Debate: How to Value an L1 Token

Transcript

[Music] from my perspective for investors where we want to understand what exactly is the bet we're making here um when we look at everything at the ground level and understand what we're being paid in and it's really about are people buying and holding this token long term um and and uh and when you model that forward I think you know for us that's that's how we think about the bet and um for all tokens this episode is brought to you by scale the next evolution in layer 1 blockchains explore Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X atcale network. Thanks to Scale for making today's episode possible. I wanted to take a moment to tell you about Focal by Falcon X, the AI

powered insights engine built for institutional crypto. By leveraging AI, Focal empowers institutional investors to streamline research, anticipate market shifts, and make sharper investment decisions. You'll hear more about Focal later in the show. As always, investments in blockchain technology involve risk, terms, and conditions apply. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is forformational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Block Works. Our hosts, guests, and the Block Works team may hold positions in the companies, funds, or projects discussed.

All right, everyone. Welcome back to Empire. I'm taking this one solo, but we are very lucky to be joined by Dan Smith, head of data at Block Works. We've also got Jonah Weinstein, investor at Skyatcher. You may have heard him on a recent bank list episode talking about a a new metric, RSOV. So, wanted to have this conversation to talk about REV, RSOV, uh, and really just this idea of how to value an L1. So, Dan, Jonah, welcome to the show. Yeah, pleasure to be here. Thanks for having me. You're smiling and laughing already, man. Yeah, just listening to that that sentence. We're talking about REB and RS so like we still can't name things sex. We lo we we lost half the listeners already. It's

gone. Yeah. Um Jonah, maybe I'd toss it to you. I think there's a conversation to be had before getting into the nerdiness of REV and RSOV and these metrics and the how to how to actually do it. I think there's a question of why we're doing this. um why do why do we need better metrics? Why do we need these valuation frameworks? What's the setup for this conversation? Yeah, I think the big thing is uh you know for investors um like myself uh and like a lot of the listeners uh we want to understand really the the opportunity we're underwriting. So we want to understand what drives the returns. We want to understand where the risks are.

Um and uh and as long as we can know our bet, right, we can do that. Um or as long as we know our bet, we can do that. And uh and so we came up with this framework that we feel like really represents the bet uh we're making. So maybe to put it in different terms, we are looking to we're trying to create a metric that tells us will the token price go up. Is that a fair? Well, we have a thesis, right? And and and um yeah, we need to be able to measure and track our thesis over time. uh and be able to make informed decisions about what's undervalued um uh what might be overvalued in terms of what drives that return. So yeah, we're investors um and we're looking to underwrite opportunities and uh we need

to be able to track our thesis uh and make informed decisions about the future today. Yeah, Dan, you have probably used too much of your brain power trying to figure out uh what are the right metrics. Why is this a worthy activity to do? Yeah, I mean look, we have smart contract platforms, which is really the core of the conversation here, right? Like L1 assets, um, worth hundreds of billions of dollars in totality. Uh, and we haven't have we don't have a great answer at the moment to why that's the case or what drives those valuations. We have a lot of different ideas. Uh, but there's no unified valuation model where people are like, okay, you know, your assumptions are going to change from investor to investor, but here's the model, here's the framework. Um, and you know, we're all kind of debating over

the nuances. Right now we're still debating over what the framework is. Um so it's just like the the natural inclination. It's like okay these are very important assets. They're extremely useful and we can see why. Uh but what's how what's generating the value that comes out the back end? That's the burning question right now. Yeah. What is wrong with the um there's been there's been a nice flow of metrics like stock to flow and um what was the Chris Berniski one? M uh PQ equals MV. Yeah. Is that right? Um so we we've we've attempted to put these metrics in place.

Uh obviously there's TVL has kind of become especially in DeFi summer kind of became like the metric. What's wrong with the the metrics today? Like why are we still why haven't we been able to nail something? I can maybe start here Jonah and then uh please uh hit anything after. But I think the overarching difference between the metrics we have today and what we're trying to do right now is valuation. So we have a lot of great uh activity metrics, we have a lot of great financial metrics, we have a lot of great flows metrics, but we haven't been able to say because of these set of metrics, we can create this valuation model. Uh and that's that's the problem, right? like TVL super useful great way to indicate uh amount of capital in a protocol or an asset or even if you zoom that out to something a

little bit more broad like total value secured as tracked by L2B let's say that's the amount of capital within a specific L2 uh really useful to understand the amount of value on this chain in this economy within this network uh but it's not clear today how that number translates into a market cap or a fully diluted valuation um so that I think that's just the piece that we're trying to square right and So the idea of taking something like REV and then using that to build out a model uh of ultimately valuing the cash flows that flows back the token that's very like pulling in the ideas from equities and understanding like okay there are cash flows that go back to these tokens. Can you forecast this out into the future and create some reasonable valuation model today? Um and then yeah I think like that's the piece we're trying to to

answer the question to uh and is the difference in how these metrics are changing a little bit. But yeah I don't know if you would agree with that or not Jonah. Yeah, I mean um we'd need a a metric and a model that allows us to there that is rooted in what is really driving uh sort of value to these tokens, right? Um because a lot of that stuff is ephemeral, maybe top down good sort of marketwide context or ecosystemwide context, but we want to be specific about what you know events that are happening on chain are driving value to the token. Um and you know we we we started with a traditional like equity style DCF and

then we sort of encountered two very specific shortcomings and realized okay there's really a bigger picture here happening how do we measure that and so that's how we came to our sov which is like there's been a lot of criticism about this idea of money and this and that being very again sort of conceptual and theoretical and and we said okay uh what is happening on chain that we can measure um and and uh how do we build a model based off that right and how does that fit together with the DCF yeah so so in my opinion the the conversation it when you have people talking about these valuations people actually it's like ships passing in the night and people are just talking right past each other and often times the it uh the the reason for that ties back to one thing which is

that their reference point is wrong where you've got half the people talking about these things like their companies and half the people talking about these things like their commodities and really what we're about is you've got the layer ones and then you've got the layer one token, right? So for Ethereum, you've got ETH, for Salana, you've got Soul. Um how do you guys uh maybe Yeah, Jonah, if you want to kick us off like what is the correct reference point when people are trying to assess the Yeah. trying to trying to assess this. Yeah. So um when we look at this, I mean to us, money has a very specific definition, right? And so, and when we look at these tokens, they really fit that definition explicitly. Um, you know, there's like people talk about these three prongs of money, store of value, medium of

exchange, uh, and unit of account. In Feffr, John Feffer's like 2017 paper, he just combined unit of account and medium of exchange into payments. So, it's like store of value and payments. And when we look at these tokens, they like really clearly fit that definition. Their primary use is for paying for transactions. Um and people buy other things like goods you know NFTTS with them but by and large they're used to pay for transactions and then uh people are staking them uh for yields which you know you take a little duration risk a little liquidity risk you get a native yields and they're using them in DeFi right as as a deposit asset uh to you know for collateral and and liquidity and so um and so when we look at that you know those just those ground level facts

um you know to us these are pretty clearly commodities or commodity monies or or something like that. They really don't fit the traditional equity style, you know, uh sort of value acrill mechanism where um you know, you can look through and uh you know, understand what your pro at a share of like true true cash true cash flow is. Interesting. So would you say all L1 tokens uh resemble? Absolutely. Any anything I mean anything that's used primarily to pay for uh you know as a payment mechanism and as a store of value. And so when we look at L1's right, all of these tokens are the native payment token. Um and they're all used like in a very significant way both uh you know to stake and in DeFi. So um um you know

like the whole point of Ben Graham security analysis is like I have I can look at how much of a company I own and based on the as a dollar investor US dollar investor I know uh what my share is worth based on uh um you know how many dollars that company has or is acrewing over time. Um, and the problem with when you look at or you know when you compare that to layer 1 tokens uh and the staking yield, you don't really have that luxury of saying, "Okay, I'm a US dollar investor. Here's how many dollars this thing compounds over time." Yes, you can use the current forex rate, right? But in reality, all of these gas uh uh these transactions are being paid in the native like the the native token is the unit of account for paying for transactions and if you buy and stake,

you know, you're getting a native yield. You're not getting any other currency. So you can use the current, you know, uh, you know, forex rate to understand what that's worth today. But if you're going to make a forward, you know, a future-looking model on how much that staking yield is going to be worth tomorrow, you have to make a forex rate assumption, uh, uh, sort of that looks out into the future. And that's where we started to get into, okay, like what's actually driving that forex rate and and then, you know, zoom out big picture. Maybe that's kind of the whole bet we're making in the first place. This episode is brought to you by Scale, the next evolution in layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, Scale allows for limitless scalability, and has already

saved its $50 million users over 11 billion in gas fees. scale's high throughput, zero transaction costs, and powerful web 3 infrastructure make it the ideal platform for gaming, AI, and other high throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X at scale network. That's scale spelled with a K. Thanks to Scale for making today's episode possible. I wanted to take a moment to tell you about Marinade, the platform connecting Salana holders with the best staking rates on Salana. Marinade unlocks a high-performance staking delegation platform that brings billions in

liquidity and security to the Salana market with solutions for both individual traders and global institutions from both DeFi and traditional finance. Use Marinade to earn rewards on your Salana treasuries and holdings. Optimize your Salana staking with Marinad's bestin-market features, including user downside protection through protected staking rewards and optimize delegation via Marinad's automated auction marketplace. To learn more about Marinade, visit marinade.inance or click the link in the show notes. As always, investments in blockchain technology involve risk, terms, and conditions apply.

So in your mind, is an L1 token more like a company, a commodity or money or some weird fourth bucket that's more like a commodity money? Yeah, I mean some people would call uh uh money a type of commodity, right? So I mean to us again it fits the literal definition, the explicit definition of money. Um it certainly doesn't look like a company. It doesn't acrude value like a company. Um, and so, you know, whether it's a money, a commodity money, uh, medium of exchange, um, it's it's clearly for us in that bucket. Yeah. Dan, how do you think about this idea? Yeah. No, I think a lot of that resonates with me. I totally agree that L1 blockchains are not companies. Uh, they're very clearly

different with the most notable example being a company is a single entity. Um and a blockchain is a network of different stakeholders that come together to actually form and operate the the network. Right? So concretely that means the validators who actually run the physical machines uh that come together process transactions come to consensus over the state of the chain. Uh you have the token holders which is largely split into two groups. The unstake holders and the stakers. Uh they have different properties uh and different risks uh and different cash flows um that they're eligible to. And then for most chains today uh especially on the L1 side of things you also have infrastructure providers that play a very important role in the operation or the facilitation of the chain right so

you can think of something like flashbots and their transaction processing system on Ethereum or JTO playing a similar role in Salana you could also think about staking operators like liquid staking operators as well who take a cut of uh the activity that moves through the chain in the form of rev uh in return for providing a service uh you know like staking operators let's say Figment uh played a very important role helping people run these physical boxes. Uh or even just liquid staking providers like let's say Lido plays a super important role in the facilitation of the network as a whole. Uh so that's just like a very different dynamic than what you see with a traditional company, right? Where there's a single entity that is legally liable for the operations of the business and uh the net assets uh after after bankruptcy go back to the equity holders, right? like

there's there's these systems in place that that make this one entity very responsible for what the operations of the business do and so that's the core difference in my mind um and why you have to think a little bit differently about the value acrruel side of things um I also agree that the assets bit the definition of money I I think that you're 100% right about that my cont where I would contend with you I think is like how they're being used today differs from why they should be valued as money right like paying for transactions absolutely the case. Uh but like okay if we look at what those transactions are it's largely like you know memecoin trades uh or even just like real asset trades um you know RWAS are are more and more coming on chain uh

NFTs in that bucket as well and we have like lending activity across DeFi and um you contrast that to let's say uh something like you fast forward to an awesome endstate world where like global trade is settled on chain and you have uh you know oil oil trades between countries being settled on trade. If you get to that point, I 100% think that the money piece becomes very very real, right? Like if you have these large nation state entities that are using this to settle massive transactions that are incredibly economically important to the success of that nation, it starts looking a lot more like something that's money versus like you know the three of us on this call like using it to uh you know be our medium of exchange for example. Um and also on the payment side it gets like really interesting like

what a medium of exchange for a transaction is. Uh Jonah, you actually tweeted something similar to this the other day, but it was like you can go to another country, right? I live in the US. I can go to Europe, let's say, uh and transact with my credit card and I paid dollars and they received euros. All right? The merchant actually got what they wanted. I got I used I got I got to hold what I wanted and and there's something that happens in the middle there. Uh but it's like not exposed to either either side of the the transaction which I find to be really interesting like what is actually the payment. So when I think about really what's like this money like commodity like value driver um to me it's like the really the store of value thing like I want to use this vehicle to transport

wealth through time. That's the most interesting uh commodity-l like aspect in my mind. Okay. So I want to unpack a few things you said there. Maybe the the last one on you know abstracting away the payment currency from the pay you know from the user. Um, this is something I've heard a little bit, uh, or, you know, more than a few times. And I think, you know, just to clarify, you're right. You can go to Europe, swipe your Chase card, and from your perspective, you're not actually holding euros because it's abstracted away from you. But the settlement, the currency of settlement between you and the good or service provider is euro. That is the unit of account. That's that's what they're charging you in, and that's what

they get paid in. So it's really not it's less of like a psychological thing and you know from from how we see it it's really more of a specific ground fact thing like that is the unit of account between you know what you owe them and what you know you know what they're selling the good or service for. So I think in the case of L1 tokens um you know whether it's today and sort of the current use case the way people are using these things to you know to trade memes or settle RWAS whatever um or in the future if people are buying and selling oil it doesn't need to be that they are you know uh like uh the claim here is not is not that people are going to buy and sell off-chain goods and services with onchain money. the claim is that they're going to uh settle

onchain goods and services namely transactions in onchain money. And so um that I think is sort of a key first principle. And then from there you say um you know in the case of L1 L1 specifically because blockchains scale so quickly like transaction fees you know the median transaction fee continue you know go you know decreases probably more than 100% a year for the next x many years right so um that is quite deflationary in terms of the effect that has on on on acrewing monetary value um but you know when you look at these other use cases, right, which is like, you know, buying the token to stake it and earn a native

yields or to use it in DeFi, you know, as collateral for a loan or as a liquidity pair. Um, you know, the supply of the token does not scale as demand for those two uh use cases of the token scales, right? The supply of block space and transaction capacity scales as the demand to use it scales. And and every commodity, you know, the golden rule of commodities investing in general is just like supply is the enemy of price. more supply is the animated price, right? So um you know L1 L1's are really sort of unique in that you know for for payments the supply side really scales like infinitely on the demand side though for the so um when you look at the sov side the supply really doesn't scale I mean

ETH the you know inflates half a percent defl whatever a year uh you know salana 10% like it's relatively meaningless or it's meaningless relative to how much the demand for these assets to use them as a store of value uh uh in defi high and the stake for native yield scales year-over-year, 100 200% year-over-year. So, that's really where we see the meat of the monetary value acrewing. But, um, yeah, maybe we can step back and talk more about like why we're looking at it this way and why we think this is really the main the core of the bet that we're making when we buy a token.

Yeah. You want to get into it? Sure. So, um, like I said, we started out as a just, you know, doing a traditional equity style DCF. And what we realized is that there's really two main shortcomings with with, you know, purely uh like doing it that way. Um, this is in the quest to try to figure out a valuation model for for an L1 token, right? Yeah. Understand the bet we're making. Yeah. To understand the bet that uh that we're making. And so the first is, and we touched on it a little bit earlier, but you know, because these are the settlement currency, right? If I'm a staker, I buy and stake soul or ETH or whatever, I'm not earning anything other than the

native currency. I just get more soul and ETH. Um, and uh and so the question is like what's that worth in dollar terms? And right now, today, it's worth what I can sell it for in dollars, but what's it going to be worth in the future? So you you know unlike a a regular equity style DCF where you're just compounding dollars uh and you know for owning Apple because I'm compounding that the you know in the native asset um you know if I want to express that value in dollars it really depends on there being a you know a forex market right for and so you have to make a a forward assumption of what that exchange rate is going to be in the future and you can't just pretend that the current economic activity the payments being made are denominated in dollars because

they're not they're denominated in some emerging market currency called cryptocurrencies. So um the first thing is okay we need a model that allows us to basically express you know make some informed projection of what that forex rate is going to be in the future if we do want to do this DCF and the second thing we realized is um you know if we just do a traditional equity style DCF like we're kind of missing this whole other area of activity here which is you know the demand that DeFi on these EOS you know on these platforms drives for the native token this is you know when we look at the data just sort of holistically to us it's much more than just you know a traditional equity asset being lent out in like interactive brokers right when we look at all these

layer one chains all of them have that have sort of um even small DeFi ecosystems small medium large all you know the the deposits in those DeFi ecosystems 50 to 70% of them are all the native token uh they're used as liquidity pairs and the one that I'm much more bullish on actually is they're used in lending markets as collateral Um, and I think you can sort of it's pretty easy to to to think about why that is the case, right? Like they're they're relatively short supply assets. The supply doesn't inflate, you know, they're very reliable in terms of how the supply changes over time. Uh they have the least amount of counterparty risk out of any asset on in that ecosystem. In many cases, they have a native yield that can be wrapped, you know, with an LST and sort of that can

be brought into the So they're, you know, relatively high quality collateral assets in the sort of the lending space on these on these markets. Um, and so yeah, for us, like we step back and say, man, like we really think we need a model that looks at the big picture here, that allows us to understand what the forex rate is going to be over the future. Um, and then, you know, big picture, I think, you know, that forex bet is really the core bet we're making, right? We're not betting on, hey, a 4% yields year after year. Um, we're really betting on this being uh um, you know, like a a big sort of change in in the in the FX price.

This episode is brought to you by Scale, the next evolution in layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, Scale allows for limitless scalability, and has already saved its $50 million users over 11 billion in gas fees. scale's high throughput, zero transaction costs, and powerful web 3 infrastructure make it the ideal platform for gaming, AI, and other high throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X at scale network. That's scale spelled with a K. Thanks to Scale for making today's episode possible. I

wanted to take a moment to tell you about Marinade, the platform connecting Salana holders with the best staking rates on Salana. Marinade unlocks a high-performance staking delegation platform that brings billions in liquidity and security to the Salana market with solutions for both individual traders and global institutions from both DeFi and traditional finance. Use Marinade to earn rewards on your Salana treasuries and holdings. Optimize your Salana staking with Marinade's bestin-market features, including user downside protection through protected staking rewards and optimize delegation via Marinad's automated auction marketplace.

To learn more about Marinade, visit marinade.inance or click the link in the show notes. As always, investments in blockchain technology involve risk, terms, and conditions apply. Awesome, Jonah. Okay, quick question then. Uh okay, two things. First is the DCF piece. Then I want to ask about the um D5 piece. So on the DC DCF piece, uh you mentioned that the sort of like the circularity problem, right? Where uh if you wanted to know what you know, if you said, okay, there's going to be one Ethan staking yield for me next year, I need to know what the value of that one e in yield is. Uh and of course, you need to make an assumption about the dollar price there. Um the core assumption that that makes is the

transacting users their demand is expressed in in units of ETH and not dollars right and so if you think about like someone coming on chain uh maybe they I don't know the simple examples let's say is like trading assets right so let's say they have like $1,000 that they bring on chain uh they you know go from their bank account to Coinbase Coinbase buy ETH then move on chain uh and now they want to make a unis swap unis swap trade right they had $1,000 to start with um and so their demand and to me is expressed in dollar terms because they just moved on chain and they weren't they didn't have any assets before. So to me their expression is some their demand to transact on that chain is some subset of their total assets that they have moved onchain. Um, and now I I definitely agree that that

has not always been the case, right? Rewind to 2021. Uh, and basically every chain had this massive wealth effect where everybody was already here. Price ran up 10, 20, 50x, uh, and now you had these insane types of transactions, right? People were buying board apes for millions of dollars. And if you asked anybody who spent any time on chain what they denominated, and the answer was overwhelmingly the native asset, largely ETH. Um, but when I think about the world going forward, I think the wealth effects, right, are are pretty muted, right? So, like for that to happen again to get another 50x in Ethereum, you're looking at a multi-t trillion dollar asset. Uh, and that's not I'm not saying it's impossible, but for us to get there is is a huge move relative to what we'd seen in the past. Um, and so when I

think about like the marginal user coming on chain, I don't think that they're going to express their demand to transact in the form of native currency units and rather are saying like they're going to have wealth, whether that be in dollars, euros, whatever. They're going to move some of it on chain and to perform some activity. Um, so that's kind of how I I feel a little bit differently about the circularity of the of analyzing cash flows, right? because I think this is really really hard to do especially because how nent this industry is but if you were to forecast the amount of spend or the rev going forward um to me you would be expressing that in in dollars right that's what users want to transacted and that's how they're thinking in in the price of uh right because that's sort of the global

reserve currency today but I'm curious what your thoughts are on this yeah so I don't think that's the core assumption that the theor that the uh sort of you know the RSSE idea is built on right because um this like for us this is really not a psychological point this is like uh what is the ground truth of you know what's actually happening and even if they're like psychologically thinking in dollars the reality is that when they transact uh you know e like their uh the unit of exchange that is happening here is in the native token and then maybe more importantly for investors right for investors that buy and hold the token they're not collecting dollars in dividends or earnings like they are earning a native yield and so that's

really where you know this model is for investors to basically be able to underwrite the bet they're making and know the bet and you know make a forward projection. um and uh investors are not earning anything but the native currency and so because that's the case right we need to basically understand what you know like uh what what that bet is sort of on a forward basis um and I think you know one of the things that you mentioned earlier you know we were talking about like is this an equity is it a currency is it money right um and you know there's this litmus uh sort of test I've mentioned before which is Um, if one person owns the entire supply of Apple, for example, it doesn't like it doesn't change the value of

Apple stock. It's still worth the the sort of, you know, all of the the total value of all future cash flows, you know, today. Um, but in the case of an L1, if the entire supply, 100% of the soul or ETH or AVAC tokens are in a single wallet, whether it's staked or not, like that's a pre-launch network, right? This is like where you see Ralph Paul doing like the network adoption model. Like no one can transact on that network unless they have tokens or unless someone else does and they're that other person is making a market for me to do that swap because the transaction costs are uh like the the native token is the unit of account in the medium of exchange for that transaction. Like I can't pay in dollars. There's no account abstraction if there's not another market out there

for me to buy the native token in the first place. So um like the reality and then you know the question is like at what price and then what's the bet we're making? What does that how does that evolve in the future? So you know sure maybe psychologically people like certain people think in dollars some people think in euros some people think in yen but uh at the end of the day for investors right you know when we buy and hold an asset we want to know what the bet we're making is and in the case of these L1 tokens we're just earning more native token and you know for this onchain economy the native token is the the core medium of exchange so um we need to understand if we're going to sort of do a DCF what's that forex rate going to be in the future um and And

again bigger picture like there is a you know when you when you ask yourself that question um you know you you begin to get into sort of the currency uh uh sort of valuation models right like there there are traditional assets beyond equities in the traditional financial world and like there are people who do sort of traditional valuation on assets beyond equities and in the case of currencies right it's very relative it's it's really driven by capital flows so like um you know Arthur Hayes wrote wrote this post recently about how capital controls might be used to uh disincentivize foreign capital you know in you know uh uh investors from uh you know other countries investing in uh in the US right basically taxing that those

inflows because it's the inflows that drive US dollar strength and the goal you know of the capital controls would be to weaken the US dollar right so to disincentivize that so that's really where we started to get into our okay like what's the bet we're making what are we trying to measure here and where we arrived at is okay with RS Sov we're measuring these capital inflows uh and specifically we're honing in on these two use cases that are so in nature and very fundamental and like core to the network. So if we're going to bet on ETH the network or we're going to bet on soul the network or we're going to bet on AVAC the network right these are very specific use cases that are uh sort of that uh sort of are so you know like people buying the token and holding the

token um and we can measure it and we can track it and like it's very core to the the sort of the network level bet. So, um, you know, we're betting on people buying the token and using it to stake and earn a native yield. We're betting on people basic on the DeFi ecosystem expanding and the native token playing an increasingly significant role in in in that native uh sort of def DeFi ecosystem, right? My point about the dollar demand uh was not psychological though, right? Like if you can say, "All right, next year there's going to be a billion dollars of transaction demand, then it's it doesn't matter what the X FX rate is to me as an investor, right? because I can just assume everything I instantly convert everything to dollars. Um, you know, there's obviously like staking lock up periods that I have to contend

with here. But if I know there's going to be a billion dollars of transaction demand um, and I own x% of the network, I know what's coming to me in dollars. Um, and you know, you might want to discount that a little more heavily if there's an epoacle staking period when you can only take out uh your staking rewards and convert them, etc. But um yeah, I I think you can you know the the dollar is unequivocally the global global reserve currency today and I think you can use that as a proxy for forecasting future demand and treat that with dollars without having to worry about the conversion rate because right if I get one token or half a token if I know what it's worth in dollars doesn't matter to me what the the token count is.

Go ahead. Sorry just like to to to to unpack that. I mean I think you're just pretending that it's happening in dollars but it's not. And so if the price of a layer 1 token like drops by 50% are you you know or the the the blockchain network scales capacity right like those are things that change the demand for these transactions. So um and then for an investor like I don't think the price changes the demand to transact though right like if I have you know I'm running a liquidation um the the amount of activity fluctuates with with market conditions for sure but the the cost of a median transaction shouldn't it doesn't really matter to me like of course it does the good and service is being denominated in the native token if

the value of the demand from the users is not because they don't denominate in that as an investor when I buy and own this asset. I'm not collecting dollars. I'm collecting a native currency. So, I have to know what sell for dollars. Okay. At the current price, what's the price going to be in the future? You have to answer that question if you're going to do a DCF. Not if the underlying piece is that I'm projecting $1 billion of of transaction demand that will come through the system. Yeah. I again, I think you're just pretending that this activity is denominated in dollars. And so, what I would say as an investor, like if an analyst came to me and said, "Here's my model." I'd say this isn't the bet we're making and like this is an incomplete DC ECF because you know like if you like

when Buffett goes to invest in the in the Japanese uh auction houses, right? He he's short he they'll also hedge the yen because they don't want to take in risk. They're just buying the compounding activity. So like which is to say it's like very easy to recognize that this is a uh sort of an emerging market currency in the case of L1 tokens or some non US dollar currency that all this activity is happening in. And when I buy in this case just like an equity like a company I'm earning more of that token you like and so for an investor um even if whatever you're projecting some dollar denominated activity uh or some some you know you can project that uh that activity is going to be you know denominated in dollars but that doesn't mean it is right like the fact of the

matter is that it's all happening in the native currency. That's what the validators are charging in. That's what the investor is earning their dividends in. And so um and I and I think you can uh uh like again like the litmus test here really highlights this um like none of these L1s can accept transactions if all of the supply is in a single in a single wallet. There has to be about that though. So let's say like Ethereum tomorrow is like okay we'll the validator we're going to enshrine an oracle and validators will accept an equivalent amount of USDC or USDT uh for their payment. Let's just pretend there is fundamentally where do they get the price? Where does that Oracle source the price from? Who's making that price,

right? There's a whole there's a whole that's the whole reason why that doesn't exist is a total pain in the ass to figure that that out from an engineering and social standpoint. But let's pretend it did. Like then does that remove the fact that if validators could take dollar denominated payments? just that's what absolutely if validators accepted USDC as payment then you value your your share of the pro at a you know cash flow in USD today they don't take they don't take USDC in payment I don't see that happening in the future and and as an investor I don't earn my pro at a share of dividends I it's a native currency all right I'm going to jump in here um Jonah you you've got this you've got this metric right you've got RSOV it is uh realized value of L1 tokens staked plus the realized value of the L1 tokens

in DeFi, you're basically saying that you can sum these two these two met these two calculations, right? L1 token stake plus L1 token in DeFi. You're measuring the uh correct me if I get this wrong, the monetary value that accumulates in that L1 token at that time, right? Yeah. In effect, I mean, that's what we call it, the monetary value, but maybe more specifically, it's the cost basis, right? Um realized value is effectively a rolling cost basis. If you say like we said at the beginning of this episode, okay, these these assets are currencies. They're monies, right? Uh and we know what drives value to uh money. It's it's sort of relative capital inflows. It's, you know, the the the ETH dollar pair is, you know, the strength or weakness

of that pair is driven by people people selling dollars uh and and buying ETH. Um so, uh yeah, so that that's really what RSOV measures. It's the and specifically rooted in these very fundamental use cases of the network. It's people doing that to stake and people doing that to uh to use the asset in DeFi. Uh before maybe countering RSOV and that was that was a good last 10 minutes of conversation. Uh a lot of this actually this whole conversation around um rev was kicked off with this piece uh or like how to value an L1 token. I mean we've been talking about it for years, but there was a DBA post that John Charo wrote called L1 and L2 token value capture. Dan, I know you and Mike worked on that with John and out of that came

Dan, you had this metric called TEV. It kind of transformed into REV. Uh, tell me about this REV metric that you know, we haven't we haven't really talked about REV, but I want to go into REV and then I want to figure out what's I think Joan would probably say uh Joan, if I hear you correctly, I think you would actually say REV is a decent metric, but there's some things missing from it. So maybe Dan, take me into REV. Yeah, for sure. So rev is just a standardized metric to track blockchain value acrruel uh based on user activity right so the good is block space uh and users pay for that with with a series of different transaction fees sometimes they're only in protocol sometimes there's an out of protocol component like fastlane jetto or flashbots um and that the point of

rev is saying what are users paying for block space that's what that's the number we want to track um and the intent of that is not to be a valuation metric it is literally a demand metric. It is a financial metric to see what users are paying for chain. If you wanted to take that and do like you know price to rev or whatever comparable to a price to sales ratio for sure that that's possible to do very easy. It's one division calculation but the intent of rev is not to be a valuation metric. It can it can be used for that and maybe that's where we trend in the future but that is not why we were looking at this as why this thing should exist. You're trying to find what is the demand what is the demand on this chain. What is the

demand to transact on the chain? That is the ultimate demand to transact. Yeah, exactly. And then you know converted to dollars. Um that that is the ultimate point of why we wanted to track this. I think it's an incredibly important metric to understand the financial uh the financial health within the network. And again it's it's a pretty decent proxy for demand. It's certainly not perfect. Uh you know there's different transaction fees across different networks and there's different activity that happens on different networks. But you know you would never look at a you know let's just use a company analogy here like a decent investor would never look at a company only look at the revenue and determine you know this is good or this is bad. It's way more complicated than that, right? You want to break down rev. Okay, what is coming from, you know, state contention or

trying to be the top of block? What is coming from just like a regular base fee just to be included in the block. All of that is super important. Um, and so it's it's way more complex than just looking at one metric and saying, "All right, this is the one." Uh, so yeah, that's just one piece I wanted to mention on like why REV exists, right? The intent was to like let's look at the financial health of the network. If you want to make this a valuation metric, you know, go do that. I don't think that's how these things are valued today at all. Um I think largely that's something like the probability of winning the massive TAM of being the the chain that settles global trade. So REV equals so in RS in RSOV we had the you know uh yeah X plus Y what is the REV calculation? Yeah fees

plus tips where fees are like your base fee priority fee anything in protocol that you would consider like a transaction fee when you just opened up your MetaMask or uh I can't believe I just said MetaMask. that's been so long. Phantom wallet, whatever it is, a Rabby wallet, uh that old habits die hard. Um so yeah, that's what you'd see there. And then the tips is the important other piece to be capturing here because this is largely the exact same thing just moving through a third party system. So I would guess based on the last 30 minutes, Jonah, you would say rev is actually a pretty good snapshot for the demand of transactions on a chain, but you're missing two key things. Uh you don't account for store like the store value premium, I guess we could call it. uh and um this whole currency conversation that we were just

having is what am I right? Yeah, I think there's an FX component uh that we have to think about and then there's um you know, as part of the FX component, right, there's demand for that yield that comes from transaction activity with people buying the token to stake it and then at the same time, you know, there's a whole DeFi ecosystem and so there's demand for for DeFi. So I think that's part of the bigger picture, but I I largely agree with Dan like we don't argue Rev is untrue, right? Um Rev is a fine way to measure uh basically the value captured by the validators from transaction activity uh on the chain. I just think again for investors the bet is a little bit bigger and it's particularly on a forward basis there's

a bigger picture here uh you know with regards to the bet they're making it's beyond just the value captured by the the the validators uh sort of today. So is it fair to say that you can't it's not REV verse RSOV because one is trying one is a valuation model or trying to put a valuation model around an L1 token and one is a uh the demand for transactions on the chain. Yeah. And and I think absolutely and I think another thing to highlight completely agree here completely agree we're not supposed to agree guys. This is a this is I think another interesting thing to point out and maybe gets lost but like the realized you know RSOV I think in a pretty elegant way like captures rev as

it compounds over time or as it accrrews over time. So the realized value right the the cost basis of ET or soul staked increases over time. If people are paying fees and the validators are just compounding a native asset right as those fees acrew to the validators and the validators just compound compound compound the realized value will increase over time. So I which is to say you know RSOV uh like it uh you know it it counts like it incorporates uh rev that's acred over time. If validators are just selling and it's kind of you know in one side out the other then you know the realized value obviously is not growing but if validators are

compounding and it's sort of like you know they're buying and holding this non-native money you know this non-government money for a native yield then then the realized value increases just from the fees. Yeah, I I do wonder. Okay, so part of this conversation, remember that idea at the very beginning, like there's a reference point and sometimes when I hear people talking past each other, it's because we're working on different reference points. The reason this is an interesting conversation is these L1 tokens are uh many different things and I think you could say they're three different things, right? They're capital assets. Uh you got the stakers where the stakers and holders are earning income.

they are um like consumable assets and like uh transact u transformable assets I guess you could say like that's the gas um and then their store value which is the monetary premium and I think Joanie you're putting more weight on that third bucket the store of value and the monetary premium where maybe Dan is putting more weight on the the second bucket which is this kind of consumable and transformable asset. Agree or disagree? Yeah, I think the the main issue with uh you know putting all the value in the payments use case is that the cost to transact uh on these networks it you know goes down uh you know decreases you know like as the

blockchain scale and the blockchain scale you know two three 400% year whatever and so that is like super super deflationary and so again if you have to like try and think about what the what the forex rate is going to be in future if no one is buying and holding the token if everyone's just using it as a medium of exchange and there's no so demand uh you know there's not a lot there to drive your returns right and particularly if the cost per transaction to your point maybe today or next year it's going to be a billion dollars but if you know in three years the cost to transact is down 99.9% then it's not going to be a billion dollars right even if more people you know join the network so for us it's really about okay are people are b are people buying and

holding the token um uh and to you know that's really what we want to measure that's what we feel like our bet is as a layer one token investor one interesting caveat there I think is the median fee is going to go to zero very close and be asmmptoic to zero the average fee I don't expect to do that right if let's say let's pretend there was a world where just for simple math at the top of every block there was a $100 arbitrage opportunity the top of block slot is always worth $99 and and then eventually $99 $9.99 as the competition for that slot heats up, right? And so I think that's an important difference uh as well in that model. Like I do 100% agree median fees are going to get slammed slammed lower.

Uh but I don't think uh hotspots are going to go to zero, right? Anatoli loves talking about this. They even tweeted the other day something to the effect of like median fees to zero, hotspots to infinity because the hotspots are what generate all the all the value today. And so when you think about like let's use Salana as the example. Hey Dan, can you just can you just define what a hotspot is for folks? 100%. Yeah, it's just like when two people want to do the same thing at the same time. How do you, you know, decide who goes first? Uh, you it's by who people trying to buy the same asset or things like that, right? Consentious state is what they call. Yeah, I completely agree with that. I completely agree with that, right? Yeah. Yeah. And so, just I guess to follow the example

through here, right? like memecoin trading on Salana right now can range from like 5 cents to 30 cents to like close to a dollar um depending on the the amount of people trying to do the same thing at the same time versus like sending USDC is always a subsent transaction because there's no no one else is trying to send USDC from my account to Jonah's account right it's just me doing it at that one point in time um and so that's the difference there and so to me it's like if the price of the native asset 10xed the question is do those hotspots 10x as well and I that's I just don't think that's quite true. Um I think are all those assets paired with soul though?

No, I don't. I think again like I think the users express their demand uh in the global reserve currency which is the dollar and that and there's no need to arbitrage the price of soul from onchain pools to sexes. But that the gap there is just every 400 milliseconds there's an arbitrage opportunity that opens up and if the price of soul is 10 bucks or 100 bucks that that's that doesn't it's just the difference percentage basis between the centralized exchange price and the onchain price. Yeah. I I I think the the challenge is I mean again you're talking about you know this is always a criticism of like the money argument right it's like it's very psychological and theoretical and all these things and so for us you know when you know as investors to underwrite this bet we're making we want we want to know what we

own um and like what we're getting paid to own it and so you know the unit of exchange between that person and the validator ultimately is in this native currency which itself is pretty short supply by the way so if you have demand growth and you supply being pretty fixed like you know um that can absolutely affect price and then you know what we're getting paid to own is also the native token. So um if we want to express what the return potential can be in dollar terms, right? Like we're not, you know, we're not buying this for a 4% yield in dollar terms, right? Like that's the basically the cost of capital today. We're buying this for big sort of, you know, upside returns, for venture style returns. And that's generally what has driven returns historically. And I think going forward,

right, it's not the um you know, it's not the 4% that people are buying cryptocurrencies for. It's it's the venture style returns and it's the it's the forex change. I wanted to take a moment to tell you about Focal by Falcon X, the AI powered insights engine built for institutional crypto. With Focal, you can create charts and generate answers to questions in seconds, used by over 80 funds with more than $10 billion in assets under management. You'll feel like you have a team of analysts at your fingertips. Ask focal questions like, "What's causing the uptick in liquidations? How much Bitcoin did Michael Sailor buy last year? And what is crypto's correlation to traditional markets? Focal pulls data

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agree. I don't disagree at all with Jonah that like that's important and that will like push price. Um the question is does that push intrinsic value as well? Uh which is harder to for me to square with, but like I think it's definitely important. I think capital flows are super important to track and I think that's why our SAV is really interesting at trying to get at that number. Um, so yeah, that's what that's what immediately drew me to it personally. I was like, "Oh, hell yeah." Like we can trap capital flows. That's the really exciting piece to me. And I think that's really important to understanding market sentiment, price action, things like this. But in terms of like the valuation side, it's just really hard for me to to want to like loop that piece in. But like I I agree will impact like market condition. Yeah.

I think I think sometimes when I think in like really extreme examples, it helps me simplify a core idea. And so um you know, we we've acknowledged that this thing is money, right? And so I think it's generally accepted that the value of money, you know, long-term is is really driven by the capital inflows and outflows, right? Like it doesn't have intrinsic value like a company. It doesn't compound some, you know, like non-native asset. It is a relative valuation, right? The dollar, USDC, all relative to gold or relative to Bitcoin. And so, you know, it's a funny like super simple example, but if the three of us are in a room and we're just passing poker chips around, uh, you know, and like I pass, you know, a poker chip or like, you know, three poker chips, Dan, you take one of those chips

as your payment for like validating the transaction happens. So, you know, gets two. Like, none of that is intrinsically valuable unless people are buying our poker chips, right? So, so in effect, the bet we're making is that more people are going to come in and buy this uh and buy and hold this this asset. And I think um that's actually a pretty exciting opportunity. Like one of the things we're you know uh that that one of the reasons we're excited about this because like that's a really big TAM. You know, when we look at these assets, these cryptocurrencies, they do represent non-government money. A whole class of them do pay a native yield, right? Um but you know the government money government monies are having their own

sort of uh crisis these days. Um and the drivers of whatever that crisis are seem to be accelerating not decelerating. And so, you know, it's taken 15, 20 years, but like what we're seeing in sort of a mainstream way is people seeing the risk that that those those changes happening in government money world um and they're saying, man, like I'm going to look for non-government money uh or or non-government monies or, you know, other store value assets that don't have you know that don't have those risks. And so people are buying gold and real estate and increasingly bitcoin. And I think people are starting with bitcoin because they see okay this asset changes the least. But if you look at the L1 token sort of landscape overall, all of these assets, right? I mean, we said they're money. They do have a lot of

these non- sovereign money attributes that Bitcoin also has is there's a few other things, you know, differences. Some of these things maybe make them more attractive. Some of these things maybe present a little bit more risk, but in general, they're non-s sovereign assets. They're relatively supply constrained. They pay a native yield and all these other things. But, um, you know, the the the the monetary policy, so to speak, is relatively transparent. It's programmatic. it's autonomous. So I think you can look at all of these assets and say you know the same thing that is driving demand for uh you know bitcoin today which is like an alternative to government money in terms of storing my wealth through time. You can look at these other layer one assets and say, you know, I think for good reason we can discount the payments as a sort of value driver because again this

blockchain scaling makes them so deflationary, but the SOV use case like makes sense and we can measure it. And so that's where we sort of get into this RSOV. Okay, Jonah, let me ask you this question then. if uh correlation not causation obviously and you know many many people make that um get that wrong obviously but if you look at the um rev of Ethereum and Salana REV of Ethereum kind of peaks when Ethereum's price peaks and then you know goes down price goes down Salana REV goes up Salana price goes up if you look at the so you could say correlation I think I've seen a John Char post that says this too if you look at the uh RSOV of Ethereum it's just up and to the right? If you look at

the price of Ethereum, not up and to the right. So, how do you if you're trying to create a valuation framework, it it has been uh I would say grinding up and to the right a lot slower over the last like year or so um in the case of Ethereum. And so, look, I mean, for us, the causation argument is pretty simple, which is like when people buy and hold the token, like you know, over time, the price goes up. That's the fundamental bet we're making. And so there is a current market cap and then there's the RSOV total and different chains have different sort of premiums in ter you know which is like the difference between uh the RSOV total and the market cap. Um um but yeah, I mean I think if you look at these RSOV, you know, growth rates

and total values as well, they they also really closely correlate with uh you know, with sort of the the peak. Um, and maybe the LST, you know, farming uh sort of season that happened uh in 2024 with Ethereum is is a really interesting case study because in many senses, you know, yes, the yields, quote unquote, the air drops, the emissions uh uh is not a sustainable that's not the real yield of Ethereum. But what we saw is effectively a period of time when the yield available to people who bought and held Ethereum, you know, was really, really high, right? because of all these airdrops and what we saw was a huge amount of inflows into Ethereum uh particularly in DeFi. So um I think it

makes a lot of sense to say that hey real yield is certainly a demand driver to buy and hold the asset and if you think right is going to increase over time uh you know that's really a proxy for real yield you you know there are other factors at play here but that's certainly one big reason why people would buy and hold the token. we just say okay like express that rev in monetary terms look at it as a as a real yield because that's what it actually is right um and then also acknowledge that there's this whole other driver here of demand to buy and hold the token which is which is DeFi and it's not a small driver right it's like 50 to 70% of all DeFi TVL across these networks is all you know uh you know comprised by the

native token one thing you mentioned there was the premium that the assets can trade at um relative to RSOV and I'm curious Can you explain to me like what does that tell me right if it let's say something goes at one and a half or 2x arsoft what is the difference between the two and how should I think about that I think you know and we've continued to evolve our thinking here but the main thing is what is the dollar value like premium between the uh RSOV and the market cap and that tells you in dollar terms how much like what is the amount of uh you know how much the cost basis like has to rise uh has to rise between RSOV and market cap like that's the growth in cost basis changing of these two drivers that the market has currently priced in. So, you know, if

you're because realized value is like a cost basis metric, right? We're just measuring the rolling cost basis. Um, and you know, if the cost basis rises, it means necessarily people are selling dollars to buy and hold this asset. Uh, and and again, specifically, we're looking at the cost basis of these two, you know, of staking and of of DeFi deposits. So, and vice versa, right? If the cost basis shrinks it means this thing is not attract you know that the inflows are negative and if it's flat it means it's not attracting uh any inflows and and and those are flat the net flows are flat. Gotcha. Okay. And then um on the uh on the inflows piece so you're using like this aggregate sum right like the the it's like a rolling cost basis

right and instead of if you think about like uh I don't know flo let's say flows into an ETF for example right you have like a single day uh value and like that's what you look at to get this sense why go for the aggregate approach here because that does introduce the the price impact right so let's say if I staked my ETH at $1,000 and then today's the price is at 2500 100 and then I unstake like wouldn't that actually create this negative inflow there because just for me specifically I deposited a thousand inflows went up a thousand and then I withdrew the same one ETH but now for 2500 it's counted more so I think there's two things here the first is you have to realize that you know you as one user we as you know individual users are part of a broader

network and so um you know what happened there is when you put your money into Ethereum gym or solar or whatever, you know, this is how much money you put in. When you took it out, like you you took out a different amount of money, and that's because the aggregate network value changed. Um, and so that that's just that uh that's why it works that way. It is a rolling cost basis metric. If you um if you're pulling money out of the network when the network is revalued higher, you're pulling more money out like it's it's counted as such. Um but yeah, I think there's also things at the same time like there's individ you know ETF flows or you know like hodddle waves in terms of measuring the length of time people are hold like there are other things I think it would be uh yeah like

great to explore in terms of optimizing the the model here. Um, and you know, one of our challenges obviously is data and like we're looking for providers and uh uh you know, like yourselves who who can sort of help you know uh uh you know, increase the signal here and and make the data better. Um um but generally I think if we're all aligned on what this asset is and generally you know the direction uh of you know uh that we all should be sort of thinking in terms of how to value this asset because like in in what the bet we're making is as investors then we could say okay like this is our starting point right that was really our goal is to say here's a here's a starting point um and uh and we can continue to optimize it.

Nice. Okay. Yeah. The reason why I ask is it's almost like the inverse activity would be just harder to think through. Right. Let's say I deposited at 3,000 and then withdrew at 1,000. So while I was holding the price, you know, decreased uh quite a bit there and the there'd be like this residual val value left in the RSOV metric, right? That $2,000 difference would still remain in this value even though I withdrew the one ETH. Um so that's that's one piece that I was thinking through. And then the other question I had on this, it's kind of adjacent to uh the so you count staking and DeFi, super important activities. Uh but you don't count holding in this which I think is a little bit hard to do but um like right like I could just be holding for a long period of time and then stake or and

then deposit in DeFi and then even if I withdraw from that activity I'm you know I could still be very well treating this as like that store value money like property just as me holding. So I'm curious how you think about that. Yeah it's true. And I think for us we wanted to say okay what can we measure that is that that is onchain and and verifiable and so in the and what can we what you know are the things that we're measuring really grounded or really rooted in a core use case of of this native token because we want to you know we want to be very specific with our model in in terms of uh you know making sure it's grounded in the like the bet we're making the core use case right we're betting on the the specific use case here and then we can model that out and

so in case of staking and you know DeFi deposits they're they're very fundamental use cases it's very clear we can measure them um and over time if you look over a long period of time right like the bet is okay you know trillions of dollars is going to come into the staking contract uh and and sort of be used as collateral or liquidity in DeFi um and that's really the core bet we're making and that's how these things go up in value right people buy and hold the token it's true you could be holding off chain but like I said you know like you said eventually you're that token token is probably going to end up in one of those two core use cases. So, um we'll just sort of count the aggregate value as it happens. Jonah, um shifting gears a little bit. So, in Tradfi, there's

obviously like DCF and different things like that. There's but there's also um like the PE ratio, right? And so, if I use So, the PE ratio of different like uh industries, right? Like, uh food distribution has actually like a PE ratio of like 30. insurance has a PE ratio of like 12. Chemicals has a PE ratio of like 15 or 16, right? And so if you say the chemicals uh PE is 15, if something's you can actually start to and you know, let's say something is way too high or way too low, you can actually start to be like, oh, this is undervalued or overvalued. If we I'm looking at your Dune dashboard, which we'll link in the show notes, and you've got a thing that's price to value, which is um market cap divided by RSOV. And so that says Ethereum is or says Ethereum

is trading at 2 point roughly two 2.5 the price to value is like 2.5. How do you think about what the right price to value is? Yeah. And I think this is also something you know that can be optimized as sort of like you know just a public discussion and other people uh you know improving the the framework here. But um and you can select different tokens. We got I think we've got you know 10 different tokens here. But um you the way this computes price to value again like you said is just uh taking the market cap and dividing it by uh the total uh um RSOV total.

One could say okay I want you know relatively low price to value as it's currently computed because then I know every incremental like change in the realized value the inflows that happen in a forward basis should have a higher price impact. There's less you know uh noise in my bet. I know precisely what my bet is is and as these metrics change um you know uh it has a much more specific impact like a direct impact. There's less growth premium already baked in. Um but you could also look at it like you know in terms of what the right uh uh multiple is you could look at it you know the annualized change in this RSOV and so you know instead of just dividing the market cap by the RSOV total you could look at okay what's the

annual or you know annualized on whatever time frame change in this RSOV and say okay this thing is growing super fast I'm willing to pay you know a slightly higher multiple whatever this thing is growing you know $50 billion a year in terms of uh RS sov or that's what I project. Um, and you know, currently, uh, you can compare what you project to what it's currently growing at and decide, okay, how much forward growth am I willing to pay for today? And that's up to every investor and that's up to every analyst. Yeah. Um, Dan, we got a we have an audience question here uh for you. Um, this is from Tom Tom Dun Dunlevy who was on the podcast the other day. I said um, let me share unshare the screen. I

said, "Please get into the math on why REV would ever spit out reasonable valuations if L1's actually do have sub 1cent transaction fees. Even if we assume trades on MEV, I keep hearing, yeah, but if we get to 10,000 TPS, it doesn't matter." This assumes that A, we are fully utilizing 10,000 TPS consistently, which is a faulty assumption. Uh, and B, if we got there, the fees would be meaningfully enough to justify today's valuation. Uh, hint, they would not. 10,000 TPS every second of the day for a year at one penny is three billion annually. Uh we need new ways to value these assets like RS RSOV or something else. Curious curious uh your thoughts on that. Yeah, this kind of touches on the discussion we mentioned earlier

between like median fee versus average fee uh and average fee being driven by state contention, right? Um I also Okay, so you know I think a lot of people compare blockchains to like payment networks. Um and I would be pretty surprised if blockchains didn't far exceed payment networks in terms of total just raw transaction count uh over the longer term. Um payments is one thing blockchains do and they do a lot of other things right you can't do all the other activity we see driving rev or just broadly onchain activity today uh on a payments network right trading assets um defy activities any of the any of these things right lending uh so that like if you look at payments uh as a percentage payment transactions as a

percentage of total transactions today I don't know what the numbers are um so you know source I'm making this up but it's I I would be pretty shocked if that number was north of 10% % um and and candidly that feels a little bit high. Uh so to that means you're just like only zooming in on this this one small piece. Um and so yeah if median fees go to zeros the fees will be driven by priority access to state and I think a lot of the push back here is that well the apps see this and the apps want to capture this for themselves for sure. I I think in a perfectly efficient market that is going to happen and it would have already happened but there are other benefits you get from building on a a shared state chain right a large L1

and that stuff gets ignored right so if the you know if ours's the perfect metric let's say and uh these things do have this awesome money-like property you're going to be want to be as close to that money as possible um or there's like more realistic not that's not what I meant like more uh tangible let's say um qualities of these chains right you have immediate uh uh integration with centralized exchanges which matters a ton for putting users on your chain. Same with wallets. Um the overhead of a wallet integrating you that people actually use is massive. Uh oracles, if you're doing anything with DeFi, that's insanely expensive to get a trusted oracle on your chain. Like there's a million different things. Um or honestly, as someone who spends all day in data, you launch a new chain and you don't get indexed by a top three

provider, your data doesn't exist in in reality, right? Or it's going to be someone uh like us who pays a lot of money on the back end to go make this happen and bring it to life, right? It's it's not like there are significant benefits to building on a shared state chain like a large L1 um that you you don't get if you go build your own chain. So I think uh there will just be a much slower transition into apps doing this themselves. Alon was on uh the new tech uh podcast uh live show really. I'm going to butcher than the four letters here, but was it TBPN or something like this? Um the Alon the co-founder of Pump Fund and he was like look we're not going anywhere. We get all these benefits. Why would we leave? Sure.

Yeah. I see the priority fee number. huge. Uh I'm sure he also sees the cash in the bank and that's a massive number right now. Like the incentive is not to go leave and do something else. And so yeah, TLDDR median fees to zero, average fees are going higher. Yeah, I uh I also disagree with Tom's uh position on this. I don't think all fees are going to zero. Dan, I completely agree with you. There's clearly benefit to being on a shared chain, and I think we're seeing that happen in the case of Ethereum. we've seen it happen which is you had all these L2s pop up you had all this state fragmentation it affected the UX and affected value capture to the in terms of the real yield available to stakers on Ethereum um and uh you know

the response from the foundation has been to pivot the roadmap to sort of reintegrate these L2s right to the base rollups or whatever where that the base layer is more active in the actual sequencing of transactions so I think that is a durable driver of real yield sequencing. I don't think base fees, you know, are uh again because it's it's it's about how supply scales with demand, right? The the the supply of DA scales as demand scales, but you can't for contentious state, there is no way to scale like time. Unless we're in a you know a quantum future where there's many different timelines at once, right?

The fact is one transaction needs to come in front of the other. That fundamental law like constraint is effectively a supply constraint. people are going to pay more for contentious estate uh you know when they can make money doing it. And so um that is a dur there's a durable driver of real yield there. Um and I I think you want to have a durable driver of real yield by the way because I think that's one of the big incentives for people to buy and hold the token right like if there's no real yield people are just going to go buy Bitcoin. Um because all of these other L1 you know networks have additional risks relative there's a there's a you know they they yeah there's additional risks relative to Bitcoin. they change more, right? Like they're more mutable. Uh devs change things, supply changes. They also, you

know, can offer a higher reward, namely in a real yield. And so the the real the way we look at it is like, you know, the market uh basically buying this yield um uh is sort of expressing the you know their uh uh uh the marketwide demand basically for this real yield. It's pricing that risk relative to Bitcoin and relative to each other. And so um you know I think at minimum there has to be some level of real yield. Certainly today where these these tokens are do you know present a little bit more risk relative to Bitcoin um they've got to offer some upside as well. Yeah I totally agree on the real yield piece as well. Um I and I also think what's super interesting about the market today are there people or the teams building

chains that are thinking very deeply about the fact that this is true and their contentious state matters a lot. Uh and then there are people on the other end of the spectrum that will tell you with a straight face that sequencing fees are going to zero in the near term and we're not going to optimize it for it as a chain. Uh and I think as an investor you should probably be doing you know thinking through which which chain is which and how should that how should I be thinking about that going uh forward. That's that's the one thing I think I'd leave the audience with. All right. So as we as we start to tie this whole conversation together, Dan, I'm curious you know we spent an hour talking about RSOV and REV. I'm curious uh if you have any updated views on RSOV

after hearing kind of all of Jonah's points. Yeah, look, I I definitely didn't come in thinking that I I hated the metric or something like this at all. Right. I think I think it's interesting. I think capital flows are super important. Uh and I agree that it like rev kind of sits within the the broader bubble of the R soft metric. I think that makes sense to me. Um yeah, I think the point where Jonah and I probably just disagree with is I don't think that me as a user has one eth of transaction demand or one soul of transaction demand. I think I have a thousand dollars of track transaction demand. Um, and so that to me makes the a DCF possible. Now, is that where things are valued today? Again, no. I think uh, you know, this is a very nent industry and think about like an AI

startup or something like obviously those are in a similar similar bucket in terms of nency and you get crazy multiples there as well. Um, so is that what's happening today? No, these are startups. We need to be like thinking more longer term. Where are things going is where I when I think about a more cash flow-based model. Um, but I I completely agree there's there's a very strong potential for another money-like driver here, right? Again, like if we go back to that crazy example that I dreamed up earlier where global trade is being settled on a chain, uh, that like that is the coolest value proposition of this entire industry in my mind. If global trade is every chain, let's say every transaction in the world is happening on a chain or a set of chains, then that is going to be paying fees and

those fees go back to the native asset. You get this real yield generated by the world's transaction demand. I mean, I don't know why you need another narrative because that is so cool to me. Um, so yeah, that's the TLDDR. I just think the one point of contention here is uh around what users think in when they want to transact. Is it at one ETH one unit or is it uh you know some form of dollars dollar denominated demand? Um and then yeah, I just need to think deeper about the actual methodology, right? Like the pieces about the time components like in theory our soft go negative, right? If you had like a very large like let's say you know 90% of the assets in some extreme example were staked super early in the chain's existence and then price runs up 100x or something and then it

would take a pretty small amount of those assets to be unstaked and just like ignore the DeFi component for now and technically it could go negative. So like I need to think through like just the timing component piece. I just haven't spent enough time with it. So I don't have like a super strong opinion uh like if it's the right thing to do or the wrong thing to do but that's just one thing that comes to mind. Yeah, I think um you know we've we've basically established that these assets are money um and in order for users to transact even if they think in dollars there has to be a market for them to buy in and out of this token because the validators are charging exclusively in this native asset. And I'm, you know, it's not to say that you can do a DCF, right, if you

just want to focus on the validator, but but even if you do a DCF, because as an investor, you're getting paid in the native token, you have to like and because users, even if they think in dollars, there has to be a like at some point they have to swap into the native token to pay for those fees. you you have to make some forex assumption if you're doing a you know if you're projecting what the future uh you know you know fees paid are going to be in dollar terms and so um RSOV is an attempt at uh you know providing a framework uh that allows investors to make more informed assumptions about that forex rate because without it you're basically just assuming that the

forex rate today is going to be the forex rate tomorrow which uh you know is incomplete and then for investors there's you asked the question uh actually that forex rate is my bet uh sort of at at an even more fundamental level that's really what my bet is. So um I hear you on the psychological point um but from my perspective for investors where we want to understand what exactly is the bet we're making here um when we look at everything at the ground level and understand what we're being paid in and it's really about are people buying and holding this token long term um and and uh and when you model that forward I think you know for us that's that's how we think about the bet and um for all tokens. Yeah Jonah and Dan good conversation. Awesome. Yeah tons of fun.

appreciate you having us on and Jonah. It's a pleasure to meet you, man. Thank you for having me, guys. It's great to meet you guys. Yeah, likewise. Thanks all. [Music]