@mobitoro ᛤ

How much should a Layer-1 be worth relative to an app that's built on top of it? I believe this is the most important question in crypto right now, and one that will decide the ultimate fates of Ethereum, Solana, and every other blockchain on the market today. Yet I don't see many people talking about it. What should the layer-1 premium be and why? 🧵 Right now, I think it's easy to dismiss layer-1s as a commodity product that is overvalued by the market. The reason is that apps built on blockchains can theoretically "swap out" what chain they're using to minimize costs. For example, an app can theoretically move to whatever the lowest-cost blockchain is in order to power its features. And apps like Focus even build cross-chain features in from day one to minimize friction for users coming from other chains (it even supports BTC). But what determines how commoditized blockchains will be in practice? I think the switching costs boil down to three categories of friction: 1) moving assets, 2) moving liquidity, and 3) moving user data. And these frictions are heavily affected by whether an app allows users to self-custody or not. Let me explain... When you want to move a user from one blockchain to another, the first question is whether your app does self-custody: I.e. whether the user controls their assets or the APP controls their assets. An exchange like Coinbase is custodial (meaning the operators of the exchange control users' assets) while an app like Focus is non-custodial (meaning the user's assets and account are wholly controlled by the user themselves). What are the implications of this? For a custodial app like Coinbase, they are able to achieve virtually "frictionless" switching between chains. If tomorrow they wanted to convert all customers' USDC from Ethereum to Solana, they could do it (and Binance even went so far as to convert all stablecoins from other chains to BUSD on Binance Chain under the hood). Cases like these make it understandable to assume that the layer-1 premium will be small. After all, why would Coinibase nudge users to anything but the lowest-cost blockchain in the long run? But where things get more complex is when non-custodial apps enter the picture. With an app like Focus, all of your assets and content are stored directly on-chain. If you make a post on Focus, the content of that post is stored on the DeSo blockchain. And if you place an order on Focus (or another DeSo app like Openfund), then that order is actually stored directly on the DeSo blockchain as well. The same goes for other self-custody apps like Uniswap or Raydium on Solana. This is where it's important to consider the three categories I mentioned previously: 1) assets, 2) liquidity, and 3) user data. When an app that is self-custody wants to move users to another chain, it requires an onerous opt-in from the user because you literally need them to sign a transaction that moves their money from one place to another. You can't do it "under the hood" like Coinbase can, and that's kind of the point: Your money belongs to YOU, not the app that you're using. But moving a user's assets is actually the easiest thing to do because it's a single-player decision. A user can switch from using USDC-ETH to using USDC-SOL or even USDC-DESO without that much of a hassle. Where things get more complex is actually with liquidity and user data (the other categories). It's one thing to move a user's assets to another chain but another thing entirely to move *liquidity* to another chain. What do I mean by liquidity? Well, consider an on-chain order-book like the DeSo DEX that powers Openfund (but you can also consider liquidity pools like Uniswap or Raydium). If there's millions of dollars in resting orders on a DEX, moving a user to another chain makes it much more onerous to trade because you have to move them BACK to the high-liquidity chain in order to execute all of their future orders. You can do it, but guess what: You're going to have to pay the toll on the high-liquidity chain no matter what (the network transaction fee), meaning that liquidity yields pricing power. What's more, having liquidity on your chain results in repeated transactions, one for every trade the user wants to do over their lifetime, vs a single-transaction single-player switching like moving assets gives you. How powerful is the "moat" provided by liquidity on your chain? It actually depends on what assets we're talking about. For major assets with lots of liquidity across a lot of venues like BTC, ETH, SOL, etc... I think reasonably strong but it's important to note that it's most likely not a "winner take all" dynamic, but rather a "split" dynamic. Chains above a certain threshold of liquidity, enough to get within a few basis points of spread of each other for such assets, will likely be somewhat inter-changable, though still hold pricing power in proportion to their share of the market. Where things get really interesting, though, is on longer-tail assets such as meme tokens or, eventually, wrapped securities on-chain. If a chain is the exclusive originator of a token, it's highly likely that the liquidity dynamics will switch from a split to winner-take-all. For example, if you launch your meme token on Focus or on PumpFun, it's highly unlikely that there will be a lot of liquidity on chains other than the original "issuing" chain. In such cases, the "pricing power" a blockchain has switches more to a winner-take-all dynamic rather than a split in my view. Lastly, I want to talk about a category of friction that hasn't really shown up in crypto yet, which is "user data" such as a user's identity or a user's on-chain content (like on a decentralized social network like DeSo). When it comes to content, I believe blockchains have much more competition from centralized players than they do with regard to liquidity. Blockchains offer permissionless access to assets, as well as the ability to issue your own assets (eg meme tokens), which gives DEX'es a major advantage over centralized exchanges. However, no such advantage exists when comparing a decentralized social network to a centralized one (they are effectively substitutes except for the fact that one is non-custodial and can't censor your content). Nevertheless, it is important to note that if a decentralized social network like DeSo were to gain traction, then I believe it would have the ultimate pricing power via its content. This is because when you make a post on a blockchain like DeSo, it is "fanned out" to all of the apps built on DeSo, meaning your reach is maximized from posting to the chain with the highest content liquidity. You will always post to all chains to maximize reach, but the toll charged by them will likely vary more like a winner take all rather than a split due to the highest coverage of the "dominant" content chain. So where does that put the layer-1 premium? Again, right now layer-1 network fees are really cheap because everyone is in a cutthroat battle to gain market share, and so it's easy to dismiss all layer-1s as having "low revenue potential." But ignoring the underlying power dynamics of the chains leads to the incorrect long-term assumption that they will be worthless, rather than have potentially-significant pricing power due to 1) liquidity aggregation and 2) content aggregation. Similar to saying Amazon is worthless because it's "not profitable" in 2005. As such, I believe focusing on the long-term power dynamics yields a different conclusion, which is that layer-1s with significant liquidity (both asset and content liquidity) should be valued at a significant premium to their current fees, and possibly even in proportion to the revenue made by apps built on top of them. I have a lot more to say here. I'm writing this post stream of consciousness (didn't even reread it because too busy). I will probably just record a long video about it all. But these are my raw thoughts in response to a question I've been getting.

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