Author: sam.frax, Founder of Frax Finance
Compiled by: TechFlow
There’s been a lot of discussion lately about how to value different crypto assets, especially in the context of the AI and memecoin craze, but I wanted to explain the correct way to value the most important large-cap crypto assets: L1 tokens vs. “Type 2” dapp/L2/”equity” tokens.
L1 Token has a mysterious "L1 premium" that has not yet been systematically explained. Many people think it is a speculative Ponzi scheme, but the opposite is true. 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 will accumulate these assets, use them to build infrastructure/DeFi, and use them to incentivize liquidity, making them safe-haven assets in crises.
When this happens, these assets become “interest-bearing” assets by issuing tokens of other projects to holders of scarce assets through liquidity provision, ICOs, DeFi, airdrops, and other innovative means. @DefiIgnas has a good explanation for this:
L1s are considered productive assets: you can use them to receive ecosystem airdrops, earn rewards through staking, and their price will increase as the ecosystem continues to expand.
In addition, if the airdrop income obtained from holding ETH, SOL, NEAR, etc. is taken into account, the overall performance of these assets will be better than the simple spot price.
In a sovereign economy (chain), dapp tokens represent the actual labor and GDP created by people in the economy. Scarce L1 assets gain benefits through people’s labor in building the digital economy (chain).
This is why “Type 2 Tokens” i.e. dapp/L2 Tokens are often likened to “equity” and valued through price-to-earnings (P/E) and discounted cash flow (DCF) models, while fundamental analysts are still confused by the mysterious “L1 premium”. In fact, this is not necessarily an L1 premium, but a premium for sovereign assets.
As many of you may know, I am not a fan of ETH opinion leaders like @justindrake, who are sending messages to the market and want to see the ETH asset as a business that sells block space and data blocks to generate a P/E valuation. They are transforming $ETH into a "type 2" token, and have had some success (although I regret this):
L2 tokens are usually not sovereign scarce assets in their digital economies, although they have some elements, such as blockchains and active developers and users. They belong to "Type 2" tokens, which are usually valued using price-to-earnings (P/E) and discounted cash flow (DCF) models. In fact, some L2s don't even have their own tokens, such as @base.
$SOL is not outperforming because of an increase in TVL (Total Value Locked) or the expectation of a large amount of SOL being burned or generating revenue in a future year. $ETH is not outperforming SOL despite billions in revenue and burns.
$SOL is rising because Solana’s sovereign economy needs it for liquidity pools, memecoin trading, and DeFi, and you need it to participate in the operation of the Solana network.
People are actively building projects to convert their labor into tokens (as type 2 dapp/PE tokens) in order to issue interest and rewards to $SOL holders, stakers and liquidity providers. ETH opinion leaders are trying to turn $ETH into a DCF equity token with little value other than cash flow from selling products through the Ethereum Foundation (EF).
As @MustStopMurad elegantly pointed out, the best products don’t need to rely on tokens, and the best tokens don’t need to rely on products. Sovereign scarce assets (Type 1/L1 tokens) can be thought of as memecoins, which are serious memes that don’t contain pictures of cats and dogs (those exist in digital nations).
@balajis has discussed the concept of a cyber nation in detail. The power of this meme is finally starting to be understood. Type 1 (L1) and Type 2 (PE/Equity/Labor/L2) tokens are completely different. The community can transform one token into another, but it takes a long time.
Bottom line: gas fees and staked security are technical signals that represent social consensus on sovereign scarce assets, not features that inherently deliver massive value. People are finally starting to realize this, including the famous @danrobinson.
Therefore, this is not a so-called "L1 premium", but a sovereign asset of a digital country, that is, a Type 1 Token. It can be said that this is the most powerful and fundamentally focused meme. It has no funny pictures, but it is economically true and extremely influential in meme culture. My point is: there are only these two types of tokens.
Next month, @fraxfinance will release its biggest announcement ever, our 2030 Vision Roadmap. One of the most important things in it is how to turn a Type 2/L2/Governance/PE token into a sovereign asset. I expect many “Type 2” tokens will use this as a guide and follow suit.
