The best products do not need to rely on Tokens, and the best Tokens do not need to rely on products.
Author: sam.frax, Founder of Frax Finance
Translation: Deep Tide TechFlow
Recently, there has been much discussion about how to evaluate different crypto assets, especially in the context of the AI and memecoin craze. However, I want to explain the correct way to assess the most important large crypto assets: L1 Tokens versus "Type 2" Tokens, which include dapp/L2/"equity" Tokens.
L1 Tokens have a mysterious "L1 premium" that has yet to be systematically explained. Many believe it is a speculative Ponzi scheme, but the truth is quite the opposite. The L1 premium is more fundamental than most people realize.
L1 assets (such as ETH, SOL, NEAR, TRX, etc.) are "sovereign scarce assets" in a chain economy. They become the most liquid assets in that economy. Other projects accumulate these assets, use them to build infrastructure/DeFi, and incentivize liquidity through them, making them safe-haven assets in times of crisis.
When this happens, these assets become "yield-bearing" assets by distributing Tokens from other projects to holders of scarce assets through liquidity provision, ICOs, DeFi, airdrops, and other innovative means. @DefiIgnas provides a good explanation of this:
L1 is seen as a productive asset: you can use them to receive airdrops from the ecosystem, earn rewards through staking, and as the ecosystem continues to expand, their prices will rise accordingly.
Moreover, if the airdrop gains from holding ETH, SOL, NEAR, etc., are taken into account, the overall performance of these assets will outperform simple spot prices.
In a sovereign economy (chain), dapp Tokens represent the actual labor and GDP created by people in that economy. Scarce L1 assets earn returns through people's labor in building the digital economy (chain).
This is why "Type 2 Tokens," namely dapp/L2 Tokens, are often compared to "equity" and are valued using price-to-earnings (P/E) and discounted cash flow (DCF) models, while fundamental analysts remain puzzled by the mysterious "L1 premium." In fact, this is not necessarily an L1 premium, but rather a premium for assets in a sovereign economy.
Many may know that I do not agree with ETH opinion leaders like @justindrake, who convey messages to the market hoping to value ETH assets as a business through the sale of block space and data blocks. They are transforming $ETH into a "Type 2" Token and have achieved some success (though I regret this):
L2 Tokens are generally not sovereign scarce assets in their digital economy, although they possess some elements, such as blockchain and active developers and users. They belong to "Type 2" Tokens and are typically valued using P/E and DCF models. In fact, some L2s do not even have their own Tokens, such as @base.
$SOL performs well not because of an increase in TVL (total value locked) or because people expect a large amount of SOL to be burned or generate income in a future year. Although $ETH has generated billions in revenue and burns, its performance is not as good as SOL.
The rise of $SOL is because the sovereign economy of Solana needs it in liquidity pools, memecoin trading, and DeFi , and you also need it to participate in the operation of the Solana network.
People are actively building projects, converting their labor into Tokens (as Type 2, i.e., dapp/PE Tokens), to issue interest and rewards to $SOL holders, stakers, and liquidity providers. Meanwhile, ETH opinion leaders are trying to transform $ETH into a DCF equity Token, with little value beyond cash flows obtained from selling products through the Ethereum Foundation (EF).
As @MustStopMurad elegantly pointed out, the best products do not need to rely on Tokens, and the best Tokens do not need to rely on products. Sovereign scarce assets (Type 1/L1 Tokens) can be seen as memecoins, a serious meme that does not contain pictures of cats and dogs (those that exist in digital nations).
@balajis has previously explored the concept of network nations in detail. The power of this meme is finally beginning to be understood. Type 1 (L1) and Type 2 (PE/equity/labor/L2) Tokens are fundamentally different. Communities can transform one type of Token into another, but this takes a long time.
Most importantly: gas fees and staking security are technical signals representing social consensus on sovereign scarce assets, rather than characteristics that inherently bring great value. People are finally beginning to realize this, including the renowned @danrobinson.
Therefore, this is not the so-called "L1 premium," but a sovereign asset of a digital nation, namely Type 1 Tokens. It can be said that this is the most powerful and fundamental meme, which does not have funny pictures but is economically real and highly influential in meme culture. My point is: there are only these two types of Tokens.
Next month, @fraxfinance will announce its most significant announcement ever, our "2030 Vision Roadmap." One of the most important aspects is how to transform a Type 2/L2/governance/PE Token into a sovereign asset. I expect many "Type 2" Tokens to take this as guidance and follow suit.
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