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A | 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 tha... |
B | Layer two fees are going to zero. |
A | 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 colla... |
B | Beginning of the da wars. |
A | It's getting, it was like, what, 99%. |
B | Cheaper or 99% cheaper? |
A | 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 exec... |
B | 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 botto... |
A | 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? |
B | 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, tech... |
A | 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. |
B | They would never join the collective, though, right? |
A | 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 ar... |
B | So can you go to arbitrum? |
A | So arbitrum is here. 21 billion for arbitrum. |
B | 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. |
A | I think that's a possible narrative for sure. |
B | 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 som... |
A | Well, that's nice. Yeah, it's nice. When your fundamentals, it's very fleeting. |
B | That's already in the rear view mirror. |
A | 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? |
B | Yes. Yeah. |
A | 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. |
B | All tokens that exist. Yeah, yeah. |
A | 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. |
B | Matic hasn't pumped yet. Matic's been lagging behind. |
A | 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... |
B | In our armchairs. |
A | 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 startin... |
B | 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. |
A | 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 o... |
B | 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? |
A | 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. |
B | What are you doing? You're driving this chain into the ground. Or they left. |
A | They left. All of those kind of whiners left. And what he had, and the Bezos. |
B | Was probably like, sick, get out of here. |
A | 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. |
B | Grow, capture mindshare, capture users, just like. |
A | We'Re just going to acquire users. I don't care about profitability. |
B | We're going to penetrate the market. |
A | 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 prob... |
B | 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. |
A | 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, o... |
B | So genius about the Ethereum, like, fundamental model. It's just like, yeah, fees, bro. High fees. |
A | 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,... |
B | Oh, that. |
A | That was the last chain to actually try to compete with Ethan bitcoin as money. Okay, so a chain could. |
B | And look what happened. |
A | 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. |
B | So that's my. In my opinion, if your chain wants to be money, you must also be a settlement layer for other chains. |
A | 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. |
B | Doesn't matter. Don't even have to say the words Ethereum. If your chain is money, other chains settle to your chain. |
A | 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, i... |
B | Right, right. |
A | What do you think about that? |
B | I think that is a crazy scientist theory that I'm totally on board with. |
A | 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. |
B | I'm on board. |
A | 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? |
B | 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 opti... |
A | 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 th... |
B | 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. |
A | 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. |
B | 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 ... |
A | 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.c... |
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