Debate: How to Value an L1 Token With Dan Smith and Jonah Weinstein

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 SKALE, the next evolution in Layer 1 blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X @ScaleNetwork. Thanks to Skale for making today's episode possible. I wanted to take a moment to tell you about Focal by FalconX, 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 for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed.

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 Blockworks. We've also got Jonah Weinstein, investor at Skycatcher. You may have heard him on a recent Bankless episode talking about a new metric, RSOV. So wanted to have this conversation to talk about REV, RSOV, 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, Ben.

Yeah, just listening to that sentence. We're talking about REV and RSOV. Like, I can't name things.

We lost half the listeners already. It's gone.

Yeah.

Jonah, maybe I'd toss it to you.

I think there's a conversation we had before getting into the nerdiness of REV and RSOV and these metrics and the how to actually do it. I think there's a question of why we're doing this. 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, you know, for investors like myself and like a lot of the listeners, we want to understand really the opportunity we're underwriting. So we want to understand what drives our returns. We want to understand where the risks are. And, and as long as we can know our bet, right, we can do that. Or as long as we know our bet, we can do that. And so we came up with this framework that we feel like really represents the bet 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 yeah, we need to be able to measure and track our thesis over time. 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 had a, 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. 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, uh, there's been a nice flow of metrics like stock to flow and, um, What was the Chris Burniske one? M, uh, PQ equals MV.

Yeah.

Is that right? Um, so we've, we've, this is not new, right? 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 L2Beat, let's say, that's the amount of capital within a specific L2. Really useful to understand the amount of value on this chain, in this economy, within this network. But it's not clear today how that number translates into a market cap or a fully diluted valuation. 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 of ultimately valuing the cash flows that flows back to 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, 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 value to these tokens, right? Because a lot of that stuff is ephemeral, maybe top-down, good market-wide context or ecosystem-wide context, but we want to be specific about what events that are happening on-chain are driving value to the token. We started with a traditional 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 we said, okay, what is happening on chain that we can measure? And how do we build a model based off that?

Right.

And how does that fit together with the DCF?

Yeah. So in my opinion, the conversation— 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 oftentimes 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 they're companies and half the people talking about these things like they're commodities. And really what we're talking about is you've got the layer 1s and then you've got the layer 1 token, right? So for Ethereum, you've got ETH, for Solana, you've got SOL. How do you guys— maybe, yeah, Jonah, if you want to kick us off, what is the correct reference point when people are trying to assess the— yeah, trying to, trying to assess this?

Yeah. So 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. You know, there's like people talk about these three prongs of money. Store of value, medium of exchange, and unit of account. In John Pfeffer's 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 really clearly fit that definition. Their primary use is for paying for transactions. And people buy other things like goods, NFTs with them, but by and large, they're used to pay for transactions. And then people are staking them for yields, which you take a little duration risk, a little liquidity risk, you get a native yield. And they're using them in DeFi as a deposit asset for collateral and liquidity. And so when we look at those ground-level facts, to us, these are pretty clearly commodities or commodity monies or something like that. They really don't fit the traditional equity-style value accrual mechanism where you can look through and understand what your pro rata share of true cash flow is.

Interesting. So would you say all L1 tokens resemble money?

Yeah, absolutely. I mean, anything that's used primarily to pay for— as a payment mechanism and as a store of value. And so when we look at L1s, all of these tokens are the native payment token, and they're all used in a very significant way, both to stake and in DeFi. The whole point of Ben Graham's security analysis is like, I can look at how much of a company I own, and based on the— as a dollar investor, US dollar investor, I know what my share is worth based on how many dollars that company has or is accruing over time. The problem with when you look at or when you compare that to Layer 1 tokens 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, but in reality, all of these gas— these transactions are being paid in the native— like, the native token is the unit of account for paying for transactions. And if you buy and stake, you're getting a native yield. You're not getting any other currency. You can use the current forex rate to understand what that's worth today. But if you're going to make a forward, a future-looking model on how much that staking yield is going to be worth tomorrow, you have to make a forex rate assumption that looks out into the future. And that's where we started to get into, okay, what's actually driving that forex rate? And then 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 SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 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 @skale_network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. I wanted to take a moment to tell you about Marinade, the platform connecting Solana holders with the best staking rates on Solana. Marinade unlocks a high-performance staking delegation platform that brings billions in liquidity and security to the Solana market with solutions for both individual traders and global institutions from both DeFi and traditional finance. Use Marinade to earn rewards on your Solana treasuries and holdings. Optimize your Solana staking with Marinade's best-in-market features, including user downside protection through protected staking rewards. And optimize delegation via Marinade's automated auction marketplace. To learn more about Marinade, visit marinade.finance 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, doesn't accrue 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. They're very clearly different, with the most notable example being a company is a single entity and a blockchain is a network of different stakeholders that come together to actually form and operate the network. Right. So concretely, that means the validators actually run the physical machines that come together, process transactions, come to consensus over the state of the chain. You have the token holders, which is largely split into two groups, the unstaked holders and the stakers. They have different properties and different risks and different cash flows that they're eligible to. And then for most chains today, 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 Jito playing a similar role in Solana. You could also think about staking operators, like liquid staking operators as well, who take a cut of the activity that moves through the chain in the form of REV in return for providing a service. You know, like staking operators, let's say Figment, played a very important role helping people run these physical boxes, 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. 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, uh, do. Uh, and so that's the core difference in my mind, um, and why you have to think a little bit differently about the value accrual side of things. Um, I also agree that the assets fit the definition of money. I think that you're 100% right about that. My content— 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, meme coin trades, uh, or even just like real asset trades. Um, you know, RWAs 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 know, fast forward to an awesome end state world where like global trade is settled on chain and you have, uh, you know, oil, oil trades between countries being settled on chain. 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 like, you know, the 3 of us on this call, like, using it to, you know, be our medium of exchange, for example. And also on the payment side, it gets, like, really interesting, like, what a medium of exchange for a transaction is. Joni, 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, 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— well, I got to hold what I wanted. And there's something that happens in the middle there but it's like not exposed to either, either side of 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 user. This is something I've heard a little bit more than a few times. And I think 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 currency of settlement between you and the good or service provider is euro. That is the unit of account. That's what they're charging you in, and that's what they get paid in. So it's less of like a psychological thing. And from how we see it, it's really more of a specific ground fact thing. Like, that is the unit of account between what you owe them and what they're selling the good or service for. So I think in the case of L1 tokens, whether it's today and sort of the current use case, the way people are using these things to trade memes or settle RWAs, whatever, or in the future, if people are buying and selling oil, it doesn't need to be that they are— the claim here is not that people are going to buy and sell off-chain goods and services with on-chain money. The claim is that they're going to settle on-chain goods and services, namely transactions, in on-chain money. That, I think, is a key first principle. Then from there, you say, In the case of L1 specifically, because blockchains scale so quickly, transaction fees— the median transaction fee decreases probably more than 100% a year for the next X many years. Right? So that is quite deflationary in terms of the effect that has on accruing monetary value. But when you look at these other use cases, which is buying the token to stake it and earn a native yield or to use it in DeFi as collateral for a loan or as a liquidity pair, the supply of the token does not scale as demand for those two use cases of the token scales. The supply of block space and transaction capacity scales as the demand to use it scales. Every commodity, the golden rule of commodities investing in general is just like supply is the enemy of price. More supply is the enemy of price. L1s are really unique in that for payments, the supply side really scales infinitely. On the demand side, though, when you look at the SOV side, the supply really doesn't scale. ETH inflates half a percent, whatever, a year. Uh, you know, Solana 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, in DeFi and to 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 occurring. 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, to 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 SOL or ETH or whatever, I'm not earning anything other than the native currency. I just get more SOL 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 unlike a regular equity-style DCF, where you're just compounding dollars for owning Apple, because I'm compounding in the native asset, if I want to express that value in dollars, it really depends on there being a forex market. And so you have to make a forward assumption of what that exchange rate is going to be in the future. 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. The first thing is, okay, we need a model that allows us to basically express, make some informed projection of what that forex rate is going to be in the future if we do want to do this DCF. The second thing we realized is if we just do a traditional equity-style DCF, like We're missing this whole other area of activity here, which is the demand that DeFi on these platforms drives for the native token. When we look at the data holistically, to us, it's much more than just a traditional equity asset being lent out in Interactive Brokers. When we look at all these Layer 1 chains, all of them that have even small DeFi ecosystems, small, medium, large, The deposits in those DeFi ecosystems, 50% to 70% of them are all the native token. 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. And I think it's pretty easy to think about why that is the case. They're relatively short supply assets. The supply doesn't inflate. They're very reliable in terms of how the supply changes over time. They have the least amount of counterparty risk out of any asset in that ecosystem. In many cases, they have a native yield that can be wrapped with an LST and that can be brought into the— so they're relatively high-quality collateral assets in the lending space on these markets. Yeah, for us, we step back and say, man, 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. Big picture, I think that forex bet is really the core bet we're making. We're not betting on, hey, a 4% yield year after year. We're really betting on this being a big change in the FX price.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, Instant finality and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space. Space slash ecosystem and follow their journey on X at Skale Network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. I wanted to take a moment to tell you about Marinade, the platform connecting Solana holders with the best staking rates on Solana. Marinade unlocks a high-performance staking delegation platform that brings billions in liquidity and security to the Solana market. With solutions for both individual traders and global institutions from both DeFi and traditional finance, use Marinade to earn rewards on your Solana treasuries and holdings. Optimize your Solana staking with Marinade's best-in-market features, including user downside protection through protected staking rewards and optimized delegation via Marinade's automated auction marketplace. To learn more about Marinade, Visit marinade.finance 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. Okay, two things. First is the DCF piece, then I want to ask about the DeFi piece. So on the DCF piece, you mentioned that the— sort of like the circularity problem, right? Where if you wanted to know what, you know, if you said, okay, there's going to be 1 ETH in staking yield for me next year, I need to know what what the value of that 1 ETH in yield is. And of course, you need to make an assumption about the dollar price there. The core assumption that that makes is the transacting users, their demand is expressed in units of ETH and not dollars. Right. And so if you think about like someone coming on-chain, 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. They, you know, go from their bank account to Coinbase, Coinbase buy ETH, then move on-chain. And now they want to make a Uniswap trade, right? They had $1,000 to start with. And so their demand 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 on-chain. And now I definitely agree that that has not always been the case, right? Rewind to 2021 and basically every chain had this massive wealth effect where everybody was already here. Price ran up 10, 20, 50x. And now you had these insane types of transactions, right? People buying Bored Apes for millions of dollars. And if you asked anybody who spent any time on-chain what they denominated in, the answer was overwhelmingly the native asset, largely ETH. But when I think about the world going forward, I think the wealth effects, right, are pretty muted, right? So like for that to happen again, to get another 50x in Ethereum, you're looking at a multi-trillion-dollar asset. And that's not— I'm not saying it's impossible, but for us to get there 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 nascent this industry is. But if you were to forecast the amount of spend or the REV going forward, To me, you would be expressing that in dollars. Right. That's what users want to transact in, and that's how they're thinking in the price of— right. Because that's sort of like 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 RSOE idea is built on. Right. Because for us, this is really not a psychological point. This is like, what is the ground truth of what's actually happening? And even if they're psychologically thinking in dollars, the reality is that when they transact, ETH, the unit of exchange that is happening here is in the native token. Then maybe more importantly for investors, for investors that buy and hold the token, they're not collecting dollars in dividends or earnings. They are earning a native yield. This model is for investors to basically be able to underwrite the bet they're making and know the bet and make a forward projection. Investors are not earning anything but the native currency. Because that's the case, we need to basically understand what that bet is on a forward basis. I think one of the things that you mentioned earlier, we were talking about, is this an equity? Is it a currency? Is it money? There's this litmus test that I've mentioned before, which is, If one person owns the entire supply of Apple, for example, it doesn't change the value of Apple stock. It's still worth the total value of all future cash flows today. But in the case of an L1, if the entire supply, 100% of the SOL or ETH or AVAX tokens are in a single wallet, whether it's staked or not, that's a pre-launch network. This is where you see Raoul Pal doing the network adoption model. No one can transact on that network unless they have tokens, or unless someone else does and that other person is making a market for me to do that swap because the transaction costs are— the native token is the unit of account and the medium of exchange for that transaction. 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. Then the question is, at what price? Then what's the bet we're making? How does that evolve in the future? Sure, maybe psychologically, logically, people think in dollars, some people think in euros, some people think in yen. But at the end of the day, for investors, 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 for this on-chain economy, the native token is the core medium of exchange. So 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? And then again, bigger picture, when you ask yourself that question, you begin to get into the currency valuation models. There are traditional assets beyond equities in the traditional financial world, and there are people who do traditional valuation on assets beyond equities. In the case of currencies, it's very relative. It's really driven by capital flows. Arthur Hayes wrote this post recently about how capital controls might be used to disincentivize foreign capital, investors from other countries investing in the US, basically taxing those inflows, because it's the inflows that drive US dollar strength. And the goal of the capital controls would be to weaken the US dollar, to disincentivize that. So that's really where we started to get into our, OK, what's the bet we're making? What are we trying to measure here? Where we arrived at is, okay, with RSOV, we're measuring these capital inflows, uh, and specifically we're honing in on these two use cases that are SOV 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 SOL the network, or we're going to bet on AVAX the network, right, these are very specific use cases that are, uh, sort of that, uh, sort of our SOV, you know, like people buying the token and holding the token and we can measure it and we can track it. And it's very core to the network-level bet. So we're betting on people buying the token and using it to stake and earn a native yield. We're betting on people based on the DeFi ecosystem expanding and the native token playing an increasingly significant role in that native DeFi ecosystem.

Right. My point about the dollar demand was not psychological, though, right? If you can say, all right, next year there's going to be $1 billion of transaction demand, then it doesn't matter what the FX rate is to me as an investor, right? Because I can just assume everything— I instantly convert everything to dollars. You know, there's obviously like staking lockup periods that I have to contend with here. But if I know there's going to be $1 billion of transaction demand and I own X% of the network, I know what's coming to me in dollars. And, you know, you might want to discount that a little more heavily if there's an epochal staking period where you can only take out your staking rewards and convert them, etc. But yeah, I think you can, you know, 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 token count is.

No, but sorry, just like 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 drops by 50%, or the blockchain network scales capacity, right? Those are things that change the demand for these transactions. And then for an investor, like—

I don't think the price changes the demand to transact though, right? If I am running a liquidation, the amount of activity fluctuates with market conditions for sure. But the cost of a median transaction shouldn't it? 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 that's for. Dollars, okay, at the current price, but 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 transaction demand that will come through the system.

Yeah. 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 DCF because, you know, like if you like, when Buffett goes to invest in the Japanese auction houses, right? He's short. They'll also hedge the yen because they don't want to take yen risk. They're just buying the compounding activity, which is to say it's very easy to recognize that this is an emerging market currency in the case of L1 tokens or some non-US dollar currency that all this activity is happening in. When I buy, in this case, just like an equity, like a company, I'm earning more of that token. For an investor, even if whatever, you're projecting some dollar-denominated activity, you can project that activity is going to be denominated in dollars, but that doesn't mean it is. 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. Again, the litmus test here really highlights this. None of these L1s can accept transactions if all of the supply is in a single wallet. There has to be a market for trading.

About that though. So let's say like Ethereum tomorrow is like, okay, well, the validator, we're going to enshrine an oracle and validators will accept an equivalent amount of USDC or USDT for their payment.

Let's just pretend there is fundamental. Where do they get the price? Where does that oracle source the price from? Who's making that price?

Right. That's the whole reason why that doesn't exist is total pain in the ass to figure that, that out from an engineering and social standpoint. But let's pretend it did. Like, then it— then does that remove the fact that if validators could take dollar-denominated payments— let's just— that's what—

absolutely. If validators accepted USDC as payment and you value your, your share of the pro— you know, cash flow in US— 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 rata share of dividends. It's a native currency.

All right, I'm going to jump in here. Jonah, you've got this, you've got this metric, right? You've got RSOV. It is 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, these two calculations, right? L1 token stake plus L1 token in DeFi. You're measuring the— 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? Realized value is effectively a rolling cost basis. If you say, like we said at the beginning of this episode, OK, these assets are currencies. They're monies, right? And we know what drives value to money. It's sort of relative capital inflows. It's the ETH-dollar pair is— the strength or weakness of that pair is driven by people selling dollars. 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 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— a lot of this actually, this whole conversation around, um, REV was kicked off with this piece or how to value an L1 token. I mean, we've been talking about it for years, but there was a DBA post that Jon Charbonneau wrote called L1 and L2 Token Value Capture. Dan, I know you and Mike worked on that with Jon, and out of that came— then you had this metric called TEV. It kind of transformed into REV. Tell me about this REV metric that, you know, 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 Jonah would probably say John, 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 accrual based on user activity, right? So the good is block space 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, Jito, or Flashbots. And the point of our review is saying, what are users paying for block space? That's what— that's the number we want to track. 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 the 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's possible to do very easy. It's one division calculation. But the intent of our review is not to be a valuation metric. It can— it can be used for that. 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, 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, the financial health within the network. And again, it's a pretty decent proxy for demand. It's certainly not perfect. 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 it, 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 our— 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. And so it's way more complex than just looking at one metric and saying, all right, this is the one. 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 evaluation metric, you know, go do that. I don't think that's how these things are valued today at all. 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 our— in our SOV, 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. Uh, Phantom wallet, uh, 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 chain, but you're missing two key things. You don't account for store like the store of value premium, I guess we could call it. And this whole currency conversation that we were just having is what— am I right?

Yeah, I think there's an FX component that we have to think about. And then there's, 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, 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 Particularly on a forward basis, there's a bigger picture here with regards to the bet they're making. It's beyond just the value captured by the validators today.

Is it fair to say that it's not REV versus RSOV? Because one is a valuation model or trying to put a valuation model around an L1 token, and one is the demand for transactions on the chain.

Yeah, and I think absolutely. And I think another thing to highlight is—

I agree here completely.

We're not supposed to agree, guys. This is a—

I think another interesting thing to point out, and maybe it gets lost, but the realized— RSOV, I think, in a pretty elegant way captures rev as it compounds over time or as it accrues over time. So the realized value, the cost basis of ETH or SOL staked increases over time if people are paying fees and the validators are just compounding a native asset, right? As those fees accrue to the validators and the validators just compound, compound, compound, the realized value will increase over time. So which is to say, you know, RSOV, uh, like, uh, you know, it counts like it incorporates, uh, REV that's accrued over time. The validators are just selling and it's kind of, you know in one side, out the other, then the realized value obviously is not growing. But if validators are compounding and it's like they're buying and holding this non-native money, this non-government money for a native yield, then the realized value increases just from the fees. Yeah.

I do wonder, okay, so part of this conversation, remember that idea at the very beginning, 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 many different things. And I think you could say there are 3 different things, right? They're capital assets. Uh, you've got the stakers where the stakers and holders are earning income. They are, um, like consumable assets and like, uh, transact— uh, transformable assets, I guess you could say, like that's the gas. Um, and then they store value, which is the monetary premium. And I think, Joni, you're putting more weight on that third bucket. Store of value and the monetary premium, or maybe Dan is putting more weight on the second bucket, which is this consumable and transformable asset. Agree or disagree?

Yeah, I think the main issue with putting all the value in the payments use case is that the cost to transact on these networks goes down, decreases you know, like as the blockchain scale and the blockchain scale, you know, 200%, 300%, 400% year over year or 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 the 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 SOV 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 in 3 years the cost to transact is down 99.9%, then it's not going to be $1 billion, right? Even if more people join the network. So for us, it's really about, okay, are people buying and holding the token? And that's really what we want to measure. That's what we feel like our bet is as a layer 1 token investor.

One interesting caveat there, I think, is the median fee is going to go to zero. Very close and be asymptotic 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 then eventually $99.99 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, but I don't think hotspots are going to go to zero. Right. Anatoly loves talking about this. He 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 value today. And so when you think about like, let's use Solana 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 decide who goes first? You—

it's by people trying to buy the same asset or things like that.

Right.

Contingent state is what they call it. 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 meme coin trading on Solana right now can range from like $0.05 to $0.30 to like close to a dollar depending on the amount of people trying to do the same thing at the same time versus like sending USDC is always a sub-cent 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 that at that one point in time. And so that's the difference there. And so to me, it's like if the price of the native asset 10x, the question is, do those hotspots 10x as well? And that's where I just don't think that's quite true.

I think all those assets paired with SOL, though.

No, I don't. I think again, like, I think the users express their demand in the global reserve currency, which is the dollar, and that there's no need to arbitrage the price of SOL from on-chain pools to CEXs. But that the gap there is just every 400 milliseconds there's an arbitrage opportunity that opens up. And if the price of SOL is 10 $10 or $100. It's just a difference percentage basis between the centralized exchange price and the on-chain price.

Yeah, I think the challenge is— I mean, again, you're talking about— this is always a criticism of the money argument, right? It's very psychological and theoretical and all these things. And so for us, as investors, to underwrite this bet we're making, we want to know what we own and what we're getting paid to own it. 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. If you have demand growth and supply being pretty fixed, that can absolutely affect price. Then what we're getting paid to own is also the native token. If we want to express what the return potential can be in dollar terms, we're not buying this for a 4% yield in dollar terms. That's basically the cost of capital today. We're buying this for big upside returns, for venture-style returns. That's generally what has driven returns historically. I think going forward, it's not the 4% that people are buying cryptocurrencies for. It's the venture-style returns, and it's the forex change.

I wanted to take a moment to tell you about Focal by FalconX, 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 Saylor buy last year? And what is crypto's correlation to traditional markets? Focal pulls data from trusted sources like CoinGecko, Token Terminal, and the tie with enterprise-grade privacy and security. Learn more at askfocal.com or check the link in the show notes. Thanks to Focal for making today's episode possible. Ever wish you could access cash without selling your Bitcoin? Ledn, the global leader in Bitcoin-backed lending, makes that possible. Since 2018, they've issued over $9 billion in loans, and not a single satoshi of client funds has ever been lost. Here's what makes a Ledn loan different. With custody loans, collateral is not lent out to generate interest. No credit checks, funds in less than 12 hours, and no monthly payments. Repay whenever you want with zero penalties. And they don't just talk security, they prove it. Ledn offers proof of reserves reports verified by a top accounting firm every 6 months. Ledn is 100% focused on doing one thing better than anyone else. Else, giving Bitcoin holders a secure, transparent way to unlock liquidity without selling. Click the link in the show notes to find out more. As always, investments in blockchain technology involve risk. Terms and conditions apply.

Dan, how much do you think the monetary premium of, of an L1 token should factor into the valuation?

It's the billion-dollar question, right? I think it's definitely important. I don't agree. I don't disagree at all with Jonah that like that's important. and, 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 I, I think it's definitely important. I think capital flows are super important to track, and I think that's why Arsov 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 track 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. Uh, but in terms of like the valuation side, It's just really hard for me to want to loop that piece in, but I agree it will impact market conditions.

Yeah, I think sometimes when I think in really extreme examples, it helps me simplify a core idea. And so we've acknowledged that this thing is money, right? And so I think it's generally accepted that the value of money long term is really driven by the capital inflows and outflows, right? It doesn't have intrinsic value like a company because 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, I guess too, like None of that is intrinsically valuable unless people are buying our poker chips. In effect, the bet we're making is that more people are going to come in and buy and hold this asset. I think that's actually a pretty exciting opportunity. One of the reasons we're excited about this is because that's a really big TAM. When we look at these assets, these cryptocurrencies, they do represent non-government money, A whole class of them do pay native yield. Right. But the government money— government monies are having their own sort of crises these days. And the drivers of whatever that crises are seem to be accelerating, not decelerating. And so it's taken 15, 20 years. But what we're seeing in sort of a mainstream way is people seeing the risk that those changes happening in government money world And they're saying, man, I'm going to look for non-government money or non-government monies or other store of value assets that don't have those risks. And so people are buying gold and real estate and increasingly Bitcoin. I think people are starting with Bitcoin because they see, OK, this asset changes the least. But if you look at the L1 token landscape overall, all of these assets— we said they're money. They do have a lot of these non-sovereign attributes that Bitcoin also has. There's a few other things, 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-sovereign assets. They're relatively supply constrained. They pay native yield and all these other things. But 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 the same thing that is driving demand for Bitcoin today, which is an alternative to government money in terms of storing my wealth through time, you can look at these other layer 1 assets and say, I think for good reason, we can discount the payments as a value driver because, again, this blockchain scaling makes them so deflationary. But the SoV use case makes sense and we can measure it. That's where we get into this RSoV. Okay.

Jonah, let me ask you this question then. Correlation, not causation, obviously. And, you know, many, many people make that, get that wrong, obviously. But if you look at the REV of Ethereum and Solana, REV of Ethereum kind of peaks when Ethereum's price peaks and then goes down, price goes down. Solana REV goes up, Solana price goes up. If you look at the— so you could say correlation. I think I've seen a John Chard post that says this too. If you look at the 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 has been, uh, I would say grinding up into 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 premiums, which is the difference between the RSOV total and the market cap. But yeah, I think if you look at these RSOV growth rates and total values as well, they also really closely correlate with the peak. And maybe the LST farming season that happened in 2024, with Ethereum is a really interesting case study because in many senses, yes, the yields, quote unquote, the airdrops, the emissions is not sustainable. That's not the real yield of Ethereum. But what we saw is effectively a period of time when the yields available to people who bought and held Ethereum was really, really high because of all these airdrops. And what we saw was a huge amount of inflows into Ethereum, particularly in DeFi. 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 Rev is going to increase over time, that's really a proxy for real yield. 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, express that Rev in monetary terms. Look at it 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, like, can you explain to me, like, what does that tell me, right? If it— let's say if something was at 1.5 or 2x RSOV, 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. Because realized value is like a cost basis metric, we're just measuring the rolling cost basis. If the cost basis rises, it means necessarily people are selling dollars to buy and hold this asset. Again, specifically, we're looking at the cost basis of these two, of staking and of DeFi deposits, and vice versa. If the cost basis shrinks, it means this thing is not attracting— the inflows are negative. If it's flat, it means it's not attracting any inflows, and those are flat. Net flows are flat.

Got you. Okay. And then on the inflows piece, so you're using like this aggregate sum, right? Like the— it's like a rolling cost basis, right? And instead of— if you think about like, I don't know, let's say flows into an ETF, for example, right? You have like a single day 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 price impact, right? So let's say if I staked my ETH at $1,000 and then today the price is at $2,500 and then I unstaked, like, wouldn't that actually create this negative inflow there? Because just for me specifically, I deposited $1,000, inflows went up $1,000, and then I withdrew the same 1 ETH, but now for $2,500.

Now 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 what happened there is when you put your money into Ethereum or SOL or whatever, this is how much money you put in. When you took it out, you took out a different amount of money. And that's because the aggregate network value changed. And so that's why it works that way. It is a rolling cost basis metric. If you're pulling money out of the network when the network is revalued higher, you're pulling more money out, it's counted as such. But yeah, I think there's also things at the same time, like there's individual ETF flows or HODL waves in terms of measuring the length of time people are holding. There are other things I think it would be great to explore in terms of optimizing the model here. And one of our challenges obviously is data, and we're looking for providers and like yourselves who can help increase the signal here and make the data better. But generally, I think if we're all aligned on what this asset is and generally the direction that we all should be thinking in terms of how to value this asset, because what the bet we're making is as investors, then we could say, OK, this is our starting point. That was really our goal. 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 value left in the RSOV metric, right? That $2,000 difference would still remain in this value even though I withdrew withdrew the 1 ETH. So that's one piece that I was thinking through. And then the other question I had on this, it's kind of adjacent to the— so you count staking and DeFi, super important activities, but you don't count holding in this, which I think is a little bit hard to do. But like, right, like I could just be holding for a long period of time and then stake or and then posit 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 of 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 on-chain and verifiable? And are the things that we're measuring really grounded or really rooted in a core use case of this native token? Because we want to be very specific with our model in terms of making sure it's grounded in the bet we're making, the core use case, right? We're betting on the specific use case here, and then we can model that out. And so in the case of stake staking and DeFi deposits, they're very fundamental use cases. It's very clear. We can measure them. And over time, if you look over a long period of time, the bet is, OK, trillions of dollars is going to come into the staking contract and be used as collateral or liquidity in DeFi. And that's really the core bet we're making. And that's how these things go up in value. 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 that token's 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 trad fi, 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 PE is 15, if something's— you can actually start to end up, 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 market cap divided by RSOV. And so that says Ethereum is trading at roughly 2, 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 that can be optimized as part of the public discussion and other people improving the framework here. But, um, and you can select different tokens. We've got— I think we got, you know, 10 different tokens here. But, um, 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, uh, 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 change in the realized value, the inflows that happen in the forward basis should have a higher price impact. There's less noise in my bet. I know precisely what my bet is, and as these metrics change, it has a much more specific impact, like a direct impact. There's less growth premium already baked in. But you could also look at it in terms of what the right multiple is. You could look at the annualized change in this RSOV. Instead of just dividing the market cap by the RSOV total, you could look at, okay, what's the annualized, on whatever time frame, change in this RSOV and say, okay, this thing is growing super fast. I'm willing to pay a slightly higher multiple, whatever. This thing is growing $50 billion a year in terms of RSOV, or that's what I project. 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? That's up to every investor. Up to every analyst.

Yeah. Dan, we got to have an audience question here for you. This is from Tom Dunleavy, who was on the podcast the other day. I said, let me share— share the screen. I said, please get into the math on why REV would ever spit out reasonable valuations if L1s actually do have sub-$0.01 transaction fees, even if we assume tradfi-like HFT profits 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, and B, if we got there, the fees would be meaningful enough to justify today's valuation. Hint: they would not. 10,000 TPS every second of the day for a year at 1 penny is $3 billion annually. We need new ways to value these assets like RSV, RSV, 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 stake 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 our EV or just broadly on-chain activity today on a payments network, right? Trading assets, DeFi activities, any of the— any of these things, right? Lending. So that, like, if you look at payments as a percentage, payment transactions as a percentage of total transactions today, I don't know what the numbers are. So, you know, source, I'm making this up, but I would be pretty shocked if that number was north of 10%. And candidly, that feels a little bit high. So that means you're just like only zooming in on this one small piece. And so yeah, if median fees go to zero, fees will be driven by priority access to state. And I think a lot of the pushback here is that, well, the apps see this and the apps want to capture this for themselves. For sure. 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 shared state chain. right? A large L1. And that stuff gets ignored, right? So if the, you know, if Arsov's the perfect metric, let's say, and these things do have this awesome money-like property, you're going to want it to be as close to that money as possible. Or there's like more realistic— not— that's not what I meant. Like more tangible, let's say, qualities of these chains, right? You have immediate integration with centralized exchanges, which matters a ton for putting users on your chain. Same with wallets. The overhead of a wallet integrating you that people actually use is massive. 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. Or honestly, as somebody who spends all day in data, you launch a new chain and you don't get indexed by a top 3 provider, your data doesn't exist in reality, right? Or it's going to be someone like us who pays a lot of money on the backend to go make this happen and bring it to life, right? It's not like 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. Elon was on, uh, the NewTek, uh, podcast, uh, live show, really. I'm gonna butcher the, the 4 letters here, but was it TBPN or something like this? Um, the Elon, the co-founder of PumpFun, 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. It's huge. 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, TL;DR: 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 in terms of the real yield available to stakers on Ethereum. The response from the foundation has been to pivot the roadmap to reintegrate these L2s to the base rollups or whatever, where the base layer is more active in the actual sequencing of transactions. 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 supply of DA scales as demand scales, but you can't— for contentious state, there is no way to scale block-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 state. When they can make money doing it. And so there is a durable driver of real yield there. And 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. If there's no real yield, people are just going to go buy Bitcoin, because all these other L1 networks have additional risks relative— yeah, there's additional risks relative to Bitcoin. They change more. More mutable. Devs change things, supply changes. They also can offer a higher reward, namely in real yield. And so the way we look at it is the market basically buying this yield is sort of expressing the market-wide demand basically for this real yield. It's pricing that risk relative to Bitcoin and relative to each other. I think at minimum, there has to be some level of real yield, certainly today, where these tokens do present a little bit more risk relative to Bitcoin. They've got to offer some upside as well.

Yeah, I totally agree on the real yield piece as well. I also think what's super interesting about the market today are there are people or the teams building chains that are thinking very deeply about the fact that this is true and there's 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 if you have any updated views on RSOV after hearing kind of all of Jonah's points.

Yeah, look, I definitely didn't come in thinking that 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 and I agree that it like REV kind of sits within the broader bubble of the RSOV metric. I think that makes sense to me. Yeah, I think the point where Jonah and I probably just disagree with is I don't think that me as a user has 1 ETH of transaction demand or 1 goal of transaction demand, I think I have $1,000 of transaction demand. Um, and so that to me makes the DCF possible. Now, is that where things are valued today? Again, no. I think, uh, you know, this is a very nascent industry. And think about like an AI startup or something. Like, obviously those are in a similar, similar bucket in terms of nascency, 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 completely agree, there is 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 trade, 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 fucking cool to me. So yeah, that's the TL;DR. I just think the one point of contention here is around what users think and when they want to transact. Is it at 1 ETH, 1 unit, or is it, you know, some form of dollars, dollar-denominated demand? And then, yeah, I just need to think deeper about the actual methodology, right? Like the pieces about the time components, like in theory, RSOV could go negative —right? If you had like a very large, like I'd 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— and because users, even if they think in dollars, at some point, they have to swap into the native token to pay for those fees. You have to make some forex assumption if you're projecting what the future fees paid are going to be in dollar terms. RSOV is an attempt at providing a framework 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 is incomplete. Then for investors, you ask the question, actually, that forex rate is my bet at an even more fundamental level. That's really what my bet is. I hear you on the psychological point, but from my perspective, for investors where we want to understand what exactly is the bet we're making here, when we look at everything at the ground level and understand what we're being paid in, it's really about are people buying and holding this token long-term. When you model that forward, I think, for us, that's how we think about the bet and for all tokens. Yeah.

Joan and Dan, good conversation. Awesome. Yeah, tons of fun.

Appreciate you having us on. And Jonah, it was a pleasure to meet, man.

Thank you for having me, guys. It's great to meet you guys. Yeah, likewise. Thanks all.