What's an L1 Token?

Transcript

[Music] 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 and 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 uh 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 NFT is 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- 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 offchain 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 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 and 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 enemy of price, right? And 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 and to stake for a 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. 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.

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