In-depth discussion of blockchain is more like a company or a country?
Author: Nick Hotz
Original compilation: 0xbread
Summer of DeFi"Summer of DeFi"That only happened a year and a half ago, and most of the other successful apps that we think have great value haven't been around for more than three years.
At Arca, we have consistently asserted that emerging industries in the blockchain application space (such as DeFi, NFTs, gaming, and Web3, including its various sub-industries in file storage, cloud computing, and telecommunications) have a striking relationship with traditional startups. similarity. But one sector, despite being around the longest, has not been able to fit this classification, and that is blockchain protocols and platforms themselves.
Layer 1 (L1) blockchains (e.g. Ethereum, Avalanche, Terra), and even layer 2 (L2) blockchains (e.g. Polygon, Ronin, Arbitrum) resist easy definitions or valuations. So while we can be sure their tokens have some value, they don't provide users with an easily definable need.
Take some DeFi applications as an example, such as Sushiswap, which is engaged in the simple business of allowing users to trade tokens. They provide profit sharing to token holders in order to establish a sufficiently simple valuation model. Protocols and platforms such as Avalanche are more like application stores on the Internet or in the Apple system, and people can build applications on top of its protocols. Still, since the protocol includes the native token it runs on, its valuation cannot be done easily.
While the specifics are complex, people seem to fall into two camps when thinking about the value and structure of blockchain. One camp of pragmatic, traditional, financially friendly people supports blockchain as a business (BaB), who see blockchain as a company with a definable cash flow, product-market fit, and business model.
The other camp is full of intellectual visionaries who support Blockchain as a Nation (BaN) as a country that supports its own government, economy, military and taxation system. These two very different frameworks lead to two different views on the value of the blockchain:The BaB faction focuses on return value to token holders today, while the BaN faction is more concerned with new users and economic growth rather than compensation to token holders.This division has also led to arguments among people who are good at evaluating their favorite blockchains with vastly different metrics.
As someone who straddles these warring factions, I have learned a lot from each, and both camps have merit in describing this subsector of digital assets.
The Case for Blockchain as a Business (BaB)
If you look at it from a traditional financial framework, it is not difficult to find that the blockchain looks a lot like a business. Ryan Sean Adams of Bankless was perhaps most apt when he claimed: “Blockchains sell blocks.” Blocks can be sold B2C (to users) or B2B (to other blockchains), But both ways can generate income.
For a business that sells blocks, increasing the number and price of blocks is the pinnacle of success. Advocates of BaB focus on the fees generated (that is, the income earned by the proxy chain) to show that the product matches the market. They use fees to achieve their goal of returning cash to token holders, either through a deflationary monetary policy or through other free cash flows (such as staking rewards). These indicators, in addition to guaranteeing the economic security of the network, also portend a great investment opportunity.
Analysts like Ryan Allis try to value the first layer (in this case Ethereum) based on fundamental cash flow metrics that will be incorporated after Ethereum’s merger event later this year. Ryan Allis found that Ethereum's trading price has a large discount compared to its base valuation (more than $10,000 per token), which is based on future cash flows from staking (similar to blockchain dividends) and deflation of the money supply (such as stock buybacks). The discounted cash flow model, the staple of analytical BaB advocates, is seen by the BaN camp as sacrilege.
Objectively speaking, these numbers show that some blockchains are doing better business than others. L1 such as Ethereum (or to narrow the scope, Binance Smart Chain) can rely on relatively high mining fees and complete blocks to make money every day. These are cash flows in the blockchain space, and for BaB, its current fundamentals justify a solid investment.
Terra could also be put into this category because of its historically deflationary monetary policy returning value to token holders (stablecoins are a great business too) Solana, Polygon, Cosmos, Avalanche on the other hand Chains such as , which only generate nominal fees, and have a more severely inflationary token supply - this will take away all superpowers of the BaB camp.
All-star digital asset metrics and research provider Token Terminal is taking the same approach to assigning fundamental metrics for blockchain (fundamental metrics include revenue, price-to-sales ratio, and price-to-earnings ratio), which is the same as application-layer players like Sushi and Axie Infinity. Do the same. However, given that many blockchain projects have different fee policies and heavy token issuance rates, this approach can run into problems when comparisons need to be made. For example, Terra can return value to holders of its original LUNA through deflation, but Token Terminal cannot distribute any "earnings" or price-earnings ratio because it cannot sell coins.
Another key issue when considering blockchains as businesses is the currency in which they generate fees. A blockchain is unlike any business in the real world in that it generates revenue and profits entirely in its own native token, rather than using an external currency like the U.S. dollar.
In the eyes of BaB's critics, saying that blockchain makes money is like defining Amazon's behavior of repurchasing its own stock as "earning a profit" instead of taking the receipt of new cash as the standard of profit. To bridge this gap of opinion, the BaB camp sees their native tokens as fundamentally new assets, arguing that they encompass the properties of capital assets, consumable assets, and store-of-value assets. When the L1 native token is framed as a new asset class, it is easier to lose sight of exactly how it earns income.
Advocates of the BaB start fundamentally with a framework for viewing fiat currencies, specifically the U.S. dollar, as their global unit of account. Fees incurred in the blockchain’s native token have value because consumers decide to buy blockchain space rather than use their dollars to spend something else.
I am not judging this view and think it may be the more practical of the two. However, there is another entirely different way of looking at the problem, which advocates blockchains as states rather than corporations.
The Case for Blockchain as a Nation (BaN)
For a financially savvy newcomer to the Web3 space, the tribalism among the various L1 communities is extremely odd. Bitcoin people and Ethereum people seem to despise each other, and there is often tension between Ethereum advocates and other "newcomers" to L1.
For those familiar with investing, this is a phenomenon that does not exist in any other asset class. No one wants to engage in a (social) war over the merits of Coca-Cola versus Pepsi, and owning Goldman Sachs instead of JPMorgan does not create some kind of identity. But for some reason, this happens across various digital asset communities.
While more perceptible in terms of their native assets (possibly due to the stability of native assets), patriotism around particular communities is prevalent among the "Dwellers of Nations". The maximalists of Ethereum and the maximalists of Solana may go to war on the confines of the blockchain world, but they will all join forces against traditional finance and promote the efficacy of blockchain.
The mechanics are like two countries that might be fighting on adjacent borders, and if they meet in New York City they will unite against other cultures. When people are deeply involved in their communities, they feel passionate about their communities. And when their social, economic, and physical health is at stake, they are willing to drop everything to stand up for their values.
In fact, you only have to look a little sideways to see that the social structure of a blockchain is similar to that of a state. When a country is first formed, it is a blank canvas with unlimited potential, but no real economic value other than "future option value".
But over time, as a society gradually builds roads, schools, and other businesses, a country's GDP and tax revenues begin to grow. The same goes for blockchain, which has grown from an early formation and speculative value to a thriving metropolis of applications and transactional revenue. Validators are responsible for "electing" the government (and deciding) the rules by which society operates, and miners and minters act as an army to provide security and keep the country safe from would-be attackers.
However, when the rebel army reaches a certain size, there is also the possibility of a brutal civil war breaking out within the blockchain. On-chain goods (NFTs) and services support a diverse economy, and deeply decentralized finance and trade routes (bridges) connect it all. Most of the activity takes place in the nation's native token, which is the primary medium of value exchange. This token is also used to pay the mining fee "tax", supporting a public good that serves everyone using the chain.
To the BaN camp, it seems silly for BaB to measure the value of tokens in terms of taxes paid by the country’s residents. A native token is a currency, and the most important thing about a currency is that it can be used in a large dynamic economy. Reserve currency status will come eventually, but in the early days of blockchain development everyone can join the game. What matters is its growth, not its current value; what will really drive the price in the long run is the money flowing into its native economy, not the token economics in favor of token holders.
In situations where growth is paramount, a graph like the following is more useful in the analysis than to understand expenses and profitability:
We have seen the winners of the past eight months (Polygon, Solana, Avalanche) emerge as fast growers, while Ethereum, Binance, Bitcoin are growing slowly and steadily. Network effects are weak in what the BaN camp sees as the emerging world of the digital nation, and the current incumbents have little to be complacent about. Ethereum (and to a lesser extent Binance Smart Chain) continue to charge high transaction fees, and other chains can seize this opportunity to compete with them at a lower tax rate, attracting users and capital to their "country".
Natasha Che of Tascha Labs firmly supports this camp. It proposes that the L1 blockchain is closer to the government than to the enterprise, and believes that it uses tokens as its native currency and increases in value as the "GDP" of its own economy expands. She also wrote a bear report on Ethereum, arguing that relatively slow growth and the shift to Layer 2 (removing direct connection to users) will make Ethereum a laggard (compared to other L1 blockchains) .
Haseeb Qureshi of Dragonfly has a similar point of view, comparing blockchain to cities that grow in size and eventually become too crowded and expensive, forcing a new batch of cities to spring up. For example, the expensive but culturally representative Ethereum is New York City, but the adventurous head west, choosing to settle in new cities like Los Angeles (Solana), Chicago (Avalanche), and San Francisco (Near).Haseeb’s city metaphor strongly defends the future of multiple blockchains (it is completely impossible for there to be only one city in the world), and also shows that these cities in the United States will be able to coexist and even cooperate instead of killing each other.
While a16z's Chris Dixon has occasionally cast an olive branch on the BaB camp, he's also someone who would poetically describe the "BaN gospel". Chris Dixon compares Web3 to a chaotic but vibrant city, while Web2 is Disneyland—it's clean and beautiful, but it's highly planned and unnatural. In Chris Dixon's view, the blockchain facilitates a composable digital economy; a new economy emerges where anyone can create new goods and services and trade them with others. They are certainly not just Disneyland-like businesses that are profitable for token holders.
While this framework may better describe the structure of blockchains, the BaB faction would (correctly) argue that its usefulness is limited. Since currencies cannot be fundamentally valued, the only way to invest for the BaN faction is to follow the momentum of financial value and citizen rotation, adoption between chains. While community natives may have strong beliefs about the technology or social structures underpinning a particular chain, investors may have difficulty feeling comfortable with tokens based on these more qualitative judgments alone.
In order for the world to join these systems, we need to help people understand blockchain in a way that resonates with them. For some, the analogy between blockchain and traditional businesses is obvious; for others, blockchain may make more sense as a more revolutionary framework for the state. Both approaches have merit in explaining the emerging world of Web3 and valuing its greatest assets. Which one resonates with you more? The answers you say can reveal blind spots you may have overlooked and help you understand why so many people are passionate about this space.
