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A
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I mean, when it's in treasury, you can distribute it via almost like a dividend to those who are staking those token holders. This is kind of, I think the convergence of this is we will have a kind of a network type equity, or an Internet type equity that returns funds to the holders of these tokens in the same way that equities in traditional capital markets are a right for governance over cash flows. That's similar to me. The last thing is, listeners might say, but none of that matters right now. P and ls don't matter. No one's actually looking at it like this. Here's a reason I think people might start to look at it like this. Block space fees, David, they're going to commoditize and collapse to zero. That is my belief.
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B
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Layer two fees are going to zero.
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A
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Yes, for all chains except master settlement chains like Ethereum. Okay? Because Ethereum is doing a different service. It is providing settlement. It's taking its block space and it's selling it to a whole bunch of chains. But the chains themselves, right, the roll ups, the layer twos themselves, their fees will collapse to zero. You just see it right now. Look at the DA layers we're just talking about live right at the very.
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B
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Beginning of the da wars.
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A
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It's getting, it was like, what, 99%.
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B
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Cheaper or 99% cheaper?
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A
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And then Eigen layer DA comes in, that's going to make it another like, you know, 90% cheaper. Again, we've got paralyzed vms, which are going to increase our transaction throughput. We've got massive advances in compression. Vitalik has talked about this. We've got ZK tech. The bottom line is, I think block space execution layer block space is going to turn into a complete commodity product. And so if you're an l one and you're trying to generate profitable block space in this environment, or you're trying to differentiate yourself on low fees, I don't think that's going to be a differentiator for you anymore. Right. And so it is true that block ordering Mev can be a source of revenue, and I think that that could be a source of revenue in the future for alternative layer ones, but it is also a source of revenue for layer twos. And if you have too much mev extraction and block ordering, users are going to leave your chain. They don't want the slippage cost, they don't want the sandwich attacks. They're going to go to somewhere where they don't have those types of hidden, let's call them transaction fees. So that is like the last point, I would say, on how this, I see this game evolving from a blockchain commodity perspective.
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B
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I think everything we've talked about, Ryan, is the bottom of the pyramid, if you will, the fundamental foundation that all future value capture of layer two stands upon. The reason why these layer twos work at all over the longest amount of terms is what we've talked about so far in this episode. I call that the bottom of the pyramid, because then there's another layer of why will tokens go up? Which is a more of a medium short term narrative or like the narrative trade. The narrative, right? The reasons why people are going to buy these tokens now in the cycle, the short term amnesia that crypto has when it's a bull market. And so I think there's plenty of reasons which are valid reasons, by the way, like brand is one of these reasons. And so I want to talk about that middle section, the narrative trade. I'm not a trader. You're not a trader? I don't look at charts, so that's not what we're going to talk about. But I want to talk about like, kind of the next shorter term phase of like, what happens when you have fundamentals. So we're going to talk about that as soon as we talk to some of these fantastic sponsors. Ryan, we talked about in the first half of the episode for a little bit, PE ratios, growth metrics, go. Growth multipliers. That I think the market perceives upon many chains, layer ones.
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A
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Interesting, right? You call that a growth metric? That is basically the amount that investor is paying for, like, future growth. That's kind of like a metric because it's price that you're paying over earnings, which is profit in the future. And that can be applied to layer twos, right?
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B
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So it is a perceived metric as to, like, what is the premium that the market is paying for a particular asset. And if it's a high premium, it's implied that there's a lot of growth baked into these things. And so for layer ones that are negative economics, as in they're issuing more than they're capturing in fees, technically, they have, like, infinite pe ratios. As soon as it turns positive, then PE actually turns into a number. But the idea is like, there's a premium here, and different, I think all different assets that have cash flows will all have this P E ratio. What factors impact a layer two tokens or layer one token P E ratio? I think one of the big ones is brand. And I think the very high P E ratio that Solana has currently comes from the brand of Solana, which is growing in strength, growing in mind share. The universal composability idea is in being incepted into people's heads. And so people are paying a very high premium for Solana because they think that Solana has a lot of growth potential. So it has a very high pe ratio. Optimism, for example, I think has the brand of a, the op stack, which has been forked like 100 times now. And we'll talk about, actually the op collective fee that the op collective charges, op stack chains that are a part of the super chain. But really, I would say the forking of the op stack and the adoption of the op stack by companies as large as Coinbase, which is a huge vote of confidence, is a huge plus one to the brand of optimism, to the trust of optimism. And humans place a lot of value on trust. And so there's this, there's a narrative that like, oh, well, if Coinbase has selected the op stack to spawn the base chain, a fortune 500 company that's public, then they are leading the way for other large companies to also use the op stack. And that is a narrative that could, over time, morph into fundamentals if it comes true. But these are the mind share metrics, brand and awareness conversations that I think people will be paying attention to as the bull market continues. And the price of attention, the value of attention, is at 100 x premium in a bull market. I think these are some of the things to pay attention to in the short term, speculative nature of the bull market. What say you about this?
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A
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Yeah, I think there's tons of narratives to kind of latch onto if you want to do sort of that shorter time horizon type of trade. Right. Including what happens if Blackrock launches a sidechain. That side chain starts as a side chain on the path to.
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B
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They would never join the collective, though, right?
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A
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Maybe they would. Who knows what could happen? I've been constantly surprised, but I mean, that type of thing can happen. I also think layer twos are, in general, kind of having a renaissance from a narrative perspective, because people have watched an alternative layer one run up, and they're like, well, layer twos are looking pretty good now from a valuation perspective. I mean, just look at this, David. This is, let's go to Coingecko, actually, and let's see what the valuations are. I'm going to turn. This is fully diluted valuation. Right.
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B
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So can you go to arbitrum?
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A
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So arbitrum is here. 21 billion for arbitrum.
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B
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And arbitrum recently reached all time highs. This is not my analysis, but it makes sense to me, is like, traders have started to purchase arbitrum on the hype of proto dank sharding EIP 4844 that is coming in March.
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A
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I think that's a possible narrative for sure.
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B
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And I think this is totally plausible narrative. Anytime I find myself, like, aligned with traders, I'm like, huh, weird. But, like, this is one of the things that happens. Like, they are. Traders have decided that there is a shelling point around the growth of a narrative about the growth of a fundamentals. And so sometimes, like, the pyramid of the traders on top, the narrative layer in the middle, and the foundation fundamentals at the bottom, like a line in stars. And I always think that's like, a funny time in crypto when, like, everyone's, like, lined up.
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A
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Well, that's nice. Yeah, it's nice. When your fundamentals, it's very fleeting.
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B
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That's already in the rear view mirror.
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A
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Yeah, it lasts a few weeks, and then you get sad again. At least that's my experience. But, um. Okay, so arbitrum is the number one highest value, layer two right now at 21 billion. Next to that?
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B
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Yes. Yeah.
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A
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Next to that would be optimism. 15 billion. They have a ton of tokens that are locked up. Right. And so that's why market cap is so different than fully diluted valuation, because fully diluted is like the full market cap that, um.
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B
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All tokens that exist. Yeah, yeah.
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A
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And so, and, like, those are the top two. And notice that they are. Well, where's matic? On this list, they should definitely make a presence. Here it is. Matic is.
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B
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Matic hasn't pumped yet. Matic's been lagging behind.
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A
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So that's less than half arbitrum. And also look at Solana, 55 billion. So it takes two arbitrums to make premium a Solana. Right. Which is interesting just how the market is valuing all of this at this point in time. And so to, I guess, zoom out to say, I do think that there are some narratives that might shift this a little bit. And there could be an l two season renaissance. And I'm not sure exactly what those narratives might lead to that that's someone else's specialty. But proto bank sharding could, like, base using a layer two more traction in general for these layer twos, or just price pumps, can just cause narratives to be told for why the price is pumping, right? And prices don't need a reason to pump. Sometimes they just do. It's just time for that specific asset or token. One thing though, I want to say, David, is and I want to actually now give the case to you for why I think alternative layer ones could be more bullish than at first appears under this thesis. Right? So, okay, so this is still within the bounds of the framework, and I want to give you a bull case for alternative layer ones. Okay, so, so far we've said from a fundamentals perspective, profitability of block space is the thing that matters, right?
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B
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In our armchairs.
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A
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Okay, so, um, layer ones, alternative layer ones like Solana and avalanche, remember, they always have the ability to become layer twos if they want. Okay, so look, I don't know all of the technical engineering behind this, but we know we've already seen wastello network, which was an alternative layer one, now starting to use Ethereum for settlement, right?
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B
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It's not a large technical lift to be switched from being a layer one to a layer two. All you do is post data elsewhere.
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A
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Yes. Here's what that means. It means every alternative layer one already has an option. The fact that ethereum exists, they have an option to become a layer two at any point in time if they choose to exercise that option. And they will choose to exercise that option game, theoretically, if it will increase the value of their token and their ecosystem. But they can.
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B
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They are done being Amazon and want to start being apple. You mean like once they are done growing and they are trying to then turn into profit?
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A
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Yes. So Amazon, the story of famously Bezos was like, hey, I'm not going to return any profit. We're going to lose money every year. We're going to make fantastic revenue, but we're going to lose money. And all the shareholders. Who said, but profitability, Bezos, it's not even profitability.
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B
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What are you doing? You're driving this chain into the ground. Or they left.
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A
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They left. All of those kind of whiners left. And what he had, and the Bezos.
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B
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Was probably like, sick, get out of here.
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A
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Yeah. Because what he had was a whole bunch of people who were along the ride for unprofitable block space. Okay? And so, like, here's a way Solana could win, for instance, right? If something like Solana, if their, their model is just grow and grow and.
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B
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Grow, capture mindshare, capture users, just like.
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A
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We'Re just going to acquire users. I don't care about profitability.
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B
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We're going to penetrate the market.
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A
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Yeah, just acquire users, acquire apps, get network effects, dilute sole holders along the way so holders won't care because numbers going up in the interim, it's a bull market. Everything's going up. And then when it becomes an issue, like when the market starts to say, huh, you really need to solve that issuance problem because sole holders are getting deluded who aren't staking.
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B
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Well, then Solana has succeeded so well that they've captured two thirds of the Internet and there's no longer that many more people to capture. And all of a sudden they're like, oh, we've won. We've captured the users. Let's become profitable.
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A
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We're saying, Solana, because that's had the, like, a big run over the last six months. But it could be monad, it could be sui, it could like, it could be any of these avalanche. Who knows? It could be any alternative layer one. Well, then all they have to do is, oh, it's about the game is now profitable blocks. But, okay, hey, yo, we're layer two now. We're just gonna sell on Ethereum and they no longer have to issue their token. So from that perspective, that's what's always.
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B
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So genius about the Ethereum, like, fundamental model. It's just like, yeah, fees, bro. High fees.
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A
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Yeah, well, like, I do think that. So, okay, this is, you know, like the Ethereum fundamental kits. It seems likely that Ethereum will win in any case. Now you, like Solana and alternative layer 1, may decide to play the settlement chain game, too. They could start to launch. They could try to compete as a money. Okay, the last chain to compete with ETh as a money. Do you know what that chain was, David? Uh, terra Luna.
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B
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Oh, that.
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A
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That was the last chain to actually try to compete with Ethan bitcoin as money. Okay, so a chain could.
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B
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And look what happened.
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A
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A chain could do that, be a settlement layer, compete with ethos money. Or it always has the option to, like, pivot into profitable block space by starting to use Ethereum as a settlement chain.
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B
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So that's my. In my opinion, if your chain wants to be money, you must also be a settlement layer for other chains.
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A
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I think that's going to be true. I also think that's going to be true. That that feels like a, like a core kind of first principles ground up.
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B
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Doesn't matter. Don't even have to say the words Ethereum. If your chain is money, other chains settle to your chain.
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A
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But do you see how, like, under this lens, you can actually start to be like, okay, the value of Solana or avalanche at 55 billion for Solana. All right, that's definitely assuming that it out competes a whole bunch of the layer twos and becomes a dominant player in execution layer. But the block space p and l thing, it doesn't matter because Solana still preserves the option to always switch and start settling on Ethereum. So it may as well recycle all of the so called profits and goodwill and brand narrative and all of these things back into growing the chain of. And if it can marshal that capital to acquire users, apps and network effects, then it has a path to winning and maybe outcompeting all of these layer twos, that kind of quote, unquote, did it the right way.
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B
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Right, right.
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A
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What do you think about that?
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B
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I think that is a crazy scientist theory that I'm totally on board with.
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A
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Yeah. Anyway, I think probably I've missed that sort of component of this for a while, and I think a lot of fundamentals analysts or eth maximalists and maybe miss that vantage point, but it very much could be the case.
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B
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I'm on board.
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A
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I'm super on board. That's what I got, man. Anything else? Where do we summarize all of this? We've got l, two tokens out there, and the question was posed, where are they worthless governance coins? I don't think they are. It seems like. Yeah. How would you summarize all of this?
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B
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Yeah, maybe before I summarize all this, I'll say a little bit more about the layer two upside case. I think we've presented the vanilla layer two upside case, the case that is true for all layer two tokens. But I think in addition to that, every single layer two token will also adapt a more specific strategy. The optimism collective strategy is to spawn the super chain, create a shared standard for what it means to be a part of the super chain, create some sort of ecosystem benefits, a union for why you joined the super chain. And then being a part of the super chain requires a 15% of your sequencer fees. To the optimism collective, that's the optimism upside case. The polygon upside case is different. They have the work token medallion model about the interoperability chain that they have in addition to other mechanisms as well, which is completely different from the optimism upside case. Arbitrum orbits, I think, still has some fleshing out to do with its upside case, but it has a similar 10% fee to join the collective type of model. Starknet has gas fees paid in the stark token. And that does zK EvM or not a Zkvm. It's Cairo based, but it's a ZK chain. A stark chain. And what is the upside model for that? It is a different flavor. And so in addition to just like the value added reseller case, which is true for all chains, there's also more specific chain specific strategies. Businesses for what they are actually doing and why they're capturing value 100%. Each one will kind of develop its own ways of navigating the world, right? And it's this own business model. A mantle, for example, has Meath, because the mantle treasury is just absolutely massive. And so they made their own liquid staking token. They're probably also going to do a liquid retaking token, calling it a. Why wouldn't you? That's a mantle strategy. And so in addition to just the fundamental case that we laid out in this episode, each layer two has the opportunity to kind of make their own additional way of capturing value.
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A
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Yeah, I think that's what's so exciting about the space right now is all of this is emerging, and maybe the place I'll leave us is kind of the opening for another set of questions that are questions in my mind for 2024. And I know they're in your mind as well, which is, okay, now we have kind of this new block space thing that we've created. In fact, I would say that's like, that's the core innovation that crypto has created. It's a trustless censorship resistance. Block space. What can you do with block space banking system. You could do sound money. You could do store of value. You could do property rights online, all of these things. You can do all of these things with this commodity that we've created. Called blockspace. Now, we have separated out the block space supply chain in three different levels of value accruing tokens, if you will. There's the consensus settlement layer, which Ethereum is trying to dominate very much. And the case for ether or some asset as a money or as an Internet bond, there's that layer, and then there's the data availability layer, which Ethereum is also a player. It's trying to sell its block space as a DA provider. But then you also have Celestia in there Eigen layer, DA, which takes its cut. And then there's a veil from formerly Polygon founders taking its cut. Near is competing for the DA layer. And then you have the execution layer, which is where the majority of these layer twos are really competing. That's where users come. That's where states are. That's where you can create super chains. It's an app acquisition game. Solana is playing full stack, but also very much on the execution layer. Execution layer, yeah, 100% execute. And so the question there is now, in my mind, and I think a major topic for 2024 is, okay, where's the value going to accrual? And the answer is all three. Okay, all three are going to accrue some value, but are we going to get more fat protocol. Are we going to get more value accrual at the. At the bottom of this pyramid? Or is it going to be an upside down pyramid? That's what some people think where, like, value accruals actually tiny at the settlement layer, and it's like bigger at the DA layer and even bigger at the execution layer. And that, in my mind, is the major fundamental question for this asset class as we move into, has always been the big question.
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B
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Probably has one of the questions that we started bankless to try and answer, and it is four years later and still asking. Question is better defined, but the answer is still just as opaque.
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A
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Yeah, well, now the question has three parts to it, right? We have three different components. So, bankless nation, we're going to be exploring this this year, and thanks for hanging with us on the bankless takes. We should mention a couple hot episodes.
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B
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That are coming down the pipeline on this. John Charbonneau and Neil Somani from Eclipse, doing an episode titled is Da a good business model? So we're attacking one of those points on the triangle head on, followed by an episode co hosted by John Charmeau. Replacing you, Ryan Bye. With sriram from Eigen Lair and Nick White from Celestia. Comparing the differences between Eigen Da and Celestia as a da construction layer. So we're doing some exploring.
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A
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Ooh. Let's go figure it out. As always, bankless, we're trying to bring you guys to the frontier. Should disclose before we end this episode. We're investors in a whole bunch of the l two s and other tokens that we mentioned today. We also hold some eTh. As you'll know, you can access all of our disclosures, bankless.com disclosures and got to end with this. We have no idea what prices will do in the short run. Crypto is just generally risky. You could lose what you put in. But we are headed west. This is the frontier. Not for everybody, but we're glad you're with us on the bankless journey. Thanks a lot.
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