Author: David Phelps

Translation: Shan Oppa, Golden Finance

The "Fat Protocol Thesis" has caused significant harm to this field, setting us back several years.

In fact, I really like the "Fat Protocol Thesis," and if you haven't read it yet, I strongly recommend you do.

The simple version of this theory is that protocols (like blockchains) will capture more value than the applications built on top of them. Why? Partly because the moats of crypto applications are weak (they are easily replicated). But the main reason is that the success of applications will drive users to accumulate protocol tokens for use, thereby creating network effects for the blockchain, as each application will drive up the token price of the chain it is built on.

In 2016, this was a highly forward-looking argument. I would like to add my perspective on why protocols can have greater value than applications: protocol tokens are akin to the national currency of a digital nation, serving not only as a medium of exchange but also representing a legal order (smart contracts) that ensures the validity of transactions, while collecting "taxes" for the ecosystem. Applications, on the other hand, are typically just ordinary business entities generating revenue.

Of course, the market value of a currency is often highly correlated with the GDP generated by everything built on it, which is why it is often much larger than the market value of a single company. This is why I believe protocols are generally more valuable than applications.

This is the crux of the issue. The past decade has validated the "Fat Protocol Thesis" in many ways, culminating in the past year. Everyone knows that the market cap of chains has crushed that of applications. Protocols often manage to raise hundreds of millions in valuation without a product, while applications with dedicated users struggle to secure funding.

To understand the extent to which the market recognizes the "Fat Protocol Thesis"—even to an unreasonable degree—just look at the recent valuations of highly interchangeable, random Layer 2 (L2) chains.

These L2s do not meet any of the requirements of the "Fat Protocol Thesis" because their tokens are not even necessary for transactions—in fact, these L2s may not need tokens at all. But in the crypto space, narratives often outweigh logic, and many of these L2s easily reached nine-figure valuations, while applications have struggled to achieve similar valuations.

(Of course, I believe some L2s will genuinely be valuable, like @mega_eth and @movementlabsxyz, but that's another topic.)

Regarding the "chain supremacy" issue, we have heard many times: a blockchain is only valuable when there are valuable applications built on it. The chains themselves would say the same, emphasizing their significant performance improvements. "We certainly need to expand block space," they say, "because the next top application will require it." But in a world where applications have failed for a whole decade, very few people want to build or fund more applications.

This is interesting, but unfortunately, the logic of "we need to fund applications to make blockchains successful" will never be sufficient to convince venture capitalists to invest in an entire category they believe will fail. The idea that applications will help blockchains become valuable is appealing, but if no one believes the applications themselves are valuable, that argument is not persuasive enough.

Therefore, I would like to propose a "Fat App Thesis." I want to point out that throughout the history of the internet, there has been a viewpoint that has been true to the point of being somewhat boring: in fact, most of the value in today's crypto space lies in applications.

There are three reasons, in increasing order of importance:

The first and most speculative reason is simply historical cycles. Applications are severely undervalued, while protocols are severely overvalued, for the reasons mentioned above. The internet tends to oscillate between decades of infrastructure and applications, and we are at the tail end of a massive infrastructure boom, during which we created extraordinary technologies that can finally operate (which was not the case two years ago). Now is the time for applications to shine; they have never been as undervalued as they are now.

The second, more compelling reason is that since the "Fat Protocol Thesis" was proposed in 2016, applications and protocols have swapped places. Back then, applications were mostly interchangeable forks of each other, while chains were walled gardens with significant liquidity moats. But the situation has changed dramatically. Nowadays, applications cannot fully replicate each other (e.g., Sushiswap) because their true moat is their users.

At the same time, chains do not even need much liquidity to support future social applications unless they are targeting DeFi applications that require liquidity (like @berachain). More importantly, with the emergence of cross-chain solutions and chain abstraction, users can seamlessly use applications and bridge across ecosystems without knowing the chain they are using, and liquidity as a moat for most chains is collapsing. Today, chains are largely interchangeable—not applications.

But this leads to the third and most important reason:

When liquidity is no longer a moat, users become the moat.

Users will gather where other users are. This is why ultimately only a few applications will prevail—because users will ultimately attract each other to a few unique internet "cities."

This is also why I suspect that today (both in and out of crypto) people are so pessimistic about applications: a few applications won a decade ago, and since then, it has been difficult to compete for their users' attention. Frankly, constrained by the limitations of Web2—especially app store fees, closed APIs, and the difficulty of spending money—it's hard for anyone to propose new application ideas.

However, on-chain technology makes entirely new application experiences possible, bringing unprecedented economic and reputational upside: they eliminate app store fees, open up public blockchain APIs, and make it easy for users to spend and save money. So this is my theory. I believe some of these applications will also prevail. As internet history consistently shows, they will become "super applications," occupying most of the block space.

I could be wrong—very wrong. This era may be different from the past. We might see a flourishing of millions of mini-applications, just like all the applications on Telegram, and I would be very happy about that.

But I suspect we are in a brief application era because the design space for new applications has only just opened up in the past two years—and those crypto applications that are entirely built on the premise of "token price appreciation" will ultimately collapse as "token prices fall." We don't talk about this enough, but all signs indicate that this era is coming to an end. The real excitement of crypto applications today lies in: the next generation of prediction markets, competitions, NFC chips, DePIN, and even e-cigarettes, no longer relying on token price appreciation as a use case. For the first time, crypto is a means, not an end.

What I mean is that applications can actually win in the long term and start to occupy all the block space we have been generating for years. So what happens next? These applications can make innovative moves. They can return funds to users instead of the Apple App Store to incentivize their growth. They can generate revenue from every click. Ultimately, they can generate massive revenue, of which only a small portion will flow to the chain.

I have previously stated that chains do not need massive revenue to achieve high valuations because they should be valued based on something akin to GDP. But when most GDP is generated by a few applications, we should ask a question: who is truly the "fattest"? Is it still the chain? Or is it more likely the applications?

Finally, I want to say that I am not pessimistic about chains—not at all. Many chains are not interchangeable, due to their unique virtual machines (VMs) or opcodes (like @solana, @irysxyz, @movementlabsxyz, @eclipsefnd), native incentive mechanisms (like @berachain), high performance in familiar VMs (like @megaeth, @monad_xyz), or specific permissioned implementations (like @repyhlabs, @celestiaorg). Applications built on these chains can only be realized on these chains. Ultimately, even if only a few applications win market share, investing in chains remains the best way to invest in these applications.

We like to think there is a war between infrastructure and applications as they compete for private market funding. But in reality, there is no real value war between the two—they complement each other and cannot survive independently. Moreover, I suspect that most applications will operate like protocols, becoming the foundation for others to build upon.

However, despite this, we not only act as if there is a war, but we also act as if infrastructure has already won. We are realizing that this is fatal for infrastructure. But we need to recognize that this is also a huge missed opportunity.

The next wave of major value will flow to applications, and in this ecosystem, very few are willing to take the risk to try to seize it.

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