The Blockchain Debate Podcast

Motion: The industry is growing out of the Fat Protocol Thesis (Jeff Dorman vs. Joel Monegro)

December 10, 2021 Richard Yan, Jeff Dorman, Joel Monegro Episode 33
Motion: The industry is growing out of the Fat Protocol Thesis (Jeff Dorman vs. Joel Monegro)
The Blockchain Debate Podcast
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The Blockchain Debate Podcast
Motion: The industry is growing out of the Fat Protocol Thesis (Jeff Dorman vs. Joel Monegro)
Dec 10, 2021 Episode 33
Richard Yan, Jeff Dorman, Joel Monegro

Announcement: I have a new show called “Crypto This Week.” It’s a weekly, five-minute news comedy satire focused on the world of crypto. Check it out on YouTube here: Crypto This Week with Richard Yan


Jeff Dorman (
Joel Monegro (


Richard Yan (

Today’s motion is “The industry is growing out of the Fat Protocol Thesis.”

The Fat Protocol Thesis was coined by a blog post on Union Square Ventures’ website. The Fat Protocol Thesis postulates that because crypto protocols are investable assets, they will likely capture more value than the applications built on top. This is contrary to the Internet stack, where applications captured much more value than the protocols they operated upon.

This thesis seems to have worked out nicely so far, with the aggregate valuation of various layer-1 protocols far exceeding that of the applications. But will this continue to be the case? What are the nuances related to the Fat Protocol Thesis that would inform sharper thinking about relative value of protocols vs applications?

Our two guests today are both investors at well-known digital asset funds. One of them is the author of the original Fat Protocol Thesis. The other has a few questions about it, to say the least.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best-known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Guest bios:

Jeff Dorman is the CIO of Arca, a digital asset investment platform with more than $500 million in assets under management. Prior to Arca, he worked in portfolio management and trading at various places including Citadel Securities, Merrill Lynch and Lehman Brothers.

Joel Monegro is a founding partner at Placeholder, a crypto venture fund. Prior to Placeholder, Joel was at Union Square Ventures, where he developed the firm’s early  blockchain thesis and portfolio. He is also the author of the seminal blog post Fat Protocol Thesis, which is still up on Union Square Ventures’ website today.

Show Notes Transcript

Announcement: I have a new show called “Crypto This Week.” It’s a weekly, five-minute news comedy satire focused on the world of crypto. Check it out on YouTube here: Crypto This Week with Richard Yan


Jeff Dorman (
Joel Monegro (


Richard Yan (

Today’s motion is “The industry is growing out of the Fat Protocol Thesis.”

The Fat Protocol Thesis was coined by a blog post on Union Square Ventures’ website. The Fat Protocol Thesis postulates that because crypto protocols are investable assets, they will likely capture more value than the applications built on top. This is contrary to the Internet stack, where applications captured much more value than the protocols they operated upon.

This thesis seems to have worked out nicely so far, with the aggregate valuation of various layer-1 protocols far exceeding that of the applications. But will this continue to be the case? What are the nuances related to the Fat Protocol Thesis that would inform sharper thinking about relative value of protocols vs applications?

Our two guests today are both investors at well-known digital asset funds. One of them is the author of the original Fat Protocol Thesis. The other has a few questions about it, to say the least.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best-known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Guest bios:

Jeff Dorman is the CIO of Arca, a digital asset investment platform with more than $500 million in assets under management. Prior to Arca, he worked in portfolio management and trading at various places including Citadel Securities, Merrill Lynch and Lehman Brothers.

Joel Monegro is a founding partner at Placeholder, a crypto venture fund. Prior to Placeholder, Joel was at Union Square Ventures, where he developed the firm’s early  blockchain thesis and portfolio. He is also the author of the seminal blog post Fat Protocol Thesis, which is still up on Union Square Ventures’ website today.

Fat Protocol Thesis Debate

[00:00:00] Richard: Welcome to another episode of The Blockchain Debate Podcast where consensus is optional, but proof of thought is required. I'm your host Richard Yan. Today's motion is: The industry is growing out of the Fat Protocol Thesis. The Fat Protocol Thesis was coined by a blog post on Union Square Ventures website. The Fat Protocol Thesis, postulates that because crypto protocols are investable assets, they will likely capture more value than the applications built on top. This is contrary to the internet stack where applications captured much more value than the protocols they operated upon. This thesis seems to have worked out nicely so far with the aggregate valuation of various Layer 1 protocols far exceeding that of the applications. But will this continue to be the case? 

[00:00:59] What are the nuances related to the Fat Protocol Thesis that would inform sharper thinking about relative value of protocols versus applications? Our two guests today are both investors at well-known digital asset funds. One of them is the author of the original Fat Protocol Thesis. The other has a few questions about it, to say the least. 

[00:01:21] If you're into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We feature some of the best known thinkers in the crypto space. If you like the show, the best way to show your support is to give us five stars on your podcast app. This will help us grow the show and reach more folks interested in crypto. Please note that nothing in our podcast should be construed as financial advice. I hope you enjoy listening to this debate. Let's dive right in.  

[00:01:48] Welcome to the debate! Consensus optional, proof of thought required. I'm your host, Richard Yan. Today's motion: The industry is growing out of the Fat Protocol Thesis. To my metaphorical left is Jeff Dorman, arguing for the motion. He agrees that the industry is growing out of the Fat Protocol Thesis. To my metaphorical right is Joel Monegro, arguing against the motion. He disagrees that The industry is growing out of the Fat Protocol Thesis.  

[00:02:16] Let's quickly go through the bios of our guests. Jeff Dorman is the CIO of Arca, a digital asset investment platform with more than $500 million in assets under management. Prior to Arca, he worked in portfolio management and trading at various places including Citadel Securities, Merrill Lynch and Lehman brothers. Joel Monegro is a founding partner at Placeholder, a crypto venture fund. Prior to Placeholder, Joel was at Union Square Ventures, where he developed the firm's early blockchain thesis and portfolio. He is also the author of the seminal blog post Fat Protocol Thesis, which is still up on Union Square Ventures' website today, which I will link to in the show notes. Welcome to the show, Jeff and Joel! 

[00:02:55] Jeff: Thanks for having me, good to be here. 

[00:02:57] Joel: Thanks Richard. And hi, Jeff. Uh, everyone at Placeholder is a fan of your work by the way. So I'm excited to talk to you today.  

[00:03:04] Jeff: And vice versa. We're big fans of you and your partners and your firms. So it'll be exciting to take the opposite side of you, even though, we largely agree on a lot of different points.  

[00:03:13] Richard: Okay, awesome. So we normally have three rounds: opening statements, host questions, and audience questions. After the release of this recording, we will release a post debate poll. There's also currently a Twitter poll ongoing for the topic at hand. Between the two polls, the debater with a bigger change in percentage votes in their favor wins the debate. Jeff, so go ahead with your opening statement. Explain to us, first of all, what is the Fat Protocol Thesis in your mind? And then why do you think The industry is growing out of it? Go ahead.  

[00:03:46] Jeff: So the original Fat Protocol Thesis, which I believe was written by Joel in August of 2016. I'll just say it was probably the most fascinating thing I ever read in my journey from traditional finance over to digital assets. It was probably the most defining piece in terms of why I came over into digital assets. The way I interpreted it was, when you go back to the birth of the internet, the protocols themselves, whether that's SMTP protocol for email or HTTP or TCP/IP for the internet, the protocol layer itself didn't accrue any economic value. But all of the companies and stocks and everything else that was built upon the internet accrued all of the value. So the protocol itself, very thin, no value. The applications themselves, took all the value. Your Googles, your Apples, your Amazons, et cetera.  

[00:04:35] The Fat Protocol Thesis under my interpretation of what was written was that the opposite will now be true because of this ability to actually invest at the protocol layer itself. Because there is the ETH token underlying the Ethereum protocol because there is the Solana token underlying the Solana protocol. The value of this new blockchain ecosystem will actually accrue to the protocol itself and not to the applications built upon them. I think it made all the sense in the world. It's actually amazing if you go back and read it. That so many of the things that he wrote five years ago still hold up today. But I think we are now heading to a point where that is going to be disproven, pretty quickly now over the next couple of years, now that we're starting to see real growth of applications built upon these protocols. 

[00:05:21] Richard: Thanks Jeff. Joel your time for the opening statement. Tell us why you disagree with the position that we're growing out of the Fat Protocol Thesis.  

[00:05:30] Joel: Well, in some ways I'm really interested in finding out if we are indeed outgrowing it. Because we're both investors. And so we, want to be correct in both how we think and how we invest. But generally... Maybe I should provide a little bit of context about where the ideas came from. And then use that as the basis for why I think they're going to persist. And going back to 2016, I was an analyst at Union Square Ventures. And we were one of the first institutional investors in Coinbase. Back when Coinbase was a private company and in the Series A stage. And at some point, I looked at every time that we have put money into Coinbase over its various private rounds and the ways that the company had been valued. And then looked at what would investment performance look like if we had actually invested in Bitcoin instead, and had put the same amount of money over the same period of time. And found that Bitcoin seemed to appreciate at a faster rate than a company like Coinbase. And that started the whole question and the whole idea of, well, there's something very interesting here. And we were coming from the venture capital context where traditional investment firm focusing on essentially private equity. And so the idea of investing directly into the protocol was a very new idea at the time. And so I set out to make the case and the argument for why we and other investors should do that. And so that was the genesis of that idea.  

[00:06:51] And what's been really interesting to see over the last six, seven years is, of course seeing Bitcoin and the entire ecosystem grow and the entire protocol layer grow. And then see Coinbase grow as a company. And it's now a public company. So now we have some data that we can look at. And we can compare the valuation of a company like Coinbase against all of the underlying protocols that allow them to provide that service. And so, so far the data seems to suggest that the thesis is right. And there's lots of different ways to debate that. But I do think that Jeff has a point that just because so far the data suggests that it's right, it does not necessarily mean that it will be right forever. That said, I do think that part of why it's a controversial idea is that the conclusions change a lot depending on how you set up your axioms. 

[00:07:45] So, the way I think about it, first we have to agree on what constitutes a protocol versus an application. And in this sense, I think a lot has changed since 2016 in how we think about these things. So that's one first point of debate. Second, I think we have to agree or at least understand each other on what we might mean by value capture and how it relates to investment returns. And, that I think has been an important point of debate and potentially misunderstanding about the thesis, broadly. And third, I think we also ought to talk about the nature of value and what are the forces that drive in. This would be more forward-looking in terms of, okay, if we can agree on what are the kind of principles of value then we might be able to think about how value might transition, away from one layer to another, and what might drive those transitions. And then finally, we might also want to talk about what constitutes a layer, right? Because on one level of analysis, you might look at a single protocol and a single application on top of that protocol, and you might arrive at a certain result. But you might arrive at a different conclusion if you look at all of the protocols plus all of the applications. And I don't think there's in either of those four points or three points, I don't think there's a right or wrong answer so much as depending on which side you take on those individual variables, you may come to a very different conclusion on whether the thesis is right or the thesis is wrong. 

[00:09:09] So, I'm a little ambivalent. I do think that broadly in general, taking into account all of those variables, that the thesis is correct and is likely to be correct. However, some of my own interpretations about what those ideas mean are different from some of the popular interpretations of the original post. And my own thinking has evolved over the past five, six years. So, I don't think it's a settled debate, but I also wouldn't say that, that we're growing out of the idea. 

[00:09:36] Jeff: Well, let me... And I appreciate that Joel. And if it's okay, Richard let me just throw a few things in here. So,  

[00:09:41] Richard: Of course. Yes. Go ahead.  

[00:09:43] Jeff: You know, one way of measuring value obviously is by market caps themselves, right? If you're just looking at market caps of the Layer 1 blockchain protocols relative to the market caps of everything else, including your public companies, like your Coinbases, as well as your DeFi applications, your gaming applications et cetera. There is no question that to date the answer would be that the value is accruing to the Layer 1 protocols, right? If you look at the aggregate, the market cap is about 857 billion across all the different Layer 1 protocols. Of course Ethereum being the biggest with 540 million and that doesn't even include Bitcoin, which is a trillion dollar asset now. So, there's no question that if you're just looking at market caps thus far, all of that value has accrued to the protocol layer.  

[00:10:27] But what I would argue is that there's a lot of reasons why that has happened. And the first is that most of the retail and even some traditional industries that are now getting into this phase, lack the resources and skills necessary to analyze all of the different complex individual tokens that have now been built on top of these protocols. So for instance, it's very easy to say, oh Ethereum yeah, that makes sense. Big market, I believe in its computing power. I'm going to invest in ETH. 

[00:10:52] It's very difficult to say. I'm going to go look at you know, specifically into SushiSwap and understand exactly the drivers of how that DEX is going to accrue value. Or I'm going to go look specifically into Chiliz and understand exactly how this new idea of Fan Tokens and sports and entertainment are going to accrue value. 

[00:11:09] It's just a lot more work. Right? So I think in some ways I would argue that the Layer 1 blockchain tokens have actually become like a lazy man's index. It's like, oh, I want to be in crypto. I'll just buy some of these because it makes sense. I've heard people talk about Ethereum. I've heard people talk about Solana or Cardano, et cetera. So, I think it is the natural starting point for a new investor, but it doesn't necessarily mean value is accruing. It just means investment dollars were accrued. 

[00:11:31] Secondly, I think, and this is a big reason why I got into digital assets in the first place, is when I get into this space four or five years ago, it actually looks very similar to what it looks like today. Which is you have all your algorithmic quantitative traders on one side who don't really necessarily care about the underlying instruments or assets at all. They just care about the correlations, the VARs, Betas, et cetera. So what are they gravitating towards? They're gravitating towards the large caps. The large caps are largely your protocols. On the other side of the spectrum, you have your early stage venture investors, which has been the dominant force in digital assets investment. What do early stage venture investors look for? They look for total addressable market. They look for what could be massive, not necessarily valuation, right? So, in the digital asset world, what are the things that could be massive? It's the Layer 1 protocols. What you're missing right now is your growth equity investors or your mutual fund investors, or your long-short equity investors. 

[00:12:21] Right? This is the corner that Arca hangs out on, which is real fundamental valuation. That's for the most part, there's not a lot of competition. There's only a handful of funds that are really looking into the secondary market and doing real valuation techniques. In my opinion, that's why you have really depressed multiples on things like DeFi and gaming and sports and entertainment and Web 3.0. A lot of these companies and projects trade at below book value. A lot of them trade at one to two times sales, where if this was the equity market, they would be trading at 10 times sales or 20 times sales or five times book value. So until we get these new crop of investors in here, a lot of the interest from an investing standpoint is going to continue to accrue to these big ideas rather than these valuable companies and projects. 

[00:13:05] And then lastly, and I think this was really important is, because the Layer 1 blockchains were first, right, obviously they're the building blocks, everything is going to be built on top of these, they raised the largest amount of money. That means they have the most money to spend on marketing. That means they can get the most people interested in what they're doing. I mean, look at things like EOS and Cardano that largely haven't done anything to date. But they have massive market caps just because they were early and they have marketing budgets and they have a lot of people who have heard about them. You can fast forward to this year alone. 

[00:13:32] I mean, just the last couple months, we've seen massive ecosystem funds from Phantom, from Avalanche, from Algorand, from NEAR Protocol. And this is just basically them saying, uh, and it's actually dovetails very well with what you wrote five years ago. Which is that once you build this protocol, they're going to have all this money to spend on developing the ecosystem. And that's a hundred percent true. But the point is, that just started happening in the last two to three months. So we haven't even gotten yet to the point where these applications can really be built on these protocols. We're still in the funding of the applications on the protocols. What I mean by that is, it's natural for the protocols to go up first but eventually for that protocol to retain its value, there has to be huge and successful applications build upon these protocols. And the numbers that we ran a long time ago was if you go back to the summer of 2020, you could argue that was the first time that there was real successful apps being built on Ethereum, right? 

[00:14:24] That was the summer of DeFi. That's when DeFi really took off. From summer of 2020 until March of 2021, DeFi applications outperformed Ethereum by 7 to 1. It's obviously retraced a lot from there. DeFi has been in a you know largely a bear market for the last three quarters. But once the first successful App, and I'm just using DeFi holistically as the first successful App. Once DeFi started to really take off in terms of user growth. This was right around Ethereum had a $25 billion market cap at the time and had about 10 billion in TVL. DeFi exploded relative to Ethereum. Then what was the next successful App on Ethereum? It was gaming and NFTs. The same thing has happened, gaming and NFT market caps and prices have outperformed Ethereum by almost 10 X. Once that started to really take off. 

[00:15:09] The point is though, now Ethereum has what, a couple uh, $500 billion market cap and a couple of hundred billion of TVL. So Ethereum has absolutely because of the success of these apps, but the Apps themselves have outperformed holistically relative to Ethereum. So now look at the rest of the protocols. Well, where do we sit right now? Every other protocol basically sits exactly where a theory of what 18 months ago. From Solano to avalanche, to Terra Luna, et cetera. Most of these protocols now are right around 25 to 50 billion market caps. And they're right around, five to 10 billion of TVL. So we're basically right in that launchpad fee period again, where if these are going to prove to be successful, you have to have that same growth of DeFi or gaming or something else that we haven't even thought of to validate the growth of that underlying blockchain. So to me, again, it's not the Fat Protocol Thesis is wrong or has been disproven yet. It's that we are just now getting into that phase where all things are going to be them. And in my opinion by definition they have to grow faster than the underlying protocol  

[00:16:08] Joel: All right. So let's dig into that because, part of what affects the conclusion is precisely how you define some of those variables. What we are really gonna talk about is the nature of value and what is the difference between capturing value and what is the difference between that and investment returns. 

[00:16:25] But before we get into that, one of the things that has changed meaningfully, or at least let's say one of the things that is the most nuanced about the Fat Protocol Thesis is what constitutes an application. And so in the original conception I've always been thinking about the application layer more as the interface layer. And I've been thinking about, for example, you look at Ethereum, you look at DeFi. I consider each DeFi project not... In some ways it is an application on top of Ethereum. But for the purposes of the Fat protocol's idea, I think of them as protocols themselves. And for example, you take something like Uniswap, Uniswap is a protocol on top of Ethereum. 

[00:17:08] But I would think of the Uniswap interface as the application interface on top of the Uniswap protocol, on top of the Ethereum protocol. Now, some people would rather think about Uniswap as an application on top of Ethereum which is a perfectly reasonable way to think about it. I don't think either way of thinking about it as wrong. But it really affects how you look at the idea because if you think of Uniswap and all of the DeFi protocols as Ethereum's application layer, then the application layer is going to look much fatter, so to speak than if you only consider the interfaces on top to be the application layer. 

[00:17:46] And then we'd have to talk about, well, how do those application interfaces accrue value? And this is where the original case study of looking at Coinbase versus Bitcoin plus Ethereum plus all of the underlying networks and protocols that allow Coinbase to provide its service. I think of Coinbase as a company that has built at the application layer. And then from that angle, it seems to me like indeed the protocol layer is much more valuable than the application layer. But that idea hinges on that specific definition about what constitutes the application layer. How would you, Jeff, think about that nuance and that distinction? Do you think of DeFi as the application layer or do you think of it as part of the protocol layer? 

[00:18:28] Jeff: Yeah, it's a really good point. And it's one that is going to be nuanced regardless of what your opinion is. In fact, it's interesting... Arca recently on our website, we actually just released our own new digital asset taxonomy. Because we were tired of a lot of lazy terms being thrown out there. Like, you know is everything a cryptocurrency or not? What is the difference between a pass-through token versus an asset-backed token? 

[00:18:47] Are you a protocol and platform, or are you an application? We're trying to help define that because it is murky, like you said. In my opinion, to me a protocol is something that by itself you don't really use, and an application is something you use. So for instance, like nobody really uses Ethereum. They use things that were built on Ethereum. So for instance, your Uniswap example, I will physically go to Uniswap to do a trade, right? There is an action and a consequence. There's no action or consequence on Ethereum itself. The Ethereum itself is just there to support it. The analogy I use and I test a lot of my analogies on my 73 year old parents to see if they stick. 

[00:19:23] I always think of the protocol is the App Store. You know, your iOS App Store might be Ethereum. Your Android App Store might be Solana or whatever. And everything else that is built upon it are the Apps. And to me, that just makes the most sense, right? Like you're not using the iOS App Store. You're not using the Android App Store. You're using something that was built upon it. And anything that I can use that I can physically go to and get some sort of utility out of it, that's what I consider an application. And that can be a company like a Coinbase. That can be, I guess a secondary protocol, like a Uniswap or a SushiSwap. It can be a lot of different things. But ultimately to me it's about whether on not you're using it. And if you're physically using it, that to me is an application. 

[00:20:02] Joel: Right. Now, I would take that same description or definition and, or I could use the same description to argue that you also don't go and you use Uniswap physically. You use the Uniswap interface that interfaces with the Uniswap protocol that then interfaces with the Ethereum protocol. But again, this is where both ways of thinking about it are right, at least as far as I'm concerned. And it's actually that question or that nuance has gotten even more complicated now, because for example, I hadn't factored in DAOs for instance anywhere in the analysis of Fat Protocols. And I was, at the time, mostly thinking, okay... The protocol layer is tokenized wherever tokens exists, that coordinate the production of a service in a decentralized way. That was my conception of the protocol and the application layer was really limited to the interfaces. And we've made some investments over time and continue to consider making investments in purely application layer interfaces. And so, for example, Zerion, which is one of our companies, builds on top of all the DeFi protocols. 

[00:21:07] And it's a single interface where you can interact with Uniswap and with Compound and with Maker and with all of these DeFi protocols. And so in that sense, I'm not touching Uniswap or Maker or Compound directly, I'm just touching Zerion. And so that to me feels like the application layer interface. But now we're moving into a world where even the application layers are launching their own tokens. And so that idea that I think it's definitely gone the idea that tokens only exist at the protocol layer. I do think that application layer tokens and protocol layer tokens do different things. The protocol layer tokens, I believe are more about the coordination of production. And the application layer tokens are about the coordination of demand. And really about getting users to stick with a particular interface given that when you're built on top of shared protocols, it's very easy for you to move from one application layer interface to another. But you know, that I think is a whole debate in and of itself. 

[00:22:04] And then with DAOs you know, I don't think DAOs are protocols. DAOs I think, muddy the waters even more because those do feel like applications of the underlying chains. And so we'd have to, if we ran the analysis today, we'd probably have to factor that in. And you know, I'm going to go look at the taxonomy that you've put together because I do think that for the next stage of the market we need to find another level of industry wide consensus about what each of these terms means. 

[00:22:32] Jeff: Probably a good time to pause and just acknowledge how awesome this industry is. That five years into this we still have people who are managing billions of dollars, still not a hundred percent agreeing on terms I mean this is it's just amazing where this industry has gone and how nuanced it is. 

[00:22:45] Joel: And it tells you how early we are. Well, let me ask you something, Jeff. Cause you mentioned something that's also very true. And so for example, I mentioned that we do invest in application layers. And to me, that's in part a response to a lot of people interpret Fat Protocols to mean that there is no value at the application layer or at the interface layer, depending on how you define it. But just know that every time I mean the application layer, I'm thinking in that way, I'm thinking that it's more the interface. And that I think that some things on top of Layer 1 constitute protocols as well. And I would put DeFi in that category. 

[00:23:21] Now we make investments at the application interface layer, obviously because we believe there's value there. And in some ways that might be surprising to some people, if they think that I meant that there is no value there. But to me, there's a difference between value capture and there's a difference between value capture and investment returns And so the way I kind of think about it, I'm just going to maybe put a clear sentence that we can debate, is I actually think that the more in thinking broadly less, you know, you can even take it outside of crypto and think more abstractly of any value chain. Any productive value chain in the economy. I would say that the more value is actually captured at any given layer of the value chain, the less investment returns there are at that layer. And so bringing it back to crypto, I believe that the more value gets captured at the protocol layer the less returns you'll find at that layer, even though the value will be captured and locked at that layer. 

[00:24:20] And then I think the new value and new investment returns continually move up. And this might be a place where we agree that I do think that eventually most of the returns are going to gradually shift to the interface layer. But I don't think it's a question of taking value away from the protocol layer. I think it's a function of the protocol layer maturing and reaching a certain steady state of stable long-term boring results, but then all of the new opportunities you find them on top. 

[00:24:51] Jeff: So here's the way I guess I would think about that is that to your point, at some point you hit the steady state. And the layer 1 blockchain is basically functioned as is. Like there is a point where it doesn't matter if Ethereum is a half a trillion dollar asset or a $5 trillion asset or a $200 billion asset is the functionality of everything that happens on there is [inaudible]. 

[00:25:16] I don't know what that number is. We're bullish on Ethereum we're bullish on a lot of other layer 1s like Terra Luna and Avalanche. So, I don't think we've hit that steady state yet. But there is definitely a path where you can get to where you don't care anymore if that underlying grows. All you care about is the things that are on that grow and I agree with that. Where I come back and keep going back to what is the word value mean? I define value as two things Right? And I was an economics major. So, maybe this is too microeconomics. 

[00:25:41] But to me value is one of two things. It's financial value or its utility value, right? Financial value is dollars and cents. Right? How much money are you making as a result of something? Utility value is a little more broad. Right? Utility value is how much enjoyment are you getting? How much satisfaction are you getting? The brilliance of most digital assets that we have been interfacing with and using, and investing in is that they do have these hybrid [inaudible], right? They have some form of financial value in the form of either just price returns or in some cases dividends, buybacks, you know, other ways where you're directly getting some form of financial gain. And then you also have the utility value, right? 

[00:26:19] Can I use this? Can I get enjoyment out of it? A lot of times, the analogy I use is, imagine if Amazon prime and Amazon shares were the exact same thing, right? You get financial value from Amazon shares, right. So you're investing in the business of Amazon and as they grow revenues and profits, you are getting financial value from that. But you get all the utility of Amazon through your prime membership. You get your whole foods discounts. You get your free movies. Your free music. Your free shipping. That's basically what a digital asset is. Right? If you think about you know BNB for example, which in my opinion was the first real hybrid security, it's exact same thing. You get your financial benefit from BNB in the form of price increases because of the strength and growth of Binance the ecosystem. And because they're using some percentage of their profits to buy back tokens but you get all the reward and utility from what you get to do with your BNB token. You get trading discounts, you get to use it as collateral for options and futures. You get first dibs on IDOs and things that they bring on the platform. Any partnerships they develop with travel companies and things like that, right? So you get both the utility and you get the financial value. So with that in mind, I think the protocols really never going to give you that utility value, right? You don't get enjoyment or benefits or anything from owning those tokens. It's purely just a financial gain. That you're getting for owning it. Whereas these other tokens, you can get both. 

[00:27:35] The way I would think about this then is, thinking about it in terms of like a country, right. If I were to go buy an island in the middle of the Pacific and I just discovered it, no one's ever seen it before. That has value just in the sense that it's new, it's wide open, anybody can build on, right. That to me, that's like the protocol layer. But there's no utility or enjoyment out of that until something gets built on it. And I'm not going to just sit there on a barren island and have fun and get anything from it. We start to get that utility value is when you start to develop on there, right? You start to develop schools and roads and houses and businesses, and all these things that eventually create that value and ultimately create the tax revenue as well, that goes back to you as the owner of the island, right? So the island in the initial days has just speculation value, but eventually it has real financial value from all these things that are happening on it.  

[00:28:22] And you can see that, you know, take the US for The broad money supply is about 20 trillion dollars. The equity market cap of all the companies and these things that are built upon the US is about $50 trillion. So to me, that's the same thing, right? You know, the US 300 years ago was basically barren wasteland, right? It had a lot of potential, but there was nothing there. Fast forward, you know, 300 years and all the development that's happened, and now all these different companies that have been built upon the US are worth an aggragate more than effectively the US itself. 

[00:28:57] Joel: Now you know we can probably debate that, cause I'm not sure that you could measure the value of the US by it's money supply.  

[00:29:03] Richard: Why is that? Can you elaborate? 

[00:29:04] Joel: Or just by its money supply. Well, um, in many ways, we use the nation state example a lot. It's actually part of our original thesis at Placeholder that we published. And it's basically, think of each crypto network as its own country. And it has similar qualities. And if you at least think of a cryptocurrency, it might even, or you think of something like Ethereum or that functions in that way, it's even more so. But for instance, the money supply is all the money outstanding. Right? But there's also everything that you measure with that money supply is what actually has value. And so, for example, all of the land in the United States that is publicly owned, I think some subpart of the value of the US. And it may not be measured. But all of the natural resources, all of the stock of the US that is publicly owned and it's, it's part of the value of the US 

[00:29:59] Jeff: It's like the value of the infrastructure  

[00:30:04] Joel: and then I would say that things that are...  

[00:30:06] Richard: Right. So land would be considered infrastructure?  

[00:30:08] Joel: The value of the infrastructure, the value, and also not just the current value, but also the expected value. And so, what was the number that you quoted Jeff? It was 20 trillion. The money supply... 

[00:30:18] Jeff: Yes. 

[00:30:19] Joel: That feels cheap for the US. I would say that the US is worth a lot more than 20 trillion. US currency is worth 20 trillion, but the US, I think, and people could debate this, but I think the US is worth a whole of a lot more than 20 trillion. And I don't know what the natural reserve resources like oil and minerals and things like that is worth, but I'm sure that the data is out there. But I would include all of that into the valuation. I wouldn't limit the value of the US to, or any country to the monetary supply I would also want to look at its capital. 

[00:30:50] Jeff: Yeah, that makes sense. Another way I look at it then would be, because the nation state is harder to really value what the nation itself is worth. Another way would be you used the largest tech companies as an example, right? Say, if you look at the largest companies in the world, they're almost all networks and ecosystems at this point, right? It's your Facebooks, your Amazon, your Apples, your Googles, right? It's not really applications, it's networks. So you might say, okay, well that proves a, you know, in theory a Fat Protocol Type thesis. Which is that all the value accrues to the network and not to the things on top of it, because Facebook is bigger than any company advertising on Facebook. Amazon is bigger than any company using the Amazon storefront. Apple is bigger than any App that's big that's being built on Apple, et cetera. But if you look at in the aggaragate, the market cap of every single storefront on Amazon is greater than Amazon itself. The market cap of all of the Apps in the iOS App Store is greater than the market cap of Apple itself. 

[00:31:43] Thus, it would stand to reason that the collective size of all of the Apps built on blockchains will be greater than each of the individual blockchains themselves.  

[00:31:51] Richard: Let's stay on that. Cause it's a good example or a good point of analysis. Now I won't immediately agree because I haven't gone in some of that data and I haven't seen someone do it and it would be interesting data to find out. But now it would be really difficult to find out exactly how those values relate to each other. But nevertheless, if we take it at face value. This I think gets into another point of nuance into whole thesis which is, are you looking at a single application over a single protocol or infrastructure layer let's call it. So that we can broaden the examples to also look at Amazon and Apple, et cetera. Or do you also have to consider everything that those stores and that those kind of services on top, uh, everything that they're built on? And so, if we just stick to Amazon, you know, Amazon is one of the world's most valuable companies. It's worth an ungodly amount of money. 

[00:32:47] I don't have the, number at the top of my head. About 2 trillion. Great. And so, it's an interesting question about whether all the stores on top of Amazon are worth more than 2 trillion. Let's say that that is true. It's probably not a complete analysis if you only look at them as a function of Amazon because their value does not come 100% from Amazon. Amazon is where they sell. But then they're selling things, right? So that means that they're either making things or buying things to resell. So I would say that in order for you to make that analysis complete, you can't just look at their value compared to Amazon, but their value compared to Amazon plus every other piece of infrastructure that they rely on. 

[00:33:26] Jeff: Yeah, that's that's all put. I'm going to give you the knot in the wind there because I have no way to to rebut that.  

[00:33:33] Joel: Well, you know. Then let's see what that means about crypto cause that's a really hard analysis to make right? Because then I think it would take an army of grad students to even estimate the number. But if we think about what that analogy means in the context of crypto, it gets at this idea of, okay, it's the whole protocol layer versus the whole application layer. Or you look at single instances and in a follow-up post, called Thin Applications where I try to explore these ideas further, one of the points that I make is that, I'm really thinking about the application layer not on top of a single protocol, but everything else that they rely on. And so in the case of Coinbase for instance you look at Coinbase which I think is worth something like 65 billion, or at least it's priced at something like 65 billion. You compare it only to Bitcoin and you get one result. You get 65 over a trillion. But then I think at a deeper level of analysis would be to take every protocol that Coinbase relies on to provide, to build its business. And that's basically every underlying network and token that they trade and that they operate with and every chain that they interface with. You get a vastly different number.  

[00:34:39] Now in both cases, at least with the current data, you would see that effect that the Fat Protocol effect where, uh, Bitcoin is worth something like 15 times what Coinbase is worth. And so from that sense you might say well, yeah. It's a Fat Protocol looking split, but you know, the application layer in this case it'd be just isolated to that case study. Actually it doesn't look that fit. It's not that huge a disproportion. But then when you take it in the context of the whole $2 trillion market and chain, then you get that more pronounced Fat Protocol image its worth relatively little when compared to the underlying protocol. However, no one would dare say that Coinbase has been a terrible investment that has captured no value. That would be preposterous. 

[00:35:24] There's clearly lots of investment returns and opportunity in a company like Coinbase, even though the underlying infrastructure has captured more value at least so far. So it really isn't, and I'm glad that we can talk about this more economically because I think, one of the most important things to realize is that we shouldn't equate value capture with investment returns, and I think investment returns show themselves on the path to value capture, but eventually you get to a steady state in how much value has been captured. The returns no longer become attractive and the returns move elsewhere. Now, you can invest in both at the same time. And I think it's actually a mistake to completely discard the application layer and say that it's not going to be valuable. And I know that you definitely don't make that case but some people do and that's probably one of the first things that we are correct about the thesis.  

[00:36:12] Jeff: Well I think, the market cap argument is it's the easiest to measure. Right? I we all kind gravitate back towards market cap or to the price gains because it is easiest to measure. But then yet again, you have to go back to utility value as well, which is, you know, we mentioned Coinbase, for example. There is certainly some measurable value that people have of excitement or euphoria or some sort of dopamine hit when they log into Coinbase. 

[00:36:35] When they look at their account when they are making a trade. Right? There's not really that same feeling at the protocol level because there's no actual interaction. Right? So again, I won't disagree that looking strictly at market caps is not the right solution but when you look beyond market caps, it's like you said, it's going to take an army of grad students to estimate what that other value is. And I think it's enormous. I think most people would get more utility, more feeling of excitement, more benefit from utilizing something than they would from the underlying protocol. And I think that is something that, that really matters as well. Right. I mean, you could take that analogy anywhere you wanna go. You can take, you know, do you actually get any value out of the chassies and the underlying of a car, or is it just the driving of the car that gives you the value.  

[00:37:23] Joel: And that depends on who you are. Different people will have different opinions about that depending their level of closeness to the underlying infrastructure. Right? Like if you are a car enthusiast who loves to tinker with the engine you know, you're touching the protocols so to speak. Much more than someone who's just driving to work.  

[00:37:40] Jeff: Right. And actually, I mean, we might be deviating using this as an analogy. But there are billions of people in the world who would jump in a car and drive. Or who would be a passenger in a car and let someone else drive them. And will you know, have enjoyment out of getting from point A to point B. How many people are actually tinkering with engine. It's a couple thousand. Maybe, hundreds thousands. But it's not the same of scale. And I think that is, know, like I said, measurable, but it's certainly going argument that depending on how we define the word value, you're still going to end having more value at the actual application level where people are interacting than you will at the underlying protocol.  

[00:38:15] Joel: So let's try the following sentence because I do believe that as the industry matures, new value will shift over to the application layer. What I'm not ready to determine right now is, and these are the kinds of things you only know in hindsight, in some ways... Is how much value will ultimately end up captured in the protocol layer, even if the protocol layer ceases to grow astronomically. But fundamentally, and I think we'll agree on this and this'll be an important point is that ultimately I think that there will be far more applications than protocols far more. 

[00:38:57] We don't need that many protocols at the end of the day. And then we have to debate, well, you know, is a DAO an application? I think a DAO counts as an application. And interfaces count, and certain things that some might call applications I think count as protocols. But generally speaking, I do think that the protocol layer reaches a state, a steady state of normal boring, you know, it just works and you don't have to touch it. And most of the new things that people create and use are clever combinations of all those different protocols. And the point of debate, I'm curious if you agree with that? And I do think that then all the new value will shift in that direction. 

[00:39:35] The point that I'm not ready to concede at this time, and maybe we have this debate again in 10 years is, how is the split of value going to be between those two layers? But not in terms of value. Because for example, I think once you get to that steady state, you have much less speculative value in the protocol layer than you might have in the application layer, for example. You may not have that growth in that protocol layer. 

[00:40:00] Jeff: Yeah. I mean, I a hundred percent agree. I mean to me, some of these things are obvious. Like for instance, one of those more than probably anybody. I argue that the term Bitcoin dominance needs to be completely shelved and never used again. Because it absolutely makes no sense. Right. Bitcoin by definition, Bitcoin dominance is going to go towards zero. It has to. Because there's going to be infinite amounts of new tokens that are issued over you know the next 10 to 50 years and there's never going to be another Bitcoin issue. Right? So, it's the equivalent of like...  

[00:40:28] Joel: That a maximalist argument I mean the argument that we should stick with it.  

[00:40:30] Jeff: Yeah. Right. But it has to go, it has to trend towards zero. There's almost.. You know Bitcoin could literally go up 50 X become biggest asset in the world. And Bitcoin dominance still go down because just be more digital assets, equivalent of like, if you used to bet on Tiger Woods versus the field at the Masters. It's like, yeah, Tiger Woods is great. He's the best. But the field is still the better bet. Because there's a lot people in the field than there are Tiger Woods.  

[00:40:52] 100% agree. I mean you'll appreciate this joke that I often say. Which is imagine discovering blockchains and then thinking that the only thing you can do with that is Bitcoin. Ridiculous.  

[00:41:01] Yeah, it's crazy. Right. So the same thing is true of what you just said, which is that by definition there will be of more applications built than there will be underlying protocols, right? Because the whole point, of these underlying protocols is to support and foster the growth of these applications. So I think there's no doubt in my mind that at some point. The totality of all of these different applications is going to be enormous relative to the underlying protocols. And that also accrues value to the underlying protocol, right? I mean the the strength of Ethereum, or Solana or Avalanche or Terra or whatever, is the fact that you can do all these amazing things on it. Right. Think about just in addition to the things with the big monetary value today, like your DeFi Apps and your gaming NFTs and all of that thing, look at just some of the other experiments that are going on, right? The idea of tokenizing real estate or Arca. 

[00:41:47] We did the first ever 1940 Act Bond Fund that was tokenized where the shares trade as Ethereum tokens rather than as traditional DTC securities through banks and brokerage. Like, a lot of market cap yet. It's a new product, but, you know, we might reinvent the entire $30 trillion ETF industry on blockchain and call it BTS, which is what we're working. Like, that's enormous amount of applications that are going to come over onto a blockchain. It doesn't increase the number of blockchains. It increases the application layer of these blockchains. So. I just think, yeah, I think that's a foregone conclusion, which is that the totality and the growth of all of these different applications is is just to be massive. Now again, going back to our earlier debate, whether or not you consider value or not is where the nuance of this debate comes from. But I think in terms of pure size and scale and number applications, I think that's a no-brainer. 

[00:42:34] Joel: And this is where we would, or anyone debating these points would have to come to agree on, on what they mean by value captured how it relates to investment returns. Coz then there's also other value, you mentioned this earlier that cannot be captured or, and captured well, then captures kind of a nuanced word. But, we might say measured instead of captured. And so there's, some value that it's very easy measure market caps. And that's why we gravitate to those as mentioned, they're visible and then there's other kinds of value that we can easily measure and they make the analysis more complex, but, I'm glad that you mentioned that you were an econ major. I was in can major as well. And so. My basic principles and axioms are about value are rooted more in economic theory than they are in, the practice of investing. And one of the things that has influenced my thinking here over the years that I'm still trying to work out is okay, and I'm going to think macro here, very broadly about the nature of value. 

[00:43:32] We can debate all of the nuances about how value is captured and distributed. And then it's a complicated debate because, these are very nuanced questions, right? And so, we do our best as an industry and as investors to work out and predict where value goes. But ultimately, something I've been trying to do is. Define some basic principles about what drives value. So instead of looking at value itself, let's look at what elements, predict value. And then trying to figure out, okay, can we pick, can we find one or two or three variables that we can look at that are predictive of where value is going to accrue? 

[00:44:10] And then because value is this kind of complicated thing to observe, because so much of it, you can't measure it beforehand, then, could those variables be easier to measure and easier to observe and then turn out to be predictive about where value accrues and one of the places where I've been, looking for answers is looking at costs. And this is something that I wrote a little bit about, I think, a couple of years ago, and really thinking about, okay, there's this basic economic idea that marginal benefit equals marginal cost Really tell at scale and equilibrium, right? It doesn't mean that at a micro level, that is always true. That is obviously not always true at a micro level. Otherwise there wouldn't be any losses ever. But at a very macro scale, it certainly does seem like marginal benefit equals marginal cost. And, you can abstract that further and say that that cost, equals value on a long enough timeframe. 

[00:45:02] And I've been using that idea and that principle. To try and predict where value accrues by looking at where costs accrue and the idea being that costs are our leading indicator of where value goes. And then we also have to have a very broad view on what costs are, not just the, accounting costs that you can easily measure, but also things like cost of capital and cost of coordination that are harder to measure. 

[00:45:27] And that has also influenced by ideas about where value accrues between the applications and the protocols. And it seems to me that so far the protocols take on most of the costs of production, of crypto services broadly. Right? So you have a user, they interact with a protocol through an application, then let's look at, what is the cost of delivering that service and how is that cost distributed between the protocol layer and the application layer? And it seems to me like most of the costs end up at the At the protocol layer. And then it seems to me like that would be predictive that therefore most of the value has to accrue to the protocol layer in order for the system to be at equilibrium  

[00:46:10] Jeff: Yeah I mean, yes, I love that we're getting into a micro-economics debate. I think my my professors at Washington University in St. Louis would be thrilled that we're  

[00:46:18] Joel: They're all listening  

[00:46:21] Jeff: I used to always joke. I was actually a, biology minor as well so I took a lot of know physics courses and I used to think you know economics and Physics were the same which is that everything was always perfect If it was done in a vacumm if there was no wind and no friction, and if there was no outside forces so I like these debates exactly I love to draw the lines on the econ charts and look at supply and demand and marginal benefit marginal cost. The reality is, as we've been talking about this whole time, it's just very hard to define what those costs are and what those benefits are. So I like to go tangentially and go, more anecdotally, like it's much easier to define kind of that marginal benefit and that utility, right? 

[00:46:55] So let's take NFTs, for example, I get a lot of marginal utility or marginal benefit every time I get an email from OpenSea that says somebody bid on one of my NFTs right There's no, just an automated email that comes through, but I get a lot of enjoyment and utility out of that. I get a lot of enjoyment showing off some of my NFTs to people, that this is what I own, whether it's a profile pic or just, you know a link to, my OpenSea account, cetera. That's really very difficult to measure in terms of value but there is very little cost there, right that's almost purely benefit.  

[00:47:28] Joel: Well you paid for the NFT.  

[00:47:29] Jeff: Upfront, for sure. But you have recurring, marginal benefits string then right. In the sense that. It's very difficult for me to show off or get any actual utility or benefit from a theory in itself. But I might get benefit from showing off the value of my account on Etherscan or MetaMask. Those are applications, right. I might get benefit from showing off my NFTs on OpenSea those are applications. So, I mean, we're getting into this nuance part of the discussion where you're never going to come up with an answer because these are incredibly intangible value points that are hard to measure. But fundamentally, I agree with you for sure that if costs of the protocol layer and that's where you're going to accrue most of the costs, and it's easy to measure, then you can at least come up with a growth curve for what long-term value should be at protocol level. I just think its much harder to then use that exact same framework on each of the applications  

[00:48:18] Joel: well this is where, one point where we probably disagree is whether you're using Ethereum directly in those scenarios or not. I would lean on the side that you are using Ethereum when you do that, though, it seems that when you think of it as not using Ethereum directly, at least. But that aside, one of the things that, for example, I observed in one of the NFT products that, we're invested in, is that, artists will come and they will create an NFT and then they will list it at the floor price that they will list it at and to being, either the gas fee or more. 

[00:48:51] Because of course it doesn't make sense for you to, incur this expense, to make an NFT And it might cost you hundreds of dollars to make one And so you don't want to sell it for 50 bucks if it costs you that much to make. And in some ways this has become, I think, high fees on Ethereum have influenced the basic underlying value of each NFT. Now, obviously that doesn't mean that each NFT is inherently worth what the cost of production, was in terms of the gas fee, cause there's certainly NFTs that are worth nothing. At least as far as the market's concerned. But it becomes this important, kind of predictor of, at least what the minimum viable prices, so to speak. 

[00:49:30] And so that would be an instantiation of that idea. Now, it seems like we do agree in that, costs don't determine value. That's not the idea, but costs give you a hint about where value is going to go. And on a macro sense and really what I, want to, try and get at is whether it is true that the protocol layer in itself carries on or takes on most of the cost of production of crypto services or whether, over time the application layer will come to, take those costs of productions more and more. And this is where I think how you define the application has a role to play. 

[00:50:11] Because if you think of the application as everything that's built on top of Ethereum, that's not Ethereum for example then all of DeFi would be an application and then you could say that DeFi protocols are taking on certain costs of production of their services. And so then that would suggest that the application layer is, worth more. 

[00:50:31] However, if you take the view that at the application layer is just the interface, part of the thinking here is that the interface layer takes on very little of the costs because it's just a front end interface. It's pretty cheap to host it doesn't cost that much to scale because what's expensive to scale is all of the underlying systems, that actually provide the services. Even if you don't touch them directly, by contrast something like Coinbase, they do take on many of costs of production for the services that they built. And I think that that influence has the value of Coinbase overall at equilibrium but otherwise I do think that the underlying protocols end up taking the lions share of that.  

[00:51:11] Jeff: Yeah we've actually been discussing that a lot. And actually think we wrote something recently, but I'm not sure we released it yet, but talking about similar kind of concept which is, ultimately what is the value of Ethereum for example. Ethereum ultimately might become the security layer for everything, right and you might have whether it's layer twos or whether it's, roll-ups from other layer ones, but whatever, like you are ultimately could see that Ethereum just becomes the security layer. for everything Right. And in that sense you could say okay, based similar you're saying, that they're taking on all the costs, therefore they're getting all the value and the benefit at the same time, though, then you could kind of turn that instead and say, well, let's look at crypto fees right now. 

[00:51:46] I'm on Right? Ethereum has done $55 million of fees per day on average for the last seven days And that's, you know five X larger next thing, which is, Uniswap, which is, 10 X larger than Bitcoin right? So you have massive feed generation going on and you can say, okay, well that is, because of all these things that are happening on Ethereum, therefore there's real financial value going to EthereumI think that's why the Ethereum price itself has gone up so much is that now actually value Ethereum, just like a security in the sense that there's real cash flows, because this has gone from inflationary to disinflationary And in some days, even, you know, deflationary 

[00:52:22] Joel: Especially when you go to proof of stake two  

[00:52:24] Jeff: Right exactly right. But you could also argue that the utility value of Ethereum has gone way down because of these higher fees right if you actuallly just anecdotally, if you think about why everybody is so excited about your avalanches and your Solano's and your polygons and other layer twos, your Arbitrum optimism, et cetera, it's because of the utility value, haven't gone down on Etherium So you have these competing forces right now, which is like yes, from a cost basis and from a security level basis, Ethereum is doing everything they've advertised but as the financial benefit of Ethereum goes up, the utility value has gone down. And you wonder if, again, it's very hard to put real numbers on this but I think that is part of the value equation as well.  

[00:53:06] And maybe that translates beyond the protocols as well, right? Each of the individual applications now built on Ethereum are also less have utility and less enjoyment because of the higher fee that's probably point where we disagree because I would actually argue that utility value Ethereum has gone up and that's why people are willing pay the fees You're absolutely right. That a lot of a utility has migrated to other chains as a result of that. But I don't think that is because Ethereum, you know, I think it's one thing to be priced out of a system and it's another thing for that system to have lost utility value. And, I actually look at crypto fees a lot through this lense that, okay, you know, yes Ethereum fees are going up, it's getting more and more expensive to use Ethereum tbut people are still using Ethereum and they are using Ethereum more. And more. And the fact that people are paying more to use Ethereum I think points to this, idea that the utility value has gone up because you're willing to pay more for it. 

[00:54:06] For sure that then begs the question, are they willing to pay up for Ethereum or are they willing pay up for the application built on Ethereum, right? I'm sure that data exists. I don't actually know where it comes from but I wonder like how much of those fees are being generated from just sending and receiving Etherium directly versus you know utilising Etherium on an OpenSea or an Uniswap or a Sushiswap or etcetera So I'm sure those numbers exist I don't have them on top of my head But that would be really the search  

[00:54:34] Joel: term that is I think called it a complex transactions they're looking at contract transactions versus simple transactions. I don't know the latest numbers, but that data does exist.  

[00:54:45] Jeff: That, would for any of the listeners out there who want that that would be an interesting to answer what we're talking right. that transactions at Ethereum level itself, just sending and receiving Ethereum for the sake of it would be going down, that would indicate that people are less willing to pay the fees just for using Ethereum as money. But if you were transacting more on the different applications, your OpenSeas your Uniswap, et cetera, that that would indicate that the applications themselves are worth it, even at the expense of potentially the underlying layer on blockchain or you can do anecdotally again you can even look at the growth of you know, transactions that are happening on polygon or on other Layer 2s, right. Because it's a similar thing, which is that people are basically saying I value the underlying security, of the Ethereum blockchain, but I don't value the fees that I'm paying. And therefore I'm going to use this other version of it, to reduce that. So again, as everything we are talking about here has a lot of nuance, we've certainly gotten into a little more of a theoretical debate here earlier on in the discussion But I think. I'll take this time...  

[00:55:43] Joel: I think it's  

[00:55:45] Jeff: Yeah, I mean, I love it. I love when these conversations go a different way. I think What's probably most fascinating is what you said maybe 20 minutes ago when you were like you know, you didn't anticipate DAOs when you originally wrote the Fat Protocol Thesis. I think it's amazing. I would encourage everybody to look up the original Fat Protocol thesis, as well as the follow up that you did more recently which was the "Thin Applications" because it's actually incredible. Yeah, it's incredible how much of it is still true given that you wrote this five years ago when none of this stuff existed and I think it's tremendous how much you got right. I think, well I guess from my standpoint going forward it is because you have gotten so much, right. We are now at this crossroads where it has to start to change. And again, I'll use those examples of Solana and the other Layer 1 s that are starting to grow. It's like the excitement around Solana at a 60 plus billion dollar market cap and whatever it has in TVL like 10 billion or so. 

[00:56:42] Like that physically can't keep up unless eventually there are real applications on Solana that people actually want to use. Every single day I've got 40 people at ARCA, 15 people in the investment team. Like we are trying to utilize applications all day long on Ethereum, on Solana, on, Avalanche testing out Polkadot, Terra Luna Apps, et cetera. 

[00:57:00] Like we haven't really found an application in Solana that jumps out at us as like, wow. This is actually easy to use. Or really accomplishes our goal. Eventually we'll have to get there to support the value that Solana has created. But in our opinion, it hasn't been there yet. We haven't found any applications that we want to use or we want to heavily invest in yet, in the Solana ecosystem. 

[00:57:18] And I'm just using that as an example because that's the one that has you know obviously rising the fastest relative to other Layer 1s. And I think again like if you fast forward five years from now, eventually Solana becomes Cardano. If what I said hasn't been disproven, right. Cardano is 56 billion and literally has, what no applications yet that you can use. Like that becomes sort of the joke of the market. Is that why is Cardano as high as it is? If there literally isn't a single working application that you can use yet. Well the same thing can't be true of the other ones like eventually there has to incredible user experiences built upon these, protocols, to validate the growth. So again, like I think the growth to date of Layer 1 protocols make sense, right? 

[00:57:54] It is the lazy man ETF. It is the best way to make a bet, a pure play bet on the growth of blockchain. It is the best, uh, total addressable market. If you're just making a broad buckshot approach to saying I believe in the growth or the strength of the ecosystem. It's just that at some point it has to be backed up. And I think the next five years, if we go back into this debate again in five years, I think the next five years is going to be all about, look at all these amazing things that were built on these protocols. And it'll look very similar to the internet, right. In the early days of the internet, if you wanted to invest in the early days of the internet, you almost pretty much had to invest in something like Dell computers or like EMC or some of the hardware. Right? 

[00:58:32] 10 years later, it was every single company in the world was an internet company. Right. You had internet native companies like Amazon that physically wouldn't have existed without the internet. And then you have everyday companies like J.P. Morgan or a rental car company,  

[00:58:45] Joel: Starbucks or something like that yeah.  

[00:58:47] Jeff: Yeah, Starbucks. um that you know, effectively are internet companies. I mean, Domino's Pizza's the best example right? Domino's Pizza is basically an internet company now. It's a pizza place, but it's an internet company. So I think that's where we're headed is eventually we started with the protocols. We started with the base layer. Now we're starting to see a few crypto native applications being built. And in five years it's going to be every single company in the world is utilizing blockchain in some way shape or form. And it'll be interesting to come back and look at what the numbers are and say well, what is the size of these underlying blockchains relative to the totality of economic activity that is happening on top of them.  

[00:59:21] Richard: Let me just quickly interject here and ask you some things that will take the debate in a slightly different direction but still relevant direction. So I'll ask them in a batch, right. Because I know there will be a lot of back and forth between you. So I also wanted you to have time to think about these questions.  

[00:59:36] Number one is cashflow analysis. So there's still a lot of traditional money sitting on the sidelines not touching crypto and maybe they will come in and there are various reasons why they're not doing so. But one traditional way of evaluating an asset class is cash flows. Whether it's real estate, equity, fixed income. You do some discounted cashflow analysis and then you get some value, right? Now, it just seems that it's a lot harder to apply that kind of analysis to protocols than to applications. So I would love to get some thoughts from the two of you about how say potential other traditional investors might be thinking about this area. And whether the preference for this older more say conservative but proven analysis method in terms of analyzing cash flows would be something that would accrue more value or bring more value to say applications versus protocols. So that's question number one.  

[01:00:38] Question number two, is what do you think about protocols in the sense of store of value. So that's something we have yet to explore, right? So I think it's if you think about the value of something it's got utility, it's got financial utility, it's got the actual utility and whatnot. But there's also a sense of something at the protocol level just has enduring value. I want to hold it because I want to think of it as money. Right. So but it's hard for me to say that if let's say Zerion or one of these applications were to issue tokens, I would just hold because I think that has enduring value. Right. So from a monetary premium and just ways to think about tokens as new kind of money, perspective. How do you think about application versus protocol in terms of drawing value? Yeah, so these two questions.  

[01:01:28] Joel: So, if I may on the first one I think there's two things going on. One is we're getting this explosion of digital assets broadly. And some of them look and work like assets that we know and love today. And some of them are completely different. And we have no idea what to do about them. And we'll find out how to value them as the market goes. And fundamentally, historically, at least the assets predate the valuation methods. And so, you know, we all got really comfortable with this idea of cashflows and it's taught in schools and that's how we learned it. And we it for granted. But it took a really long time to develop and refine those frameworks. 

[01:02:12] And they're still being debated today. Debated in the sense of, for example, people still debate what's an appropriate multiple. Well, you know, it turns out that that depends. It depends on so many different things. But the main point is that the asset is one thing and the valuation method is a constantly evolving conversation among the market or between the market about what that asset should be worth. 

[01:02:38] And it's not perfect. And there's a lot of competing models. And I think that actually drives the dynamism of the market itself because different market participants have different ways of interpreting valuation. And that actually creates opportunities in the market. The fact that we don't all agree on what something worth is what allows for there to be opportunities for both the upside and the downside. 

[01:03:03] And so I don't think that's a question that will ever be settled. And in fact, I think it can't ever be settled because the moment that it's settled, there's no longer any market opportunities. And I'm curious about how Jeff would react to that idea, because it's also kind of funny. But you know, going back to the original question and actually something that Jeff said at beginning of conversation, I do agree that, existing traditional investors are conditioned to look at assets through the lens of what they know. I do wonder if we're also in a very long transition. Generational transition where, know, I'm looking at all the new young managers that are coming to investment management broadly and evaluation models are indeed this perpetual conversation, not just in crypto, but in all markets broadly. 

[01:03:54] I do wonder if the narratives around what creates value are going to change, in response to so many things about the world changing, right? Like for example, how does valuation work in a hyperinflationary world? Well, we have some examples that throughout history. But the world is also very different today than it was a hundred years ago, for instance. And so, I'm not sure that that will ever have. Global complete consensus about what is the right way to value anything. 

[01:04:18] Richard: Jeff, do you to to that?  

[01:04:21] Jeff: Yes so I've got a lot to say on this topic. It's something that's near and dear to me. So first of all I would to Joel's point, there was classroom, every you know, investment deal. They all teach the exact same frameworks right now. Right? If you, an analysts the exact same inputs, their outputs would be almost identical, right? There's no nuance anymore to valuing a bond or valuing a real estate or valuing a stock. Uh, for granted in the sense that most of those techniques are only, you know, 50 or so years old. I mean, you could go back to Graham and Dodd, I guess that's almost a hundred years old now. But Graham and Dodd was in the 1920s thirties when that first came out. Then you had for fixed income and Dodd is like the you know, the equity evaluation of fundamental value investing which Warren Buffet built his whole career on. You then have Frank Fabozzi who created the fixed income bible. I think that was like in 1960 or 1970. And that basically was a 1400 page book on how to value different fixed income instruments. And that is used by everybody on Wall Street today. Um, there is no Graham or Frank Fabozzi yet in digital assets. 

[01:05:23] Truthfully, you know, Joel and his partner Chris Burniske and they're like, they're probably the closest to the next Graham and Dodd. I mean, we joke sometimes I have two uh in Arca, named Hassan Bassiri and Katie Talati. And we joke sometimes that Bassiri and Talati doesn't maybe roll of the tongue as well as Graham and Dodd but they might be writing the book on digital asset valuation one day. And uh, to Joel's point... It's not that there is no value here. It's that nobody agrees on the value yet, right? There is not that 50 or a 100 year old book that tells you exactly how to value this stuff, but we will get there eventually. And in fact, there's two great books that everybody listening to this should probably read at some point. 

[01:06:00] The first is a book called "Reminiscences of a Stock Operator". I think it was written in 1923. It is the craziest book you'll ever read. It is about all these traders. And all they're doing is looking at ticker tapes and trying to figure out value theirs. There was no fundamental didn't even exist back then. This is predates Graham and Dodd. There's an entire book about just how traders are trading the stock market based on literally nothing. And, you know, over time you now read that book and be like, that is ridiculous. But that's what was going on. But a hundred years ago, that's how stocks traded. It was just on gut. It was on passionate. It was on reading the tape.  

[01:06:30] Um, there's also a great book called "The Great Game" written by John Gordon. And that is about like, you know, the 1600 1700s, 1800s. All about Alexander Hamilton and JP Morgan's rise. This is like, you know, if you ever heard the term somebody cornered the market. Like that book talks about what it means. Like somebody would literally get all of the sugar and put it on the corner of the own all the sugars. Like do you want to buy sugar, it has to go through me. And that's why the price will rise. That's what cornering the market is. Like it's amazing some of the things that used to happen in traditional finance that nowadays would be like, that is ridiculous. I cannot believe, hundreds of millions or dollars are transacting on this, but it's what happens. And then eventually there was these techniques that people agreed upon and made sense.  

[01:07:08] So anyway, sorry, long-winded intro to what I'm about to say, which is when we first started Arca in 2018, we talked a lot about Bitcoin and Ethereum. It was still a big part of the market. There wasn't as many opportunities as we have today, right? The investment set of digital assets has grown exponentially, compared to where we were just three, five years ago. We've been talking about a lot of these other opportunities. You know, we were in BNB for example, in 2018. 

[01:07:31] And I remember four years ago, I would spend 45 minutes talking about BNB. I'd spend maybe five minutes talking about Bitcoin and Ethereum because it was clear that nobody understood what the hell I was talking about when I was talking about Bitcoin and Ethereum. It was just like, "Okay. Yeah, I kind of get it. But I had no idea how to value this, so let's move on. I talked about BNB. They're like, oh, okay. I get it. 20% of the cash flows of the business are going to be used to buy back like, well, okay. Tell me the supply of the token. How, how do you, how do you... and even investors back then when the investment opportunities that was so limited were gravitating more towards that. You fast forward to today... I'll talk for two hours on a panel or with investors. And we don't even talk about Bitcoin and Ethereum any more. That's just like a foregone conclusion.  

[01:08:08] If you want to make a bet on relative value in terms of, you know, currency or... Sure. Bitcoin. Yeah. Great. Gold is 10 trillion. Bitcoin's a trillion. Sure. That's a 10 X gain. If it ever catches up to gold. Got it. I don't need to learn anything else. Ethereum. Cool. Total computing power of the world. Okay. I got it. It's probably worth more than 500 billion. I don't know what it's worth, but it's worth a lot more than that. Okay. Got it But then I'll go into massive detail on you know, here's the revenues of SushiSwap and here's the dividend yield and here's all the different product lines that they've created. 

[01:08:34] And I can compare that directly to something like FTX. FTX is a real company with a real CEO that has very similar product lines to SushiSwap, which is a DAO. It has no leader. But it's the same concept, right? I can, I can, actually look what product lines, how are the revenues going to grow? What's the average revenue per user? What kind of margins will they take? What kind of these profits will be dividend back to me as a token holder? What's the size of the underlying treasury? Like these are all things that traditional investors just get a lot more. The examples I over and over again when I talk traditional investors is, the comparison of DEXes versus Coinbase as an FTX or a Binance, right? 

[01:09:07] Coinbase is they're all basically the business, but Coinbase only has equity and no token. So we can look at the equity market. The Dexis, like Sushi and Uni only have tokens and no equity value. So we can just value the market cap of the tokens. FTX and Binance have both. They have equity and tokens. 

[01:09:22] We have to figure out the total enterprise value. These are concepts that people understand and they gravitate more towards. And that's why, if you look at the inflows into digital assets over the last 12 months, it hasn't been directly into Bitcoin or Ethereum as much as it has been into private funds. Because the private funds are the ones who are investing in these cashflow and revenue producing entities. So Ethereum and Terra Luna are really interesting cases at the protocol level because the Ethereum, in my opinion, was impossible to value up until six months ago. Now, with the new EIP-1559 proposal going live, you can actually now come up with a real economic model for what Ethereum is worth. In fact, you know, one of my analysts shout out to Nick Holtz, who's a former macro investor and now on the Arca team. We have a real model with a real price target for Ethereum based on specifically this dis-inflationary and sometimes deflationary force of the cashflow part.  

[01:10:08] Like Terra Luna. Very interesting Layer 1 blockchain. It is built entirely on the growth of the UST stablecoin. And as UST is minted, you actually burn Luna. Same thing because of these burns, we can value it. Really hard to value something like Solana right now, right? There's no fees. That's the whole point of Solana. It's super fast, but there's no fees. So what am I valuing Solana? I can't tell you I can't come up with a number. So I don't talk about  

[01:10:28] Joel: Yeah, I won't drag us down that rabbit hole again. But it does take me back to, to cost being predictive of value. Just from that kind of fundamental principle. But again, I won't drag us there. There is one thing that I think it's worth picking on, which is... Actually I'm curious about your take on this, Jeff, which is, do you think that we have come up with I won't call them models, but frameworks, valuation frameworks, right. And what I mean is a framework might be looking at income flows, wherever they go, income flows. And then the models maybe pick on the nuances about what that means, right? Like revenue for a company versus revenue for a network and how that's distributed among a traditional equity versus a decentralized network of peers and all that. But the framework is generally the same, right? And this is why we both look at crypto fees as well. It's because it's not, what network revenue is not quite like company revenue, but it is an income flow. Do you think that we have broadly in finance broadly, figured out the most basic frameworks and then we're just iterating on the models? Or do you think that new frameworks will emerge as a consequence of new kinds of assets emerging? Or do you think were stuck in the frameworks? 

[01:11:44] Jeff: I think it's the former, I think everything is going to be rooted in traditional financial analysis with some tweaks and innovations on top of it. So I'll give you a really good example of this. Chiliz for those not familiar with Chiliz. Chiliz is, they have an App called the Socios App. They issue fan tokens. If you're fan of Man City or Juventus, or you're fan of the UFC or you're fan of the just rolled out partnerships with the NBA, the NFL and the NHL... They're issuing fan tokens on the Chiliz blockchain. Okay. The fan tokens themselves have no real financial value. They're largely novelties. If you own a Man City token, you get to participate in governance of Man City. You know what jerseys they're going to wear. What sponsorships they take, et cetera. If you own the Chiliz token, the Chiliz token is basically the underwriter and the broker dealer of the Chiliz system. Meaning, they're the underwriter they're generating fees for introducing these fan tokens to the market. So for basically selling these fan tokens to the market. And they're also the broker dealer in the sense that every secondary transaction of these fans tokens, a fee accrues back to Chiliz.  

[01:12:40] So from a pure financial standpoint, we can say, okay, I can come up with a valuation model using traditional cashflow analysis, DCF analysis, dividend yield models, et cetera, to value just the revenue stream created from this underwriting and broker dealer process. But here's the nuance. You also have to own the Chiliz token in order to participate in a fan token. And they have what's called the locker room where you basically have to lock up your Chiliz tokens in order to be next in line for whatever the next fan token is. And their data suggests that most people own up to five fan tokens. They're not just a fan of one team.  

[01:13:13] So now you have to come up with a completely new analysis on top of it, which is,what's supply sync of the Chiliz token. What percentage of outstanding Chiliz tokens at any time are going be effectively locked up in this locker room to participate in the next fan token offer. 

[01:13:27] Right there, you're already combining two things. You're taking traditional cashflow analysis on the revenues, and now you're introducing this new kind of supply sync utility value of the Chiliz token. On top of it, there's now going to be NFTs in the Chiliz system where you're going to have to use a Chiliz token in order to have access to some of these NFTs. So this is where we talk about these hybrid securities, where they're part financial instrument, part utility. The financial part of it is always very easy to value. The utility part of is where it gets really difficult, you know, using these other techniques. So think in my opinion, it's always going to be rooted in traditional finance. 

[01:14:00] You're going to have to start with a framework that everybody understands and agrees upon. You're then going to build upon that for the nuances of this asset class. Nuances like the supply and inflationary pressures. These utility benefits that you get from owning it. These lottery tickets you get for getting extra things. And even the fact that there's no liquidation preference, right? If one of these companies or projects goes, quote unquote bankrupt, you have a claim on that asset. So what does that mean for multiples as Joel mentioned earlier, right? What is the appropriate multiple for something that has no liquidation preference if it gets in trouble? As a going concern, meaning as a live working company or project, it doesn't matter. Right?  

[01:14:34] I have no more control, over Amazon being a shareholder as I do over SushiSwap being a token holder in the sense that ultimately there's people behind the scenes who work for those companies and projects that are making the decisions that are ultimately gonna be good or bad, right? I can't tell the CEO not to make a horrible acquisition or not to pay his employees 20% more. But, if I win a proxy battle or it goes into bankruptcy, now I have a real voice or a real say. The same thing is true of most tokens, right? As a going concern, you don't have a lot of say in what's going on. But if they get in trouble, and there's some sort of liquidation, you have no rights whatsoever. So that affects valuation technique. That affects exit multiples and terminal values when you're running cash flow analysis. So again in my opinion, everything starts with financial analysis. You just have to make these little tweaks to acknowledge the fact that this industry and this asset is just very different from traditional debt, equity and real estate securities. 

[01:15:24] Richard: Okay. Great So about my question regarding potentially evaluating protocol...  

[01:15:30] Joel: On whether protocols could be stores of value?  

[01:15:32] Richard: Yes Yes Yes. Protocol of value Yes Do you have an opinion on that?

[01:15:36] Joel: Yeah, well, I mean the short answer is it depends, right? It depends on the protocol and what it does. Um, this whole conversation I've been thinking about actual utilities. Um, one needs to go look for clues. And so, interesting is that uh, things in any economy, any kind of you know, economy. They are so fundamental. Um, they start private and end up being socialized or nationalized. Not always and obviously there's nuance. But for example, the electric grid, for instance. Uh, there's places where it's private and there's places where it's public, but in most cases it's some launch of those two things. Interesting is, think about, um, Do you value the electric grid of a country? And would you consider that a store of value. Same for the water system or you know these these other pieces of infrastructure. And the reason it's kind of interesting. I think, it's kind of interesting to go look for clues there is that, having problem with some of these protocols is that, and I think broadly part of what influences the value protocols altogether is the ownership structure. 

[01:16:41] And so the reason you nationalize something is because theoretically it's become so valuable that it can't belong to a single entity. It has to belong to everybody. In sense, although I know that this isn't always the case. This in blockchains as well or in crypto protocols as well, where the applications on top of Ethereum and on top of these other systems are also stakeholders in the underlying, structure as well. 

[01:17:08] Um, that to his point earlier, or we're looking at, for example, Amazon. I would imagine that a very small number proportionally, a very small number of Amazon stores also own some stocks. And certainly a very small number of Amazon's customers. And so I do wonder if that's an interesting analogy to interesting case of study of, okay, well, some ways everyone's a stakeholder in the electric grid, the electric grid could be considered part of the systems capital. 

[01:17:39] And the way that may be considered or you know, if your miners or ETH itself wants to move to proof of stake as part of the, of Ethereum's capital. And then on top of that shared capital and top of that store of value. Then we can create all of these things. But, um, but participates in the appreciation of the underlying value and that may justify the broadly the invisible hand allowing for that layer to capture the most value. This is a new thought for me. So it's not very articulate, but think of it as as this basic, you know, roads and bridges and utilities and waterways, think of those as store of values and no context in that that there are useful analogies between those systems and protocols then. Um, blockchain protocols that fulfill roles like that, could turnout to be stores value.  

[01:18:30] Jeff: Yeah I think store of value is a super interesting concept, right? Because, it store value a hundred percent depends on how closed your ecosystem is. We here in the United States talk all the time about, "Oh, look at hyperinflation in Zimbabwe and in Venezuela, in South Africa, in or in Greece. The devaluation of Greece in 2010". If you actually lived in those economies and you never traveled, and you never imported anything and you just had a very close ecosystem. You couldn't care less without what's happening around you in the world. 

[01:19:03] Right. It doesn't matter if the Turkish Lira declines 50% versus the dollar if every input and output in your life is in Turkey, right. It doesn't affect you one bit. So store of value is interesting, right? You would say, oh, you know, the dollar is such a great store of value relative to the Turkish Lira. But you also, if you lived in Turkey, you might be like yeah, Turkish Lira is fine. Store of my value fine. Everything is in this closed ecosystem. And I don't care.  

[01:19:25] In the same way, you can now look at something like Ethereum because of the EIP 1559 and because that Ethereum, ETH is now paid for all base fees and all transactions on the Ethereum network, it's essentially ETH becomes the currency of the Ethereum network. So if you were, if you have most of your costs and expenses and transactions in dollars, would you say, "Hey, ETH is a great store value". Probably not. Right. It's very volatile in dollar terms. If you started do everything within the Ethereum ecosystem and you never left it, becomes an incredibly great store of value. So I think it's all very relative. Anybody who's been involved in FX or currencies ever know that it's all relative value, right? There's no valuation framework in a nominal sense. It's all evaluation frameworks relative to something else.  

[01:20:14] So I think that's where we need to look, right. Is if I invest in a Brazilian bond and I think the Brazilian bond is the safest thing in the world, and I'm earning 5%. I'm like, this is a no brainer. Cheapest security on the planet. It's absolutely worth par. There's no way it's ever going to be worth less than I put in. And I'm earning 5%. But I'm earning it in Brazilian real. That's great. As as long as I don't have to convert that back to dollars. But if you have to convert that back dollars, all of sudden it's going to have an incredible amount of volatility. 

[01:20:42] So if you believe that inside of these different blockchain networks, that eventually you will stay in there and never have to cross over anywhere else. I think these are amazing stores of value. If you're comparing them to dollars or some other currency, it's difficult, right? The fluctuating narratives, the fluctuating macro palsy that affects... it. There's just too many variable in my opinion to say that these are going to be a store of value relative to the world.  

[01:21:05] Joel: I think for another discussion, you might enjoy hearing my partner's take, Chris' take on how Ethereum could become an internet native bond. And become really fundamental to online economies and then it would be kinda like that example, it becomes a store of value if the world organizes itself around ETH as a base macro asset, for instance, and then you can stake and ETH staking then has that function of equivalent to a government bond.  

[01:21:31] Richard: Right So, especially with dollar entering into a non transitory hyperinflationary scenario what do you think is the right unit of account for token funds? I mean obviously traditional investors, your LPs, probably still measure things in US dollars. Right. Does that still make sense any more? Go ahead.  

[01:21:53] Joel: That's a very good question. Yeah, they hold dollars. Yeah. The other thing is, I know funds that denominated themselves in BTC in 2017 and 2018 and that was horrible. Um, It depends on how your investors measure your performance.  

[01:22:09] Richard: Did you say that was horrible?  

[01:22:12] Joel: Horrible, it was really bad. But it was only really bad because we went through a brutal down trend. But they were being measured in dollars. Now, and I actually, I'm curious about your take on this Jeff because I think ultimately people lived their lives dollars fundamentally. And unless and until we move to a world where everything else is priced in a new unit of account, the dollar then is the way to go then I even with the inflation.  

[01:22:40] Jeff: Going back to what I just said a minute, ago this is all about your assets and your liabilities, right? If your liabilities are in dollars then it is absolutely not okay to value all of your assets in Bitcoin and Ethereum. It just doesn't make sense. Until we move to a world where your liabilities are also in the same native currency, you're always going to have this asset liability mismatch. If you look at monetary sovereigns across the world, like the US, Japan, Australia, like they're in a powerful position because they can never actually default on their debts, right. In the same way, you know, since Ethereum is a currency issuer that only spends ETH. In the Ethereum economy, it can never default. But if you have investors coming in who are giving you have who dollars and expect dollars back because their liabilities are in dollars, it's just not okay.  

[01:23:20] I mean, we got compared recently. I mean, we have a very strict risk management framework at on our liquid funds at Arco. Where we use a lot of different things from having cash or stable coins to put some things like that. We were being compared against another fund recently where the investor said to us, "Well, we just talked to another fund and their risk management policy is just going into Bitcoin, whenever things get dicey". And I laughed out loud. And I didn't mean to. I didn't want to disparage another fund. I'm like, how is that a risk management? Like all you're doing is you're moving into an 80 vol asset as your risk management? That makes no sense unless everybody put Bitcoin in and he's expecting to take Bitcoin out and have all of their liabilities in Bitcoin. Now you can have a view that Bitcoin is going to go higher. You can have a view that Bitcoin is going to be a store of value over But it is not right now. And as a result, if you have a dollar-based investor and a dollar-based fund, that's not prudent or practical. We could get there one day certainly. I mean, we get in kind of subscriptions now in Bitcoin, in Ethereum and in stablecoins. And you know, there's certainly tons of people out there who are trying to live a completely you know, digital asset life where they no longer interact with the bank and brokerage system. But we are certainly not there yet. Right? I can't pay my mortgage in You know, Ethereum yet. I can't do 99% of the things I do with digital assets yet. But if we get there, then it's a whole other story. and I most of the people, Joel, myself. Most people in this industry, industry, like we are all envisioning a world where that happens, but we have to get there first.  

[01:24:47] Richard: Okay. So we're at 90 minutes. Let me just ask one audience question and have you guys close out with closing remarks. Derek Song asks, what do you foresee as the tipping points or breakthrough events that could catapult the applications to flip the L ones in terms of valuation? So this is a timing and driven question. So this is for both of you.

[01:25:10] Jeff: I'll go first here if you don't mind. It's always very difficult to come up with the exact timing or the the Malcolm Gladwell's tipping point. So I'm not going to put a date or a timing or anything. What I'll say is, it's going to come down to UI and UX, right. Which is just, when does this become a no brainer and you're not even thinking about using it. So an analogy I'll give is like, if you remember 20 years ago, or maybe it was 15 years ago or whenever. When all of a sudden you went to the airport and instead of having your paper ticket, instead of going to the ticket counter, you just had a kiosk and you would just get your ticket and go. 

[01:25:42] There was a time period where as ridiculous as it sounds now, where majority of the people were afraid to use that machine. Which ironically, they would happily go up into a giant metal tube that's 30,000 miles in the air and 500 miles an hour, but they're not going to put a credit card in the machine cause it scares them. But that was the case. Like people were scared of doing that. So what did they do? They'd wait in an hour and a half line at the ticket counter and wait to a ticket agent to help them. And then what did the ticket agent do? They would say, okay, let me walk you over to the kiosk and show you how to get your ticket. 

[01:26:10] So that was a pain point for a long time. And then at some point over the next 20 years, everyone just got comfortable with putting their credit card in the machine and get their ticket out. The same thing is now true of blockchain. Right now. Right now we talk about the underlying blockchains. Like, are you using Solano or are you using Ethereum or are you using Luna? Are using MetaMask or Phantom wallet? What kind of cross, bridges are you using? Cross-Chain Bridges? And the reality is like, none of that's gonna matter in five or 10 years. At some point it's just going to be, "Hey, I was playing a game and I was done with the game. So I took my asset off and I sent it to someone else".  

[01:26:41] And behind the scenes, you might've been playing an Ethereum based game where you have an ETH based in-game asset that you took off. You sent it on some exchange to someone else who bought it from you and they're using Solano and they are using it now in a Solana game. And it's all kinds of backend processes that are converting it, you know, Cross-Chain? But you have no idea. All you cared about was you were playing a cool game. You were done playing the game and you moved on. So when we get to that UI UX level, where it no longer matters what your underlying protocol is, what your underlying asset is, you're just using it for the utility entertainment enjoyment of what you're doing. 

[01:27:15] I think that's when we start to see this application layer just explode. And at that point, the protocols themselves will certainly still be valuable and will be probably 10 X higher than they are today. But it will be incredibly smaller percentage of the overall financial and economic and utility value of all of these different applications built on it.  

[01:27:34] Joel: And that's, I think bringing it back to the beginning, probably where we, one of the few points where we do agree that the relevance of the application layer is going to only increase from here. But I do think it's separate from the question about, how much value they capture. 

[01:27:48] And so, the way I think this is gonna play out is I don't think there's going to be a moment or a tipping point. I think it's going to be a gradual shift in where new value goes. But I don't think it's going to be a situation where value shifts away from the protocol layer. I think as we go there, then value becomes more stagnant. It remains captured at that layer. And then new values shift to the application layer. And I think it remains to be seen, what are people's relationships going to be. Couple of years ago? I thought about this as uh, the invisible blockchain debate might be another debate for the podcast. It's an interesting one. Is the application layer going to evolve to completely abstract blockchains? Or are users going to be always aware of the blockchain that they're using. And is it going to influence their decision making. That's a whole other debate. I fall on the side of the visible blockchain rather than the invisible blockchain. But I think there's many many credible arguments or reasonable arguments for why you would argue for blockchain invisibility. And I do think ultimately, the outcome here if the blockchain is invisible, then that allows for more value to be elsewhere. And the invisible the blockchains, the more visible value they are likely to accrue.

[01:29:09] Richard: it's interesting just on the invisible blockchain point, I used to debate with my business partner about whether blockchain will essentially evolve into say the S in HTTPS. So you will navigate through any website. It's got that HTTPS in the URL. But very few people know what that means and very few people care what that does, but ultimately that's actually provides security for the website that you browse without compromising the performance. And I was hoping that at one point blockchain will become the S in HTTPS. But then my business partner vehemently disagreed and felt that there needs to be education on the user's part to understand the benefit of S and to embrace the value of S and so on, so forth. 

[01:29:50] Ultimately I actually don't think there's a lot of disagreement there. It's just that I think that from his perspective, you felt that people should be more aware of the impact of blockchain, embrace this new kind of paradigm and understand the underlying value of the technology that they're using. Anyway, I digress. So Joel, that was a great closing remark. Did you want to add more to that or did you wanna leave it at that?  

[01:30:12] Joel: I think we can leave it there.  

[01:30:14] Richard: Okay So, Jeff, do you want to, provide us with your closing remark? Tell us a little bit about what you have learned from the other side and what you still hold firm in your position?  

[01:30:24] Jeff: Yeah, I think first of all that this was a powerful, exciting debate. And I think there's no right or wrong answers. And you know that's the exciting part about a thesis versus you know a fact or a law is that it's still developing. Regardless of the points where we disagree or where we agree, I think, one thing Joel said that I a hundred percent agree with is that, this is what's so fascinating about this space. Is that there is no agreed upon values. There is no agreed upon consensus. And that's what makes for incredibly interesting investing ideas, as well as you know, the power of active management. But this is going to be an ongoing debate for years if not decades where this value ultimately accrues. And I'm excited to be a part of it. You know, we, have our investments across both the application layer and the protocol layer. We do a lot of education on both across the application layer and the, education layer or at the protocol layer. 

[01:31:13] And, it's going to be fascinating to see how these grow either in tandem or converge or diverge. So I'm excited for the next 10 plus years of what we're doing here. And more importantly is, all the people who are now early to this space and are learning the protocol layer, even if I'm right where you ultimately won't care about it, it certainly will be a benefit to have already understood the protocol layer itself. To understood exactly what these chains are and how to store your assets and the security so that were not just heading into another couple of decades of people using technology without understanding it. So going to be beneficial to everyone to have educational uh couple of years even if I am right. And if I'm not right then, you know, to Joel's point, it is going to be, uh, fascinating to watch all these different chains compete and how ultimately users make those decisions on what they value more between speed and decentralization and security. So, a lot to think over the next couple of years regardless of which way we end  

[01:32:09] Richard: Great so not to drag on any further but I'd be remised to not to ask this. In the face of market uncertainty if you want to put on a long application short protocol trade, would you want to put on that trade. And if so, what instruments would you use? To both. And maybe you don't want to put on that trade.  

[01:32:30] Joel: Uuu  

[01:32:31] Jeff: I would never do that. There's three things. They get every single investor in trouble. weather you're a retail investor or running a multi-billion dollar fund is: leverage, illiquidity and shorting. Leverage for obvious reasons, illiquidity for obvious reasons. Shorting, you need to have a more mature asset class to really make money shorting. When you have asymmetry to the upside. Like we do. Even my opinion of the applications are going to outpace the protocols. I still think the protocols are going to go five or 10 X from here anyway. So, in the same way that I said, even though Bitcoin dominance is going to fall, Bitcoin itself is still going to go higher. So, to me, shorting is just a fool's errand in an asset class like this, or in an industry like this that has such a symmetry, to the upside. So I would not put on any long short trade, however if I were ever to do it, I would target the historical data, like I said, when Ethereum got to $25 billion of market cap 10 billion of TVL, that's when investing in DeFi and investing in gaming and NFTs took off relative to Ethereum. You're at that same level right now with Avalanche and Solana and Luna and Polka like you know, this would be the time to do it but I personally would not do.  

[01:33:35] Richard: Okay sounds good. That's fair. Alright Well thanks for joining the debate today Jeff and Joel. How can our listeners find both of you? Starting with Joel.  

[01:33:42] Joel: that's going to be hard. haven't tweeted in years, but I'm @jmonegro on Twitter. that's not really useful. You maintain an active blog, right? Semi-active blog over um that's our firm's website. and  

[01:33:58] Richard: Great. How about you Jeff?  

[01:34:00] Jeff: Our website is We have a blog and a whole educational resource section there where you can find our taxonomy. You can find our thoughts on Ethereum as a monetary currency. You can find on the Fat Protocol Thesis. and then you can find me personally @jdorman81. 

[01:34:20] Richard: On Twitter.  

[01:34:21] Jeff: Yes.  

[01:34:21] Richard: Great! Thank you both. So listeners, we'd love to hear from you and have you joined the debate via Twitter? Definitely vote in the post debate poll and feel free to join the conversation with your comments on Twitter. We look forward to seeing you in future episodes of The Blockchain Debate Podcast. Consensus optional, proof of thought required. Thank you, Joe. And thank you, Jeff. It's been a fascinating debate.  

[01:34:38] Jeff: Great. Thank you. A lot of fun.  

[01:34:40] Joel: Thank you Richard. 

[01:34:42] Thanks again to Jeff and Joe for coming on this show. An important point that emerged during the debate is that it's important not to conflate value captured with investment returns. To quote Joel's blog post in 2020 entitled "Thin Applications", sort of like a follow-up to his original Fat Protocol Thesis. 

[01:35:03] "To be clear that less overall value ends up at the application layer does not mean there are fewer outsized return opportunities available to application businesses. Nor does it mean there's always returns in protocols. Value capture is more about total addressable market and other macro elements. While returns vary by things like cost basis, growth rates and ownership concentration. What's different between protocols and applications is how these elements combine". 

[01:35:37] So value capture is important to assess, but ultimately it's the returns that matter. Let's not confound the two. What was your takeaway from the debate? Don't forget to vote in our post debate Twitter poll. This will be live for a few days after the release of this episode and feel free to say hi or post feedback for our show on Twitter. 

[01:35:57] If you like the show, the best way to show your support is to give us five stars on your podcast App. This will help us grow the show and reach more folks interested in crypto. And be sure to check out our other episodes with a variety of debate topics: POW vs POS, Scaling without Sharding, The Merits of Economic Bailouts, The case for Central Bank, Digital Currencies. And so on.  

[01:36:22] Thanks for joining us on the debate today. I'm your host Richard Yan. And my Twitter is @gentso09, G E N T S O 0 9. Our show's Twitter is @BlockDebate. See you at our next debate. And don't forget to check out my new five minute weekly new satire show "Crypto This Week with Richard Yan" on YouTube. Thank you.