How to correctly value L1 assets?

Original author: Sam Kazemian, Frax Finance

Translated by: Alex Liu, Foresight News

Many people are talking about how to value different assets in Cryptocurrency, especially during the recent AI memecoin frenzy. But I want to talk about my method of valuing the most important encryption assets: L1 Token and ‘Type 2’ (dapp / L2 / ‘equity’ Token).

L1 Token has a mysterious ‘L1 premium’, and no one systematically explains this. Many people think this is a speculative Ponzi Scheme, but the fact is quite the opposite. The L1 premium is a very important and fundamental attribute.

L1 assets (ETH, SOL, NEAR, TRX, etc.) are the ‘sovereign scarce assets’ of the corresponding blockchain economy. They naturally become the most liquid assets in the chain economy. Other projects accumulate and use them to build products / Decentralized Finance, and incentivize their Liquidity, making them a safe-haven asset in times of crisis.

The asset will “yield” through innovative ways such as Liquidity + ICO + Decentralized Finance, Airdrop, etc. to issue Tokens of other projects to scarce asset holders.

@DefiIgnas 解释得很好：

“L1 is a productive asset: you can use them to receive ecosystem Airdrops, stake for rewards, and their price will pump as the ecosystem expands. Additionally, if you include Airdrops obtained from holding ETH, SOL, NEAR, etc., their performance is better than Spot prices. In contrast, L2 is a non-productive asset. You cannot use them to receive native rewards, nor can you use them as gas (except for STRK, MNT, METIS, and now ZK?). Moreover, the inflation brought by unlocking is usually too high. L2 Tokens’ holders are rarely rewarded by their own ecosystem protocol (through Airdrops).”

In the sovereign economic entity (chain), dapp Token represents the actual labor/GDP performed by humans in the economic entity. Scarce L1 assets will generate Interest from the labor of people building the digital national economy (chain).

This is why ‘Type 2 Token’ (also known as dapp / L2 Token) is often compared to ‘equity’ and valued through P/E DCF model, while fundamental analysts are still puzzled by the mysterious ‘L1 premium’. It doesn’t need to be called ‘L1 premium’, but the asset premium of sovereign economy.

Many people may know that I don’t like ETH KOL very much, such as @justindrake. They are sending a signal to the market that they consider ETH assets as a business that needs to calculate the P/E ratio for selling Block space + blob. They are turning ETH into a “Type 2” Token. Unfortunately, they succeeded.

L2 Tokens are usually not sovereign scarce assets of their digital economy, although they have chains and vibrant builders. They belong to ‘Type 2’ and are included in the P/E DCF valuation model. In fact, some L2s don’t even have Tokens! For example, Base.

SOL’s performance is very good, not because its TVL (Total Value Locked) has risen, but because people expect that in some distant future year, SOL will be burned / generate tens of billions of dollars in revenue. ETH has already generated / burned tens of billions of dollars, but its performance is not better than SOL. The pump of SOL is because the entire economy of Solana is being used in liquidity pools, memecoin trading, and Decentralized Finance, and you need it to participate in the Solana network.

People are actually working to tokenize their labor (as “Type 2”, i.e., dapp / PE Token) in order to distribute Interest / rewards to SOL holders / stakers / LP, while ETH KOL attempts to transform ETH into DCF equity Tokens, which have no value other than the cash flow generated from ETH Foundation’s product sales.

@MustStopMurad elegantly said, the best products don’t need tokens, and the best tokens don’t need products. Sovereign scarce assets (L1 Token) are memecoins, a serious meme without pictures of cats/dogs (cats/dogs living in the digital nation). Balaji discussed the concept of network states 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 clearly different. Communities can transform one community into another, but it is a long process.

The most important thing is: The security brought by Gas + stake is a technical signal, which reflects a social protocol based on sovereign scarce assets, and it is not an important value capture function in itself. People finally realized this, including the legendary @danrobinson.

Therefore, there is no so-called ‘L1 premium’, but the sovereign assets of digital nations, namely Type 1 Token. It can be said to be the most powerful and fundamental meme, without interesting pictures, it is true economics, but with strong memeticity. My view: only these two types of Token.

Next month, @fraxfinance will release its largest announcement to date, our 2030 vision roadmap. One of the most important things we will launch is how to transform the “Type 2” L2/governance/PE Token into sovereign assets. I expect many “Type 2” Tokens will use it as a guide.