Dragonfly Partners: Encryption has fallen into financial cynicism, and those who use PE to value public chains have already lost.

Author: Haseeb >|<

Compiled by: Deep Tide TechFlow

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Rebranding “Defense of Exponential Growth”

In the past, I often told entrepreneurs that the reaction you receive after launching your project will not be “hate,” but rather “indifference.” Because by default, no one will care about the new blockchain you launched.

But now, I must stop saying that. This week, Monad just launched, and I've never seen a newly launched blockchain provoke so much “hate.” I have been a professional investor in the crypto space for over 7 years. Before 2023, almost every new chain I saw launch was met with either enthusiasm or indifference.

However, now that a new chain is born, it will be surrounded by the “disliked” chorus of voices. The number of critics I have seen for projects like Monad, Tempo, MegaETH, etc.—even before their mainnets are launched—is indeed a completely new phenomenon.

I have been trying to analyze: why is this situation starting to happen now? Does this reflect the psychological state of the market?

“The medicine is worse than the disease”

A heads up: this may be the most ambiguous article you've read about blockchain valuation. I don't have any flashy data metrics or charts to impress you. Instead, I will attempt to counter the mainstream thinking on Crypto Twitter, which I have almost always opposed over the past few years.

In 2024, I feel that what I oppose is a form of “financial nihilism.” Financial nihilism is the belief that these assets are fundamentally meaningless, that everything ultimately amounts to nothing but “meme culture,” and that everything we build is essentially worthless.

Fortunately, that atmosphere of “financial nihilism” no longer exists, and we have finally escaped this predicament.

But the current mainstream mentality can be described as “financial cynicism”: well, perhaps these things do have some value, maybe it’s not all about “meme culture”, but their valuations are severely inflated, and Wall Street will eventually realize this. It’s not that all blockchains are worthless, but their actual value may only be one-fifth or even one-tenth of the current trading price (have you looked at these price-to-earnings ratios?). So, you better pray that Wall Street doesn’t expose our bluff, because once they do, everything will turn to ashes.

Currently, many bullish analysts are trying to counter this sentiment with optimistic primary blockchain (L1) valuation models, desperately raising price-to-earnings ratios, gross margins, and discounted cash flow (DCF) in an attempt to reverse this pessimistic trend.

At the end of last year, Solana proudly adopted REV (Realized Economic Value) as a metric that can ultimately prove the rationality of its valuation. They proudly announced: We—only we—are no longer putting on a show for Wall Street!

However, of course, almost immediately after Solana adopted REV, this metric collapsed rapidly (although interestingly, the performance of $SOL was much better than REV itself).

This is not to say that REV (Realized Economic Value) itself has a problem. REV is indeed a very clever indicator. However, the focus of this article is not on the choice of indicators.

Next is the launch of Hyperliquid. A decentralized exchange (DEX) that has real revenue, a buyback mechanism, and a price-to-earnings (P/E) ratio. Thus, the voices in the market arose – see, I told you so! Finally, for the first time, there is a truly profitable token with a reasonable P/E ratio. (Don't mention BNB, we are not discussing it.) Hyperliquid will devour everything, as it is clear that Ethereum and Solana are not really making money, and we can stop pretending to value them now.

Hyperliquid, Pump, and Sky are all excellent tokens centered around buybacks. However, the market has always had the ability to invest in exchanges. You can buy Coinbase stock at any time, or BNB, or other similar products. We also hold $HYPE, and I agree that it is a fantastic product.

But that is not the reason people invest in ETH and SOL. Layer 1 blockchains do not have high profit margins like exchanges do, and that is not why people buy them—if they wanted that kind of profit margin, they could just buy shares of Coinbase directly.

So, if I'm not criticizing the financial metrics of blockchain, you might think this article is aimed at condemning the “evils” of the token industrial system.

Clearly, everyone has lost money on tokens over the past year, including venture capital firms (VCs). This year, the performance of altcoins has been very poor. As a result, the other half of the mainstream voices on Crypto Twitter have begun to argue about who should be held responsible for this. Who has become greedy? Is it the VCs who are greedy? Is it Wintermute that is greedy? Is it Binance that is greedy? Is it the liquidity mining farmers who are greedy? Or is it the founders who are greedy?

Of course, the answer is the same as before, it has never changed.

Everyone is greedy. Every single person—venture capitalists (VCs), Wintermute, liquidity mining farmers, Binance, opinion leaders (KOLs)—they are all greedy, and so are you. But it doesn't matter. Because any normally functioning market does not require participants to act against their own interests. If our judgment about the future of the crypto industry is correct, then even if everyone is greedy, investments can still succeed. Trying to explain market declines by analyzing “who is greedier” is like holding a meaningless “witch hunt.” I can guarantee that no one started becoming greedy in 2025.

So, this is not what I wanted to write about.

Many people want me to write an article about why $MON should be worth X or why $MEGA should be worth Y. But I am not interested in that, nor would I advise you to buy any specific assets. In fact, if you don't have confidence in these projects, you probably shouldn't buy them at all.

So, will the new challenger chain (emerging public chain) prevail? Who knows. But if it indeed has a chance of prevailing, then its pricing will be based on that possibility. If Ethereum's market cap is $300 billion and Solana's market cap is $80 billion, then a project with a 1%-5% chance of becoming the next Ethereum or Solana will also be priced according to that probability.

Crypto Twitter (CT) is shocked by this, but it is actually no different from the biotechnology field. A drug with less than a 10% chance of curing Alzheimer's disease, even with a 90% probability of ultimately failing in Phase III clinical trials, will still be valued by the market in the billions of dollars. This is the logic of mathematics – and it turns out that the market is quite good at doing these mathematical calculations. The pricing of binary outcomes is based on probabilities, rather than current earnings performance or moral judgments. This is the valuation logic of 'shut up and calculate'.

I really don't think this is an interesting topic worth writing about. “5% chance of winning? Impossible, it's clearly a 10% chance!” For any individual token, the market rather than the article is the best way to assess such probabilities.

So, what I really want to write is: Crypto Twitter seems to no longer believe that public chains themselves are valuable.

I do not believe this is because people do not think the new chains can gain market share. After all, we have just witnessed Solana rise from the ruins and dominate the market share in less than two years. This is not easy, but it is clearly possible.

The bigger problem is that people are starting to believe that even if a new chain wins the competition, there is no prize worth competing for. If $ETH is just a meme, and if it can never generate real income, then even if you win, it can't possibly be worth 300 billion dollars. The competition itself is not worth participating in because these valuations are all false, and everything will collapse before you can claim the “prize.”

Having an optimistic view on chain valuation has become outdated. Of course, this doesn’t mean that no one is optimistic—clearly, there are always optimists. After all, for every seller, there is a buyer. Despite the “cool kids” on crypto Twitter (CT) being eager to mock Layer 1 (L1) blockchains, there are still those willing to buy SOL for $140 and ETH for $3000 .

However, there is now a common view that all smart people have given up on buying smart contract chains. Smart people know that this game is over. If it is not over now, it will be over soon. Those who are still buying now are considered “suckers”—like Uber drivers, Tom Lee, or those KOLs who say “trillion-dollar market.” Perhaps even the U.S. Treasury. But “smart money” will not enter the market again.

This is complete nonsense. I don't believe this claim, and you shouldn't believe it either.

Therefore, I feel it is necessary to write a “Declaration of the Smart People” to explain why a general-purpose public blockchain is valuable. This article is not about Monad or MegaETH, but rather a defense of ETH and SOL. Because if you believe that ETH and SOL are valuable, then everything else will naturally fall into place.

As a venture capitalist (VC), defending the valuations of ETH and SOL is usually not my job, but damn it, if no one is willing to step up and do it, then I'll write this article.

Feel the power of “exponential growth”

My partner Bo experienced the explosive growth of the Chinese internet firsthand when he was a venture capitalist (VC). Over the years, I have heard countless comparisons of “crypto is like the internet,” and I have become numb to them. But every time I hear his stories, I am reminded of how costly it can be to get it wrong on these major trends.

A story he often tells is about the early 2000s, when all the early investors in e-commerce, in a still small circle, gathered together for coffee. They debated: how big would the e-commerce market actually become?

Will it mainly focus on electronic products (perhaps only tech enthusiasts will shop online)? Will women use it (maybe they care too much about the tactile experience)? What about food (perhaps fresh food is simply unmanageable)? These questions are crucial for early-stage investors because they determine what projects to invest in and what prices they are willing to pay.

Of course, the final answer is that all these people are completely wrong. E-commerce will ultimately sell everything, and the target users are the whole world. But at that time, no one really believed this. Even if someone did believe it, saying it out loud would seem utterly absurd.

You can only wait long enough for “exponential growth” to tell you the truth. Even among those who believe in e-commerce, there are very few who truly think it will become so massive. And those few who truly believe have almost all become billionaires by holding on and not selling. As for the other venture capitalists—just like Bo told me, because he is one of them—they all sold too early.

In the cryptocurrency field, the belief in “exponential growth” has become an outdated concept.

But I still believe in the exponential growth of the cryptocurrency field. Because I have experienced it firsthand.

This is Amazon's profit and loss statement (P&L) from 1995 to 2019, a full 24 years. The red represents revenue, and the gray represents profit. Did you see that little fluctuation at the end? The gray line starts to rise, which is when Amazon began to really turn a profit for the first time, 22 years after its founding.

It was only after 22 years since Amazon's establishment that this gray net profit line finally rose from 0 for the first time. Before that, every year, there were column articles, critics, and short sellers claiming that Amazon was a Ponzi scheme that would never make money.

Ethereum has just turned 10 years old. And this is Amazon's stock performance in its first 10 years:

A decade of turbulence. During this time, Amazon has been surrounded by skeptics and detractors. Is e-commerce a charity subsidized by venture capital? Are they just selling low-priced, low-quality small goods to consumers chasing bargains, and what’s the point? How can they possibly make real profits like Walmart or General Electric?

If you were discussing Amazon's price-to-earnings (P/E) ratio at the time, you were completely off base. The P/E ratio falls under the category of linear growth, while e-commerce is not a linear trend. Therefore, those who argued based on the P/E ratio over the 22 years were all very mistaken. No matter how much you paid or when you bought in, your bullishness was insufficient.

Because this is the characteristic of exponential growth. When it comes to truly exponential technology, no matter how large you think it can become, it will always become larger.

This is precisely where Silicon Valley understands more deeply than Wall Street. Silicon Valley has grown on exponential growth, while Wall Street is accustomed to linear growth. Over the past few years, the focus of the cryptocurrency industry has gradually shifted from Silicon Valley to Wall Street. This change is evident.

Of course, the growth of the cryptocurrency industry does not appear to be as smooth as that of e-commerce. It is more volatile and exhibits characteristics of intermittent bursts. This is because the cryptocurrency industry is closely related to money, heavily influenced by macroeconomic factors, and also faces more intense regulatory tug-of-war than e-commerce. The cryptocurrency industry strikes at the core of the nation—currency—therefore, its impact on governments is much greater and more unsettling than that of e-commerce.

However, the trend of exponential growth will not decrease as a result. This may be a rough argument, but if the cryptocurrency industry is indeed exponential, then this rough argument is correct.

Zoom out.

Financial assets crave freedom. They desire openness, interconnectivity. Cryptographic technology transforms financial assets into file formats, making it as easy to send a dollar or a stock as it is to send a PDF. Cryptographic technology enables everything to communicate with everything, allowing it to operate around the clock, be global, interconnected, and open.

This model will definitely prevail. Openness will always prevail.

If the internet has taught me one thing, it is this. The vested interests will fight hard, the government will loudly oppose, but in the end, they will compromise in the face of the universality, creativity, and sheer efficiency brought by this technology. This is exactly what the internet has done to other industries. And blockchain will engulf the entire financial and monetary realm in the same way.

Yes—given enough time—everything.

There is an old saying: “People overestimate what will happen in two years and underestimate what will happen in ten years.”

If you believe in exponential growth and zoom out your perspective, everything still seems cheap. What should humble you even more is that every day, those holders are surpassing the sellers and skeptics. The time horizon of big capital is much longer than what short-term traders on Crypto Twitter (CT) would have you believe. Big capital has learned from history not to easily give up on significant technological bets. Did you know? That moving story that initially made you buy $ETH or $SOL ? Big capital also believes that story and has never stopped believing.