and very direct way of like let's say the salon of vision was

correct the like OG one of like everything runs on salana I think there's like a reasonable argument in that world that you know Soul does make maybe Soul does displace Bitcoin in 10 years from now when people start to look at it like ah this is like kind of the same thing like it gives you all the same properties but we all use salana and we all hold Soul like why don't we just use this thing instead I think that's like a reasonable outcome um I don't think that's a reasonable outcome when you have like a million different chains and they're kind of fractured all over the place I think it's like quite unlikely um and that's like probably the base case for these systems that like there going to be a lot of Chains It's pretty fractured you don't have one chain that has like 99% of the users um

and then Bitcoin is that thing it is the best meme so yep that makes a ton of sense to me yeah um all right the the last uh before we move on here to using some of the metrics that we've outlined to to compare across different l1s versus l1's l1's versus l2s Etc um is this idea of subsidization and this where I actually wanted to to poke at some like real world examples um and actually probably the the most relevant one or it's at least it's the only one that I'm able to think of at the current moment is when people talk about like the the uh delegation program that the salana uh Foundation has U right where they're like hey you know it's more expensive to

run a salon of validator and so we're going to they've got this sort of matching or delegation program for I don't have the details immediately but they're but they're paying out a good amount you know per year to salon validators and people look at that and say Hey you know in in the example of um you know that you gave of company A and B that both sell widgets um and it's kind of the same thing right you're saying well actually uh it's these Salon of validators couldn't actually validate the network if it wasn't for this huge uh you know external party which is giving giving a bunch of soul to validator so that they can be profitable and therefore you know it's not um you know it's not sustainable uh as a network and so I don't know if there are other subsidization examples that would

make sense but maybe you can just like unpack that one and how it fits into the framework and then we can move on to L1 ver L2 comparisons yeah so the the Salo one is interesting and I think a good example that that gets to this point of I think that people misuse the sustainability argument quite frankly of um my my understanding if I remember correctly for the the Solano delegation program is their quote unquote like subsidization is that they have uh a lot of soul and if you want to start up as a validator that they approve of they will delegate to you some predefined number of Soul let's say it's like I don't know a thousand Soul whatever a million Soul um that like they they will just delegate to you a certain amount of soul to kind to get you started um that you

could charge your commission on top of just so that like they're not like giving them money directly or giving them like sold to keep um it is just that you know if I'm charging a 5% commission and you know it costs me a certain amount of money each year to run it like I need to hit some minimum amount of stake before I'm like net profitable um and they kind of help Kickstart a lot of people um just so that you can like particularly early on just like help get more decentralized operators you can more easily get over that hurdle as opposed to having to go out there and attract a bunch of stake um and that they're also weeding this program off over time um but yeah that gets to the point of like I I think that you can argue that that in practice

today like helps the decentralization of the network which you know you could call security or whatever in some sense um but this very clearly I mean like the network is fully sustainable in the sense that like they could yank this program tomorrow like it's not like the the Val like Salon goes away or all these validator go validators go away like some of them probably go away on the margins that you know didn't quite have enough stake to be profitable based on their commission rate in absence of like being granted this like larger delegation but I mean if you look at the network level at the whole I mean like what do the cost to run the boxes I mean call it order magnitude like 20 million $50 million something like that um you know what what are the what's the RV of salana on a given year right now Network

fees and me uh it's like a billion dollars a year plus um like there's a whole lot more money than is needed to go around to literally pay the boxes and then return the excess value back to to token holders so the network is completely sustainable in that regard um it's really just like you have this entity early on who is trying to very in a directed manner help the decentralization of like longer tale operators which is like reasonable thing to me and obviously I think that should be like phed out over time because yeah I mean a foundation's not going to do this forever but the network on its own is like financially super healthy and super sustainable in that regard yeah and this is kind of beyond the scope of this podcast but uh I really love the the episode that you and hassu did on on

Common Core with um Angar and uh Casper and I mean I agreed I think it was hosu that said this line but it's basically kind of like the more money that you spray at the proposers or the validators of a network the more diverse that proposer set ultimately ends up looking like and I I kind of that makes sense to me intuitively because you know if you're a solo Staker you're not going to have like economies of scale you're not going to be an expert at this you're not going to be able to run it as cheaply as possible um any of that stuff and so the more money you spray even though you're overpaying what you maybe get is a more diverse more solo stery validator set and then I guess it's up to Market forces over time to you know tell us if

that actually ends up mattering um in some meaningful way right and that's just like a difficult question to answer the the difficult part too is what matters uh to the kind of like health and like what's the pie that operators have to go around to keep them decentralized is isn't the amount of tev or even the amount of issuance it is that operator payment amount so that also fluctuates based on like what are their um like actual commission rates being taken like if you imagine like ethereum did just double the issuance but all the you know the coin bases of the world and whatever if they just like cut their Commissions in half because like all right like we're just making more money on the same pie well it didn't really help the solo Staker in that regard if they're like uncompetitive now like ah like my

margins are off so I I don't think there's any like avoiding that like fundamental Point um is that like you should be out competed in that permissionless market like that is just how it works it's the amount that's going to operate or that actually matters um and it Al it also gets to one of the interesting differences between proof of stake and proof of work is what you see at the end of the day is like in proof of work where all the value goes to operator payments like there's no attempt to give access to token holders um operator payments are really high and you see real world costs for proof of work mimic that like they're really high like people spend a lot of money on mining um versus in proof of stake where most of the value goes to token holders and then like some amount goes to the

operators there's a much lower amount of operator payments obviously um the the interesting part of that is so I mean like the good part of that is like people say like oh like our security budget's cheaper whatever like we're not paying operators to spend a bunch of money blah blah blah um I think there's truth to that there's value to that um you get to rely on different things like realistically accountability and public knowledge of like who these operators are they're probably not going to do stuff wrong um but I in some sense to me there is no like cheating the devil of fundamentally your security budget and your level of security is whatever you are paying to operators um like particularly in a delegated proof of stake model what you end up with is this is what I like got into like the proof

of governance stuff a year ago is like the the dollars Capital that you have staked if you just delegate that to someone else okay now you're just trusting coinbase not to be dishonest right now and like double sign it's your money like they're not slashing their own money they're slashing your money and what is their incentive to not double sign right now is a DCF of their future cash flows that is their incentive to not reorg the chain not to double sign on a strict value basis and what is that that is a DCF of the operator payments the good part of brief of stake is you have really low operator payments because we're giving most of the to the Token holders the bad part of it is in theory like they are actually significantly more incentivized to be dishonest because their future profits are much lower in expectation or at

least their future revenues that they're going to be getting compared to minors who you're throwing all the money at them their incentive to be pretty honest um and it's the same idea in proof of stake if you imagine that like proof of stake token holders got nothing and we gave all the value to all the validators they're very incentivized to be very honest because they know that their future business is super super profitable they're gonna make a ton of money on this thing um so there is in some sense like no really getting around that is like how profitable are these people are going to be in some sense um the the argument is a lot of it gets wasted too um and proof work technically and like maybe they're not as incentivized because they're not profitable but yeah the and a lot of ways like paying your operators like

there's no way around that if you want them to be really decentralized and you want them to be really good and you want them to be super incentivized there's no get around that which is why I mean there's potentially value on like paying 10% commissions or whatever to Lio like they could be more decentralized it may be more expensive in the long run but like they're going to delegate to like a 100 operators underneath or whatever or a thousand um it's more expensive than giving my money to coinbase in the long run can I um voice say maybe this is a controversial opinion but I I actually wouldn't be surprised if over time um staking ended up being a loss leader for businesses I actually think there is you could make a pretty strong case that um the cash flows for stakers basically disappears entirely in the future and

you could still have very secure networks and so here would be the this would be like the idea that I would give you here and I've heard Anatoli say this and I completely agree it's like if businesses like a lot of this is through the lens of individual people spinning up a validator and then operating the network I've always had an issue with that because I think people are lazy as has been tried in the internet and I've literally been working in crypto for seven years I love this industry I'm GNA work in this industry for the rest of my life and if they outlawed crypto I'd move but I still don't run my own validator and I just don't think other people will either and so I ultimately see the validating entities of all these networks on a long enough time Horizon not as individuals but as companies um

and maybe even eventually governments and so I could imagine there are all these uh incentives actually for businesses to run validators today that feel small but over time I would imagine it gets much larger like there's a strong incentive actually for data businesses uh to run their own validator set right for a whole bunch of reasons you want clean data that maybe you want to own the whole thing yourself maybe you want to own the entire data stack for IP reasons whatever it is um if you're like a trading firm or if you run a DEX or something like that you're running your own validator uh right on salana maybe it's like the way that you they're a little bit more okay I think uh maybe I don't want to speak for them but like collocation type thing right if you want if you running an operation

like you running your own validator set Bitcoin is a little bit trickier to reason about and this is where this going to seem like a weird crazy out there prediction but the reason I'm not a Bitcoin fee truther is because I think if Bitcoin memes its way onto the balance sheet of like the United States and China and uh Japan and all this stuff there's gonna mine at a loss those was m at a loss um and what's going to keep you secure is that you've got different companies operating mining sets and there's this weird game theory around that so I don't know I I would just challenge people to think that the future is a weird um the future is bizarre uh and if you get like rigidly stuck into this like well everyone's Gonna Act Like An rational economic actor I think you're gonna miss some

stuff um but what do you guys think about that idea that eventually op like validators might do it as a loss leader yeah I I I at least for pro mistake I don't know that they will need to do it as a loss leader you're starting to see early signs of that at least on uh salana where a lot of businesses whether it's like RPC businesses or trading businesses they do have artificially low commissions because they do make money off of it elsewhere um so that that is very possible um it's interesting to think about it because it's actually the exact opposite of how it works today at a company like coinbase or whatever is there other businesses or loss leaders because staking is so profitable you know it's like you burn money on RPC so that you can make you know the 10% commissions on validation because it's

so profitable um which is interesting uh it's plausible that it goes the other way if it does in proof of stake it's for those reasons of like there's utility in being a validator and you know whether that's you know trying to promote the rest of your business you're trading from whatever you want to attract the stake um and try to eek that out at the end the proof of work one yeah I agree um that that would be the like ultimate kind of CAS is like yeah people just subsidize it because it provides a lot of utility to the world and like they're incentivized to do so um which is also why I don't actually think these like strict DCFS of like what is the security budget blah blah blah like coinbase is not going to sign because like we know who they are and

like I don't know it's like probably illegal to do that like we don't really know if it's illegal but like like they're not going to do that um I like we don't actually have to worry about like literally what is the dollar operator payment to most of these people um I think it is a more fair argument in proof of work because there is less of this reputation and cryptographically proof like hey this person double sign blah blah blah um but there's probably more incentive for that kind of thing particular with Bitcoin yeah I almost take the other side funny enough just because like uh nation states mining at a loss is like okay that's like the final boss right if if that's where we end up I mean my God like I think we're all rejoicing but the hurdle to get there is I mean actually

who knows maybe the hurdle is another 30 days until the election because that's apparently the direction we're headed so um I don't know it's just harder for me to I I I can very much visualize how you'll run a validator cost of goods sold the income statement if it's still you know green at the bottom we're good right but if I'm going to mind at a loss maybe I should just sell this thing I don't know it just doesn't it just doesn't sit there with me it's a weird sci-fi future right like I don't know um I have no idea but this is something that I could imagine happening right um and ultimately like people love to say this right like what crypto networks do is they coordinate different stakeholders right it's a new design space for coordinating and people had a very kind of myopic definition of

what that coordination was supposed to look like and again I just think the future's weird uh you know you tend to overestimate what you can do in one year underestimate what you can do in 10 or 20 and how different things are going to look and it's impossible to predict that I'm not going to try but like that would be in the range of you know this like broad spectrum of possibilities that could end up happening all right I want to take us back to the here now and I I want to start to use some examples of how can we like look at um all right so I'm I'm this like trafi investor right I'm coming in here I worked at a private Equity Fund and I know my metrics and Etc and I'm trying to get get a sense of how do I look at um you know R across

like different l1's versus maybe even l2s why don't we actually start with the L1 versus L2 comparison because you know for me l2s are I I'm 100% bought into this idea that you know when you look at an L1 this thing doesn't even look like a company it is a network you can create different pnls for different sets of stakeholders but creating a p&l for this one thing just makes no sense l2s look a little bit more company- like to me right it's kind of like okay it's like a company that's running a box and you know people submit traction you know um transactions to that box and they're really the ones that's operating everything and the profits kind of go to them it goes to a dow but whatever it's them and it looks a little bit more company like so John can you just like

walk us through like how should we think about applying some of these metrics like rev uh you know net net income across like l1's versus l2s yeah most of it ends up looking the same whether you're looking at like salana ethereum versus an L2 the thing that ends up being uh nice and different is that it generally looks much simpler um in that these l2s not to have inflation um and issuance rewards and this get to the point of like a lot of people argue that like oh l2s are these magical things and like they are so profitable because they don't need like issuance and blah blah blah and like all of that um I think that's completely incorrect um I think that there are like slight economic

differences between them but they're not these like magical things um like they they just don't have stakers you are trusting a centralized entity and okay cool like like like that that is a difference if wanted to decentralize entity you would end up with the same like type of proof of stake stuff like if you wanted a decentralize operator set like and you wanted to have some like cryptoeconomic security like you give them some stake you end up with issuance you end up with the fees going between them like it ends up looking the same um which is fine because issuance is not a cost to begin with as a lot of those people will argue it's usually those arguments go together um but the operator payments line item just end up usually looking a little bit different as opposed to it being for nl1 what that

ends up looking as like the fees all go directly to you and then some percent goes out to your own operators for your chain like the salon validators the salon mvv infrastructure for an L2 that's posting its data somewhere else those operator payments just kind of get grouped together and thrown to the other layer your operator payments as opposed to paying like my operators there's some amount of that because the sequencer needs to capture some profit to run their like even just a centralized box like that cost money um most of those like literal physical operator payment s are just going to someone else's operators you're just like paying the ethereum operators or the salon operators like wherever you're throwing all your data like it's the same idea though like they are validators they are

running the boxes you know they are going to charge you some amount of money for the service that they are providing which in theory should end up looking like you know what does it cost to run those boxes plus or minus some like amount of profit um the uh best argument for why that would be better in some ways uh would be that like if you think that that's going to be artificially cheaper I guess in some ways of like it's going to be cheaper for me to pay the ethereum uh operators or the salon operators or whatever I just like throw all my data there as opposed to having my own operator set who has to one I mean like in theory they have to have like somewhat like better Hardware because now they have to execute all the data so we're increasing the replication

of people who need to execute the data not just actually replicate um and send the data around so in theory like you have less people who need to do that that you need to pay for for I don't think that's a big deal um the other part of it is that in practice it ends up getting subsidized today what are the data costs that is what at least looks like on ethereum and on Celestia and some other places where the cost that you're paying to throw data on that thing is probably actually cheaper than like literally what is the cost for all of these validators on that Network to be like literally just paying the bandwidth costs of sending this data around it's probably cheaper to throw the data on there right now when the base fee is like effectively just zero um so if you have something that's

subsidizing your cost in that way like that is potentially like it's economically valuable to do that it's not clear that that is economically sustainable for those base layers to be subsidizing these things long term um interestingly that gets into um I've seen some people start to pick up on this recently finally is like the the best argument for the way that you could sustainably um subsidize at a loss those costs is if you're um uh your base asset one is you rely on monetary premium of like ah the asset's just worth something anyway um the other part is if you have a bunch of me at the Bas layer and a bunch of uh fees being paid at the Bas layer itself like oh I can just capture all the fees and me on the Bas layer and then I could just like you know provide

da to these rollups like kind of for free um so that's where that ends up getting into but at the end of the day l1's and o2s I honestly think they end up looking like super super similar it's just they in practice today the L2 is kind of just rip out the iswin thing great makes it look a lot cleaner they could add it back if they want to add their own proof of stake you know sequencer set then it'll just get more complicated again um and then their operator pay as opposed to being commissions to their own operators are just fees paid to someone else's operators like I play blob fees to post this thing on ethereum but I mean it's the same thing they operators who in theory in a rational Market should be charging for Capital costs um and operational costs um I guess the one

other we call out this is not fundamental to l2s or rollups or anything is that in practice more of them end up looking like what you described of they look a little more like they have a treasury they have governance token and a lot more of them tend to be the ones who give out these incentive programs um which does look like a real expense in just in practice we just don't see those on l1s usually at least like we don't see salana and ethereum issuing a bunch of new tokens uh out of their supply that governance holders are voting on and like giving them to application developers uh l2s do that um and that matters for the token because that is an expense though so that and I just want to underline again that for for people because again if if what we're saying here is that rev is

this metric that you can use across different l1s and l2s to compare them the um you know what one alarm Bel the mic go off is like hold on a second um because there are lots of l2s that give out um you know not necessarily in a bad way right it's just a strategy it's just like but even arbitrum something like the L tip or step incentive programs like you basically are giving away a whole bunch of tokens and that actually impacts the reev and so you can if you're only looking at something like rev then you can actually use this metric that doesn't get picked up which is um inflation although that's not how we're going to end up classifying so it would impact the net income not the Rev yeah yeah yeah right so it's the same thing as like a startup which is you

know raised hundreds of millions of dollars and they're you know they've got an ARR which is grown at 100% or 200% a year but like when you look at the bottom line it's like woof uh that does not look particularly good right so you just as an investor have to figure out whether or not that matters to you um and the other the other point because I just want to make sure we get through as many like tropes that you hear people saying crypto Twitter is possible is this kind of l2s are much more profitable than l1's you would push back against that right because ultimately at the end of the day it's like you're still having to pay some operator set to run these boxes yeah people are arguing that because of this idea of if you treat issuance as a cost is the real

reason why people say it's way more profitable it's if you subscribe to the the two equations which are ridiculous of either profit equals fees minus issuance or profit equals burn minus issuance um fundamentally taking out issurance as an expense um all of it makes no sense um and it is interesting that they actually all deeply far more unprofitable than the l1s um by the metrics which I am saying because they uh tend to have much higher expenses because the inflation being paid to token holders is not a net income expense um but the token inflation that you're just paying out to random people absolutely is an expense and those tend to surpass the RV that they are getting so it is probably not a surprise why a lot of um I would say more ethereum rollup L2 Centric will argue that

issuance is a cost um uh that makes l2s uh and low inflation chains look rather good um as opposed to I would say the more simple reality which is how much are people paying to use your chain people are paying a lot to use most of these chains and they're pretty much cheap to run the actual boxes what matters is if you're giving tokens away to other people that's that's a real expense like that's a lot more expensive you know what I would compare this to a little bit because I have a Bugaboo about B2B SAS and how it gets valued as a as businesses in general it's like this is there's some you know people love software because there's extremely high gross margins right and so people look at that and say hey hey that's good right like the fundamentals of this business are really strong but

when you end up looking at the net margin of a lot of software businesses it doesn't look very different from any other like real world business and the reason why is because they're competing with a bunch of other businesses that have very high gross margins so you end up spending it on marketing right and then it's also like it's not a real world thing you don't have a real cost here so all these software businesses end up discounting up the wazo as opposed to if you just had like a real world thing that you couldn't discount below and so you know I don't know that's just me complaining because I hate that as a dynamic but the world has decided this is how we're going to Value these businesses but there is like you can't escape you know the reality of net income in general um and maybe another

way of thinking about this as well just if I had to make the you know bull case as well for l2s here is that you could make an argument that okay even if there's like a little bit of artificial artificiality to it um okay it's lower cost that I need to pay out to my boxes and then the trade-off for that is for whatever reason and l2s get lower Goodwill than l1's do right like there's less of a gap so if I was if I was in the camp of you know eventually uh I think this Goodwill is going to get compressed over time I don't think I'm not a huge believer in this idea of a monetary premium you would want to own you know developer platforms that index more towards uh cash flows and ultimate profitability than something that mon like maximizes for Goodwill so that's

kind of the bull case that I could lay out a little bit but um all right I've got another question uh for you which is may even like getting out of the weeds of of some of this a little bit like how do you think about um like where a network is in its development and what metrics are appropriate to use right so like the classic example of a startup is okay you know you when you're raising money in a really early stage you're not looking at you know cash flow statement or p&l to determine whether or not you're going to make that investment you're really just looking at like the team and maybe something like uh Topline growth or something like that and then when you get a little bit more mature there's some kind of unit economic analysis that gets run which is okay you know when you

scale these revenues like does it eventually become profitable and then only once you usually become like very late stage or a public company or something like that are people looking at this much more comprehensive view of profitability uh you know related to growth and so you know when we look at the metrics that we've kind of laid out here which is teev Rev and net income you know how do you you know trying to take some practical applications like how can we compare the metrics that like ethereum versus salana shows because they're very different stages in their protocol like in their development and same thing with l1s to l2s Y uh so the main thing I would do just to kind of start the answer to this is I'm just going to throw away proof of work in this answer so just assume that I'm

talking about scenarios where the token is actually capturing some value which obviously makes sense um and this is something that I called out earlier in the article too of like these metrics I think are super helpful to understand what's going on in proof of work but they're obviously not going to ever be applicable as valuation metric when the whole point of this is that is always strictly negative in proof of work like you are not going to Value Bitcoin on the fact that it is like losing billions of dollars per year like you'll always get a negative ridiculous number um so just looking at examples where token holders for this chain like can actually capture value um for that thing um so uh sorry can you can you remind me uh which uh which comparison did you want

between L1 just like how yeah I mean even if which metrics are like better for those ones in particular yeah yeah and like different stages like how should we think about companies or protocols being at different stages of development yeah so taking yeah so taking that subset of the ones where token holders presumably have rights to capture some of the value that's going through the system which is basically where thr away per work um so the main metrics are the classic split of like early versus late stage uh like Revenue versus profitability they map over like quite well here honestly um the early stage stuff if you're like looking at like the Financial Health of these things things like like what do you care most about when you're looking at like an early stage startup you're not looking at like are they super profitable that's directionally what you

care less about you care about like are they getting traction do people want to pay for this thing like is their revenue like do people like care about this thing and get excited about it uh that's that's rev here for all of these chains it's like do people actually care about this thing and like want to pay fees to use this thing um so that is generally the most useful I would say across most of these things um particularly now when I I would call like most of this stuff early stage even the like more mature Network um you just care about like are people going to use this thing um and I think that Maps very well I mean you could see that very directly of like what what is the most like non uh kind of cable easy metric to game um is this it's like

actual fees that people are really paying to use the thing obviously um it's not like active addresses and like all this other crap that you like do work in web to but like don't work here at all it's this it's like people pay to use the thing um and like go look at salana what like metric is going to be like probably pretty correlated to Solana's uptick people started using the chain they started paying more to use the chain fees went up me went up that is like pretty in lock step Nots surprisingly with the price going up it happened in correlation with like people wanted to use the thing it was successful it tracks pretty well to this um so in general I would say like the Rev is like pretty analogous to you know Revenue ARR type thing for token um tokens where uh they are able to capture

value from their chain um and then net income out say like a better for a later stage type of thing if you're just like looking at very strictly like all right like what like what am I what cash flows am I really going to get here positive at the end of the day like how much money am i g to make what are my expenses is this consistent long-term value blah blah blah um and this gets to that point of where like I was pointing out like I think that uh people underrate the fact that these l2s printing a bunch of money is like a serious expense that people are just like not treating as a real expense but we treat proof of stake inflation as an expense when it's kind of the exact opposite way around um well I think that is important to understand

it is also important to understand that these are effectively early stage startups which like all right like it's probably fine that they're burning money like you know people aren't you know going to these like AI startups because they think that they're super profitable right now it's because like oh like they'll be profitable at some point in the future um it's the same kind of idea here it's like it's okay if they're like subsidizing early on and you know we're operating at some level of a loss because Equity holders token holders like they're excited about the business in the long term we'll you know we'll pair back these incentives over time of the users to make money um that is the more I would say like later stag is like looking at that um but I do also think it's probably more reasonable here versus the real world in some cases to

take a little bit more seriously um the kind of net income and the expenses part of it relative to the real world because real world being like offchain stuff um because I think you can generally get a little bit sillier here with the amount of money that you you can just throw it stuff to kind of pump up your metrics here relative to what you tend to actually see in most like offchain companies they're not just going to like all of a sudden go throw a billion dollars at users like like ah like we voted to you know go throw all this money at users um you tend to see that more into a more extreme scale much more quickly um in cryptos I I you definitely need to pay attention to like what what are the expenses that are actually going out of this things if that's all that's

driving you as or activity um that ends up being like super super important to look at um what do you think uh this is all right so this is another debate that always ends up cropping up which is would you when you're looking to compare something like ethereum versus salana would you include you know do you start to look at rev of ethereum plus its l2s or do you just look at like eth versus each L2 as its own separate different thing no the people who say uh the L2 is like arbitr is a theory but optimism is theorum just it's ridiculous um so no I definitely don't um I I think it is like reasonable to do that at Network level

metrics that are actually going through the L1 like if you want to take you know say what is the the the TPS of all of the chains that are both ethereum L1 and that are using blob data I think that's like a reasonable metric like that that is like an actual useful thing they're like all right this is like this is what these operators are providing it results in this much TPS because they're doing x amount of bth totally reasonable thing um looking at the like oh people are paying a bunch of money to use base that should make eth more valuable is just like an incredible amount of cope um that like there's definitely like really no tracking there I think that the more realistic Vision um that ethereum should and probably does care more about is

like I I think that ethereum in general is with the L2 road map accepting the tradeoff and taking the bet that this whole like monetary premium thing actually is real probably sustainable long term and so you are taking this bet that okay we're going to sacrifice this rev like most of this real value that users are paying cool ton of it's going to go to l2s we are taking the bet that on the margin a lot of them are going to use a lot of eth which in practice at least so far today is like generally true that like most of these l2s are pretty eth denominated eth heavy we're going to get eth in everyone's hands and then like we're going to win the kind of money game it's not like a cash flow game we just need enough cash flows to kind of keep the General Financial

balances of the L1 like reasonable like we got enough money to like pay the operators without some crazy inflation that makes you not want to hold the E like keep it pretty flat and then we do the whole like money meme and then like eth goes everywhere um I I think that's the reasonable bet that people are making but yeah extrapolating the kind of like Financial metrics of the l2s and like pumping them into like the value of eth I I definitely don't think ends up holding up of the different components of R so you've got me there and then Network fees which of those do you Vision being more durable over time uh so part of it is I think that like they they are broken out into separate terms today but they're actually uh not really exclusive terms uh I am very much in the

camp of people who say the priority fees are not in any way me that's just incorrect like priority fees are totally me like whether you pay a priority fee it's the block Builder to include your transaction at the top of the block where you send him a coinbase do transfer of the same amount of value to include your transaction at the top of the block it is the exact same thing um so I I think what we end up coming down to is like uh what generally is the amount that users are paying at kind of like a baseline level to like I just want to use the Chain versus how much is like a specific ordering preference um which gets into this what people like really think of as me um of like you know how much is like Arbitrage trading going to end up resulting in value back

to um the chains token itself that you know reordering of transactions result in abroad um the the I mean like a big part of it for me is honestly like I had a tweet joking about this probably a few weeks ago is like I always like how people debate um whether we should value these tokens based on cash flows um or as more like currency stores of values without acknowledging the third option that maybe they're all just like super overvalued and they're going to go to zero I think that there is a very reasonable argument that both of them will go to zero so I will put that out there at the first part of it U not like actually go to zero um but that in expectation they will never justify the values that we actually see today I like

I think that is a very reasonable scenario which I do want to like put out there as a start sorry for people who all all the L1 tokens myself included but that is definitely a possibility um for both of them is like let's just take the Baseline fees if we assume that like all this like actually works in the long term and there isn't like these crazy Network effects and friction and moving across These Chains you shouldn't ever be able to charge like multiples higher than what is like literally the cost of the bandwidth on this thing like State should be pretty transferable there shouldn't be these like huge Moes of moving across these networks you should never be able to extract like that much because if you're extracting that much someone else should spit up another chain it's going to be super cheap to run people are going to move

over it's all interchangeable um m is uh the argument again of like why it would be valuable is like if you think that like the network effects in the state on these places are not very transferable and it's very sticky you need to be in this place um and that it doesn't get captured by the applications which I think both of these are going to Trend towards zero like we like on a long enough time Horizon you should expect that generally the network effects and stickiness of the state of these different places does become much looser and that you could operate across chains much more easily um and the same is true of MV of the reason it would be valuable for the token is if you assume like the state the network effects of this place are so sticky the people will never leave and they will never like

capture it for themselves I like I I don't think that holds up you clearly I see like every application wants to capture this for themselves um and it it's very funny that like like the the big salones will often argue that like oh l2s are parastic to ones uh because they capture the me I mean that gets into a whole argument of like ah like maybe they're adding transactions that you couldn't do on the L1 so it's net new value blah blah blah um but guess what it's also parasitic to the L1 if I just like don't have a shitty auction on my app that leaks all the M back to the L1 validators and like I make sure I get it as an app from the L1 to perspective there's absolutely no difference the m is going to someone else and in both cases whether it's the rollup Centric

world or the apps on the L1 we see the same push apps want to keep the me for themselves because like they're the one who's bringing the user um I think that directionally both of these things are going to happen is that it's going to get easier to operate across chains on a long enough time Horizon there shouldn't be these huge Network effects like I needed to be on this chain I'm gonna pay a high base fee to be on this chain same is true of MV people are going to try to capture this for themselves it won't need to happen in the same paage and like play pay this huge BR um the difficult part of honestly evaluating all of this in the long term is like okay let's say that I think that's G to get rid of 90% of me so we're going to

get instead of like let's say 1% of transaction value today it goes to me let's say in the long run it's going to be like 0.1% like most of it will go away but there's always going to be some sort of ordering advantage that the valer is going to take you're never going to get everything out okay if it's 0.1% but like what is the number that we're applying that to is this on a billion dollars of economic activity is it a trillion dollars is it like a hundred trillion dollars I think you can make totally reasonable Arguments for all of those things um so it gets like very difficult to come up with you know what do I think is like actually like where is the value you're going to come from in the long term on these things because I think you're talking about

like such fundamental order of magnitude changes that are totally reasonable to me you could tell me it's like the long run amount of like M that goes to validators is one basis point you could tell me it's 10 basis points you could tell me it's 20 basis points I like they're all plausible to me um like trying to pinpoint like an actual number where like we're going to get long run cash flows for these things and like model it out today I don't think it's reasonable um for most of these I think what you end up having to do is just end up looking at like okay in the long run can I argue that people are going to really use and want to use this thing on a relative basis to all these other things um I think you can make very coherent Arguments for like this is why

I think this Salon is the place where most of this activity is going to take place and then you are taking the bet that like if this is order valued on cash flows then the order of magnitudes are going to work out that like this is a big number um but admittedly it is very hard to get to the numbers that will justify these things being worth you know a trillion dollars based on cash flows alone like if you want to put a reasonable multiple on that like if this is like you know a 20x profitability or whatever we're talking about like gigantic numbers this is like $50 billion do a year in profit that we're talking about just going to Salon of validators that is a huge Target for like some of their CH to go spin up and get all of these like

mbv and fee Revenue like that is a huge margin for someone to go after um it's very very hard to see the types of cash flows alone that justify like these trillion dollar valuations this is where and this is why you end up getting into what is the big vision for most of these networks who are gunning for the big Vision it's this more utility value monetary value people are just going to want to use this thing like there is empirically a very large band in the world for what is the best censorship resistant store value money thing that I could move around and that is going to be in my mind worth many many trillions of dollars whether that's Bitcoin or salana or some other chain that's like better that has all the users it has better privacy properties I don't know what it's going

to be but it it's very clear to me whatever that thing is going to be worth trillions of dollars um but that that is why I think it is very difficult to justify on like these like MV and priority fees and base fees like are those ever going to be enough to justify these huge valuations I think all of them should Trend down over time as a percent um so yeah so uh I could not agreee more with you and Dan's heard me go on the Spiel many times but like I I am a long-term long-term bear on basically every L1 and I I I with the caveat that I think that these are going to end up like many multiples higher than they trade at today but I think there's inevitably a time when these things just move sideways forever and I think it's kind

of like both if you look at this from the perspective of a cash flows or if you look at this from the perspective of this mushier like monetary premium type thing I still don't see a long-term bull case for like either one for price to go up forever you did a great job of explaining the cash flow thing I think exactly the same thing I think all these things are going to be siphoned off by apps anyways hence why I'm big eventually when apps you know we get a couple good apps very bullish on those uh but the cash flow argument is pretty well understood it's I just don't think there's any argument that you could possibly construct um and for what it's worth I do think the salana camp has taken a lot of the wrong lessons away from the ethereum camp perspective on

this um and they're just like hey these TW or parasa it's like buddy you guys are going to have to deal with the same thing as well so I just think there's been a lot of wrong lessons taken away from this and a lot of like grave dancing where there shouldn't be but on the commodity you know do you use these things as money perspective as well one of the challenges with like I would actually be in the camp that it's not you don't want your money to go up 20% per year that is bad as money because what it imposes is a really high hurdle rate for investment right like it would be societally very damaging if your money went up 20% here you never put it in anything else right marginally you just save everything and that would never go towards new business Etc and

ultimately like this stuff is supposed to be you know somewhat stable anyway so even like if you're in the monetary camp or if you're in the cash flow camp like eventually these things have to start trading sideways at some point the the one thing though that I could see these things I've always liked this by the way as a as an argument for ethereum is the internet Bond I've always bought into that quite a bit because like bonds like treasuries are they're a monetary asset they're basically money for governments and big institutions and investment funds and it's it's not supposed to be super stable but like the risk adjusted return that you get for a bond you know it it outweighs uh you know what you pay in terms of like the very limited volatility that you experience and maybe that's the end state for all these hell1

assets but John I'm like 100% of your Camp man that like these these things yeah there's you can squint at it and like a lot of the stuff is probably you don't even have to squint it's overvalued you know um the the point on the the kind of like yeah you don't want to go 20% or whatever year um part of what you said was uh whether that's the cashlow or the commodity Direction like you need to kind of like address that thing I think this is actually one of the better uh Arguments for Bitcoin and proof of work and all the commodity like stuff is uh it's that like like completely seriously it's the like meme from Silicon Valley where he's like no no like Revenue like why would you go after Revenue like once you have Revenue then they want more Revenue like you want to be Pure Play I

like like honestly that is a legitimately very good argument for Bitcoin and proof of work as this like better way to get the store value thing no one is attempting to Value Bitcoin on like the profitability of this thing even if are people are like arguing about like ah like what are the cash flows going to be for salana in you know 10 years like is it gonna be 100 billion is it be 50 billion like is it going to be enough to justify the valuation that is like always fundamentally going to be a question there's always going to be competitors who are like ah we're going to do even more like this is even more profitable this is better like there's always going to be that argument of people fighting over like ah the is should be this like you know we're getting all these fees um I think it is

like legitimately like very positive for Bitcoin to prove of work that like no value capture just to like meme like useful like decide if you want it or not like like there's no one else who's like legitimately trying to do that and I think that was like legitimately a very positive um argument for them as opposed to like oh like our fees went up double this year like the price of this thing should go up because like we're capturing more value like that's what people are arguing about with salon and ethereum and I think that argument is like actively detracting from the ability to like win as kind of like the monetary asset okay so I agree with that but I'm actually G to push back a little bit uh and I have this chart that like changed my view about this um this guy

yurian timer who's like head of macro Fidelity came on on the margin podcast like three years ago and he showed me this chart which was just two charts right one one in front of the other but the one which is really helpful is you charted investment returns back from like the 1700s or something like that and you chart equities bonds yield bearing cash non-yield bearing Cash Gold and you know all those charts about like cash losing its purchasing prob over time 100% you could stake your dollars in bonds and actually do extremely well um and it way outperforms gold the thing that performs best is equities because you get compounding right like that's the thing that none of these things have and gold actually underperformed a lot of this stuff so I'm not going to argue with you that there have been a lot of

uh there's a lot of instances in crypto where it's like is there utility or is it basically meability Bitcoin ethereum right like Bitcoin just wants to be kind of a store value meme ethereum's like hey we actually want to use this money uh punks versus Bard Apes right there were some execution problems on the board a side but it's was the same thing it was like is this just a picture or and this is like art or do we actually want to use this and become decentralized Disney I'm not going to try to defend that Vision it's a dumb Vision but like it was the same it's the same thing right it's like do we actually use this stuff or is it like meme ability basically and meme ability has outperformed usability over time but I would argue in the long Arc of his history I would rather be on the

usability side like if you and I if if we just transported all of us back like the 1900s and it's like all right you can invest in the US bond market as it's developing or gold like you basically want to actually buy stuff that has value over time um because that that would be that would be like my I'm revealing probably my own mid curve bias here that I want to see some cash flows but it's this really persistent thing right it actually it's it's this is also the reason why gold isn't adopted in a lot of institutional portfol it's like well I can't value it um and so I think it's helpful in the beginning but ultimately a hindrance and I think this is what proof of stake l1s can do better than Bitcoin which is not to go on a rent but this is why I always hated

ethereum trying to directly compete with Bitcoin it's like you have a bigger Market you know you have a bigger Market yield bearing store value thing is a better Market than non-yield bearing store value thing in my opinion in the long run so I don't get why they're trying to make it compete with the thing I it's frustrating to me uh so for for what it's worth I agree with you that it is the right strategic move for I I put it like this I think both are a valuable path that are worth pursuing and I I for that reason I am in the camp of I do think that ethereum should try to compete less with Bitcoin in this regard and should go more for the vision of what you're describing that's also why I'm more inclined in the direction of I have been in that camp of I think that

we should make the L1 useful I think that cash flows are actually useful for this regard if you want to have the thing have some like reasonable amount of real yield even if it's not like we're talking about you know something you can put a real P multiple on and like value like a company like show like some real yield like and that this is the biggest platform that people are using I think is probably a better pitch than trying to chase what Bitcoin has already done um that being said I think that that is probably a much more challenging route compared to what we see in the world world where you have like a whole full economy and like real GDP that's helping to juice these numbers versus a chain um I think that for these crypto assets the most likely thing that's going to work is the simple

dumb like Bitcoin um the thing that I think is important for Bitcoin to still completely overcome is the utility in getting people in their hands aspect um like I don't think that Bitcoin will ever fulfill its Vision if you don't get like relatively trust minimized scaling and privacy like if you can use Bitcoin at scale like I could just send it to you privately like effectively for free then I think it can win this game if it doesn't get the utility I like it's gonna be difficult then it is like very much stuck to like gold like more in that range like it's never going to be used like like a meaningful amount and I think it's difficult to even get to gold level while not being like private and super scalable um but yeah yeah for the ethereum and these other chains I do

agree that they should go this route of trying to be like we're are this like productive money like we have an economy with like real GDP that like helps our yields effectively um trying to go that route I think is like strategically the right move for them because I think bit Bitcoin already has their Lane um it's just like if I had to place a bet now on which of those Lanes is more likely to be like which is going to be the monetary asset in let's say five years from now which the thing that matters even 10 years from now is it going to be Bitcoin or is it going to be the best version of like this like productive money thing whether that's soul eth whatever my bet is still on bitcoin over that um if we push this to like 10 years

20 years I think it gets like probably a better argument for the second one um but still it's difficult for me to see one of those like overcoming Bitcoin even in like the longer terms of my like that's my like General guess on those two paths um but for anyone new I agree it makes sense to focus on that second path and not try to Chase Bitcoins you know chase them yeah it's um you know what the one one thing that I would just add by the way about like the Privacy and scalability of being able to use Bitcoin that's ZK rollups on bitcoin that's like alpen and craa what they're doing and that's why we're all very excited about this I will say there is a case that you could make I don't know if I'm prepared to make this case that that will kind of

be bearish for bitcoin price action uh because if you view Bitcoin as the ultimate no cash flows meme coin then like my reaction whenever I see like Bon try to integrate utility I'm like no stop you're you're misunderstanding why people are buying you right like that stop adding any cash flows right like it's this weird and I could actually see that as you know you start to build ethereum like economies on top of Bitcoin you might run into that weird issue where you're trying to make a meme coin useful and people are like wait I just wanted you to be a meme coin you know so the important thing is uh it's not the cash flows on those like all that I think that Bitcoin needs in cash flows is whatever is enough cash flows to make sure that the chain is like secure enough or people are just willing

to operate at a loss in the extreme scenario of what you paid for like governments whatever other than that like I hope rollups take all the revenue I like Alpin and like all these other ones I think it is like in excess of like whatever is like a normal amount of security budget like sufficient for that like they can keep all the revenue like I I it's not that I want them to pay that back I think the utility is valuable and that people can use the thing it's not that any of that like cash flows going back to bitcoin it's the fact that like I I can send you dollars and it's harder for me to send you Bitcoin and I can't do it in a private way right now um I I think that is the useful aspect same with gold um like I I can just give you a piece of

gold and like you know no one will know that I gave it to you you can't do that with Bitcoin um and so I think that those are super important just to make it more usable but not not to send more cash flows back to the asset yeah because I mean none of it goes back to the asset which is I I think a good thing yeah all right guys we've gone over two hours here I think we have uh uh I think we've probably captured most of the important points John of this um of this this piece that you've created but do you have any any closing thoughts like any sort of conclusions for people uh I know part of the motivation for writing this post was hey there are a lot of ships passing in the night here and people aren't using metrics and it's

causing them to say silly things like XYZ network isn't sustainable or l2s are more profitable or whatever so I guess if you want to just tie this whole conversation in a bow you what do you hope comes out of this my general hope is just honestly that we move towards like like what is the real world what does trafi look like like I I'm not saying that all of these assets map to trafi but I think we should map to the aspect of they have useful terms that everyone agrees on and like knows what we are talking about and we compare these things to each other like that that is just a generally useful concept that we completely lack today which is like very surprising and I think like does make it really difficult to assess these things um so I I think that we do

need to like get better at trying to do stuff like this of like what are just some very reason able simple things that we can use like I can calculate this I can compare these networks to each other these tokens to each other and I can understand like what's going on and make a more informed decision of whether that's like do I think the token price is going to go up do I think this thing is going to be secure in the long run do I think people are going to keep using this like to to make more informed decisions and compare these things um really it's all in that direction um and for people who will think that that is semantics so what uh accounting is semantics like that that's kind of how it works like this is like lowl stuff but like that's kind of what we need to

do to be able to compare these things well make it useful um well this was a ton of fun um and yeah for listeners who have made it this far and still stuck around with us uh I would highly recommend that we we covered some of the you know the important points of the post but I would highly recommend that you read the post as well we've linked it in the show notes so go and give it a read um and yeah John we're looking it's always great uh it's a it's a pleasure when you when you take the time to write um whole indust she reads it I feel like so thanks for writing this and coming on the show and breaking it down with us yeah this is a ton of fun thanks for having me out awesome cheers John cheers guys