The Layer 1 Fallacy: Chasing Premium Without Substance

1 week ago

In fiscal markets, startups person agelong sought to marketplace themselves arsenic "tech firms" hoping investors volition worth them with tech-company multiples. And often, they bash — astatine slightest for a while.

Traditional institutions learned this the hard way. Throughout the 2010s, galore corporations scrambled to reposition themselves arsenic exertion companies. Banks, outgo processors and retailers began calling themselves fintechs oregon information businesses. But fewer earned the valuation multiples of existent tech firms — due to the fact that the fundamentals seldom matched the narrative.

WeWork was among the astir infamous examples: a existent property institution dressed up arsenic a tech level that yet collapsed nether the value of its ain illusion. In fiscal services, Goldman Sachs launched Marcus successful 2016 arsenic a digital-first level to rival user fintechs. Despite aboriginal traction, the inaugural was scaled backmost successful 2023 aft persistent profitability issues.

JPMorgan famously declared itself “a exertion institution with a banking license,” portion BBVA and Wells Fargo invested heavy successful integer transformation. Yet fewer of these efforts produced platform-level economics. Today, there’s a graveyard of specified firm tech delusions — a wide reminder that nary magnitude of branding tin override the structural constraints of capital-intensive oregon regulated concern models.

Crypto is present confronting a akin individuality crisis. DeFi protocols privation to beryllium valued similar Layer 1s. Real-world plus (RWA) dApps are presenting themselves arsenic sovereign networks. Everyone is chasing the Layer 1 “technology premium.”

And to beryllium just — that premium is real. Layer 1 networks similar Ethereum, Solana and BNB consistently bid higher valuation multiples, comparative to metrics similar Total Value Locked (TVL) and interest generation. They payment from a broader marketplace communicative — 1 that rewards infrastructure implicit applications, and platforms implicit products.

This premium holds adjacent erstwhile controlling for fundamentals. Many DeFi protocols show beardown TVL oregon interest generation, yet inactive conflict to execute comparable marketplace capitalizations. In contrast, Layer 1s pull aboriginal users done validator incentives and autochthonal token economics, past grow into developer ecosystems and composable applications.

Ultimately, this premium reflects Layer 1s’ capableness for wide autochthonal token utility, ecosystem coordination and semipermanent extensibility. Furthermore, arsenic interest measurement grows, these networks often spot disproportionate increases successful marketplace capitalization — a motion that investors are pricing successful not conscionable existent usage, but aboriginal imaginable and compounding web effects.

This layered flywheel, moving from infrastructure adoption to ecosystem growth, helps explicate wherefore Layer 1s consistently bid higher valuations than dApps, adjacent erstwhile underlying show metrics look similar.

This mirrors however equity markets separate platforms from products. Infrastructure companies similar AWS, Microsoft Azure, Apple’s App Store oregon Meta’s developer ecosystem are much than work providers — they are ecosystems. They alteration thousands of developers and businesses to build, standard and interact. Investors delegate higher multiples not conscionable for contiguous revenues, but for the imaginable to enactment emergent usage cases, web effects and economies of scale. By contrast, adjacent highly profitable SaaS tools oregon niche services seldom pull the aforesaid valuation premium — their maturation is constrained by constricted API composability and constrictive utility.

The aforesaid signifier is present playing retired among ample connection exemplary (LLM) providers. Most are racing to presumption themselves not arsenic chatbots, but arsenic foundational infrastructure for AI applications. Everyone wants to beryllium AWS — not Mailchimp.

Layer 1s successful crypto travel a akin logic. They’re not conscionable blockchains; they’re coordination layers for decentralized computation and authorities synchronization. They enactment a wide scope of composable applications and assets. Their autochthonal tokens accrue worth done base-layer activity: state fees, staking, MEV and more. Crucially, these tokens besides service arsenic mechanisms to incentivize developers and users. Layer 1s payment from self-reinforcing loops — betwixt users, builders, liquidity and token request — and they enactment some vertical and horizontal scaling crossed sectors. Read the afloat nonfiction here.

Most protocols, by contrast, are not infrastructure. They are single-purpose products. So adding a validator acceptable doesn’t marque them Layer 1s — it simply dresses up a merchandise successful infrastructure optics to warrant a higher valuation.

This is wherever the appchain inclination enters the picture. Appchains harvester application, protocol logic and a colony furniture into a vertically integrated stack. They committedness amended interest capture, idiosyncratic acquisition and “sovereignty.” In a fewer cases — similar Hyperliquid — they deliver. By controlling the afloat stack, Hyperliquid has achieved accelerated execution, fantabulous UX and meaningful interest procreation — each without relying connected token incentives. Developers tin adjacent deploy dApps connected its underlying Layer 1, leveraging its high-performance decentralized speech infrastructure. While its scope remains narrow, it offers a glimpse of immoderate level of broader scaling potential.

But astir appchains are simply protocols trying to rebrand, with small usage and nary ecosystem depth. They’re warring a two-front war: trying to physique some infrastructure and a merchandise simultaneously, often without the superior oregon squad to bash either well. The effect is simply a blurry hybrid — not rather a performant Layer 1, and not a category-defining dApp.

We’ve seen this before. A robo-advisor with a slick UI was inactive a wealthiness manager. A slope with unfastened APIs was inactive a balance-sheet business. A coworking institution with a polished app was inactive conscionable renting bureau space. Eventually, the hype wears disconnected — and the marketplace reprices accordingly.

RWA protocols are present falling into the aforesaid trap. Many are positioning themselves arsenic infrastructure for tokenized concern — but without meaningful differentiation from existing Layer 1s, oregon sustainable idiosyncratic adoption. At best, they are vertically integrated products with nary compelling request for a sovereign colony layer. Worse, astir haven’t achieved product-market acceptable successful their halfway usage case. They bolt connected infrastructure and thin into inflated narratives, hoping to warrant valuations their economics can’t support.

So what’s the way forward?

The reply isn’t to fake infrastructure status. It’s to ain your relation arsenic a merchandise oregon work — and execute it exceptionally well. If your protocol solves a existent occupation and drives meaningful TVL growth, that’s a beardown foundation. But TVL unsocial won’t marque you a palmy appchain.

What matters astir is existent economical activity: TVL that drives sustainable interest generation, idiosyncratic retention and wide worth accrual to the autochthonal token. In addition, if developers physique connected your protocol due to the fact that it’s genuinely utile — not due to the fact that it claims to beryllium infrastructure — the marketplace volition reward you. Platform presumption is earned, not claimed.

Some DeFi protocols — similar Maker/Sky and Uniswap — are pursuing this path. They’re evolving toward appchain-style models that amended scalability and cross-network access. But they’re doing truthful from a presumption of strength: with established ecosystems, wide monetization and product-market fit.

In contrast, the emerging RWA abstraction has yet to show durable traction. Nearly each RWA protocol oregon centralized work is rushing to motorboat an appchain — often backed by fragile oregon untested economics. As with starring DeFi protocols transitioning towards an appchain model, the champion way guardant for RWA protocols is to archetypal leverage existing Layer 1 ecosystems, physique idiosyncratic and developer traction that leads to TVL growth, show sustainable interest procreation and lone past germinate toward an appchain infrastructure exemplary — with a wide intent and strategy.

Therefore, successful the lawsuit of an appchain, the inferior and economics of the underlying exertion indispensable travel first. Only erstwhile these are proven does a modulation to a sovereign Layer 1 go viable. This stands successful opposition to the maturation trajectory of general-purpose Layer 1s, which tin initially prioritize gathering a validator and trader ecosystem. Early interest procreation is driven by autochthonal token transactions, and implicit time, transverse marketplace scaling broadens the web to see developers and extremity users — yet driving TVL maturation and diversified interest streams.

As crypto matures, the fog of storytelling is lifting, and investors are becoming much discerning. Buzzwords similar “appchain” and “Layer 1” nary longer bid attraction connected their own. Without a wide worth proposition, sustainable token economics and a well-defined strategical trajectory, protocols deficiency the foundational elements required for immoderate credible modulation to existent infrastructure.

What crypto needs — particularly successful the RWA assemblage — isn’t much Layer 1s. It needs amended products. And the marketplace volition reward those who absorption connected gathering precisely that.