What's your "thesis" on crypto?


There was a famous post written by Joel Monegro at USV, called fat protocols. In it, he argues that a disproportionate amount of value will be captured at the protocol layer rather than the application layer. Since then, many “theses” have come out. Fat protocols. Thin protocols. Not fat protocols. Middleware. Money tokens. Smart contracts. dApps. Wallets. Everyone has their own ideas about where value will accrue in the crypto ecosystem. Where do you think value will accrue and why?

More context: Check out the video and summary notes from our AMA with Jon Choi!


A very difficult question.

The answer to where the value will accrue will most likely take many many years, maybe even decades to arise. I would argue it took at least a decade for that question to be generally answered for internet companies. I honestly don’t know. I do think the publicly traded tokens of a cryptoasset project will be worth more in aggregate than the equity of that project.

There are too many variables in play right now in my opinion. Maybe if atomic swaps and other inter-blockchain communication technologies are successfully implemented over the years, my guess would be applications since the base protocol layer could potentially be abstracted away. But the answer to that question is outside of my core competency.


There is a scalability problem with the blockchain. Until this scalability problem is solved the network cannot grow and create the environment for value to accrue any more than the current state of blockchain technologies today.

Bitcoin, Cosmos and Ethereum are all working towards a solution for the scalability problem which, if solved, would vastly increase the possible applications that can be built on the blockchain, leading to an increase in new funds entering the system and causing “the next boom”.

To me, the only place that accrues value is the token balances with the goal of liquidating the token balance by exchanging it for another currency. People who are there from early on in the project (founders) will naturally have higher token balances due to the length of time they have been on the chain.

There is a growing amount of hybrid businesses, or services built on top of the blockchain that charge a fee (Coinbase, Binex are examples that currently exist) and these businesses will often be VC backed.

Mohit Mamoria says that a lot of funds are becoming hybrid equity and crypto funds, and I expect to see more of those if progress is made in the blockchain industry.

Unlike Mattison, I’m the opposite of a “markets guy” and instead try to make investments based on intrinsic value, using the same definition as Aswath Damadoran:

It is the value that you would attach to an asset, based upon its fundamentals: cash flows, expected growth and risk. The essence of intrinsic value is that you can estimate it in a vacuum for a specific asset, without any information on how the market is pricing other assets (though it does certainly help to have that information).


love this. I am with you. this is one of the reasons why we are choosing not to list the token for TruStory, until and unless we accrue intrinsic value on the platform by building a kickass information marketplace: What do you think is the right way to measure "success" for TruStory?


Granted, I’m probably oversimplifying the process it takes to solve scaling, but did anyone ever try to just launch a coin, already forked, 6 times over but still self contained, and each transaction just goes to any one of the chain “sisters?” and there’s some kind of shared singular output that reassembles the ledger into 1?


According to your phrasing of token balance, it seems that the “token balances” would represent equity. Of course, if they represent equity, they should have ownership over a cash flow. But if they work that way, they need to be classified as equity, regulated as equity, and function as equity, not tokens.

I do not personally think that most cryptoassets function like equity. For example, I think Ether functions much more closely to a commodity (or a currency that’s main use is to purchase a commodity) and Bitcoin like gold (which many classify as a currency). Almost all other cryptoasset tokens operate under that framework as well (many utility tokens are tokens that are used to pay for a specific function).

Both commodities and currencies themselves have no intrinsic value. A barrel of oil or a US dollar itself has little to no intrinsic value in the way you formulate, in that there are no cash flows, expected growth, etc. tied to those assets. You cannot estimate the value of those assets in a vacuum, for those assets have no value in a vacuum. Their perceived value is completely tied to the pricing function performed by the market.

I would argue that most cryptoassets function and are viewed closer to commodities and currencies by the majority of market participants, and very few will ever hold intrinsic value under your definition. Unless they are equity of course, but then they are really tokenized securities.

I, in fact, think that more “value” (which I define as total computed worth determined by the market) in dollar terms will accrue to cryptoassets because they are not equity and have no intrinsic value as you define it. The total value of all the barrels of oil in existence is worth far more than the enterprise value of Exxon Mobil, which as of 2/28/18 was $367 billion. In the US alone in 2017, 7.28 billion barrels of oil were consumed. At the average oil price of 2017, which was $54.15, $394.2 billion worth of oil was consumed in the US. The value of that oil alone was worth more than the enterprise value, not just equity value, of Exxon Mobil.

I think one would have an exceptionally difficult time being a Warren Buffett like value investor when dealing with non-tokenized securities cryptoassets themselves.


The reason I used the word “token balance” is because it generalises across all blockchain applications.

There is a great excerpt from a [blog post] (http://aswathdamodaran.blogspot.com/2017/08/the-crypto-currency-debate-future-of.html) by Aswath which breaks this down:

The analogy between gold and crypto currency has one weak link. Gold has held its value through the centuries and is a physical asset. For better or worse, it is unlikely that we will decide a few years from now that gold is worthless. A crypto currency that few people use as currency ultimately will not be able to sustain itself, as shinier and newer versions of it pop up. Ironically, if traders in bitcoin and ether want their investments in the crypto currencies to hold their value, the currencies have to become less exciting and lucrative as investments, and become more accepted as currencies. Since that will not happen by accident, I would suggest that the winning crypto currency or currencies will share the following characteristics;

  1. Transaction, not trading, talk: From creators and proponents of the currency, you will hear less talk about how much money you would make by buying and selling the currency and more on its efficacy in transactions.

  2. Transaction, not trading, features: The design of the crypto currency will focus on creating features that make it attractive as a currency (for transactions), not as investments. Thus, if you are going to impose a cap (either rigid like Bitcoin or more flexible, as with other currencies), you need to explain to transactors, not traders, why the cap makes sense.

  3. Trust in something: I know that we live in an age where trust is a scarce resource and I argued that that the growth in crypto currencies can be attributed, at least partly, to this loss of trust. That said, to be effective as a currency, you do need to be able to trust in something and perhaps accept compromises on privacy and centralized authority (at least on some dimensions of the currency).

He doesn’t address blockchain’s outside of bitcoin and ethereum in the post, but I think the same principles apply, much like a virtual currency (think MMORPGs like World Of Warcraft of Runescape) there is no way to calculate their “intrinsic value” but they do have utility to the people that posses them, and if you wanted to play the market game, you could accumulate many of these tokens (virtual currency coins) with the hope of trading them for some other currency down the line.


@Edwin is what you’re describing any different to the sharding efforts? https://github.com/ethereum/wiki/wiki/Sharding-roadmap


I would argue that very rarely is gold today used for transactions. Furthermore, the paper market around gold (ETFs, futures, options, CFDs, etc.) far surpasses the value of the underlying asset.

There have also been times where gold has been incredibly volatile, even during modern times. In fact, from around 1979-1980 Gold increased by 4x from $200 to over $800, only to come crashing back down to roughly $300 in around 1982.

In some ways, Bitcoin also is a far superior Store of Value compared to gold. Below is an excerpt from the newsletter of a friend (https://www.patreon.com/mattisonasher):

"Beyond gold having a high scarcity relative to other stores of value, this shiny asset also has a high stock to flow ratio. “Stock” in this scenario means an asset that has not been used, while “flow” in this context means new units of that asset entering the market. For example, roughly 170,000 tons of gold have already been mined and are not being used to create items such as jewelry. Approximately 2,400 tons of newly mined gold enter the market every year, which means gold has a stock to flow ratio of around 71 (170,000/2,400). No other physical asset has nearly as high a stock to flow ratio. Consequently, considering there is such a sizeable amount of stock, the new gold entering the market is not able to significantly alter the price of gold. In other words, the yearly price inflation of gold is minute.

Likewise, bitcoin also has an extremely high stock to flow ratio. Coded into Bitcoin is a cap on the number of coins that can enter circulation. Hence, only 21 million bitcoins will ever be in existence. There are currently 17,248,087 bitcoins in existence or roughly 82% of all the bitcoins that will ever be mined. Every day, miners produce 1,800 new bitcoins. Therefore, bitcoin’s stock to flow ratio is 26.3 (17,248,087/(1,800 x 365)). While currently lower than gold’s stock to flow ratio, it is estimated that by 2025 bitcoin’s stock to flow ratio will be 120, which will be higher than gold. This increase will happen because roughly every four years, the inflation rate of bitcoin is halved. Thus, bitcoin will be a far more effective store of value than gold by 2025.

But in contrast to gold, bitcoin has another characteristic that makes it superior; bitcoins are incredibly portable. You can carry millions of dollars’ worth of bitcoins in your pocket. If you needed to flee a failing state afflicted by enormously high inflation rates, such as Zimbabwe, you would have a far easier time carrying your net worth in bitcoins as opposed to lugging around bags of gold. Furthermore, unlike gold, if you have an internet connection, bitcoins are electronically transferable to anyone anywhere in the world.

Therefore, out of the numerous narratives that drove the previous bull market, this story so far has evolved the furthest in transitioning from theory to reality. There is clear evidence of the utilization of bitcoin as a store of value during regime changes or economic implosions in countries such as Zimbabwe, Venezuela, Cyprus, and Greece. Consequently, the reason why this theme has been able to gain traction is that there remain few technical requirements for viewing an asset as a store of value. Beyond the stock to flow ratio, all other characteristics used in defining a valid store of value are psychological and social. Therefore, for stores of value, social consensus is everything."


I agree with you that a market-driven philosophy could lead to someone accumulating tokens that they think will be in high demand for utility purposes in the future. Though a token could be in high demand for more reasons than just utility. In fact, most holders of tokens, in my opinion, do not hold the token because of some expected future utility.


Agreed, Patri Friedman made a point about this in the AMA with reference to a storage coin, people expect the price will go up but if more supply enters the market (as we build more datacenters) there is no reason to believe the token value will rise.


From what I glanced about sharding, yes it could be similar. Aside from the details, the big picture I was going for is that a coin forks and then there’s two; is there any way to make that work for the sake of faster and more throughput of transactions under load.


@priyatham Thanks! for sharing great read on Fat Protocols!.
Initially, I liked the thesis of Fat Protocols and thought it as a game changer. But I feel the idea of Fat Protocols is very broad and probably not a great investment thesis, to begin with as mentioned here

I would like to summarize what I understood.

This is in essence what Fat protocol says
Protocol layer accrues more value than the application layer. The fat protocol theory points to two main reasons why this happens:

  • Shared data layer in a blockchain network
    Historically data was siloed and barriers to entry were large. With a shared data center, it’s easier for companies to build on top and for them to work together. For example, it takes quite a bit of effort to transfer your assets from Robinhood to E-trade (built on different bases), but it’s seamless to do so between Coinbase and Binance.

  • Speculative token attachment with the token feedback loop
    The speculative token attachment encourages building and speculation on early stage protocols, as an application built on top of the protocol will increase its value and create a loop of value creation. As applications are built, the protocol accrues more value. As the protocol accrues value, people are incentivized to build applications. Since the tokens are needed to access & use the protocol, they go up in value the more a protocol is used. This is a cycle.! The market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer.

There is also thin protocols which take its origin from the idea that protocols (blockchain networks) can be forked. Protocols can be forked. So, if a protocol is “fat” and capturing a disproportionate amount of value, it’s likely ripe for a fork or a competitive protocol, where the new parallel protocol would be specialized to provide some portion of the functionality in a more efficient way. In this way, I believe “fatness” to actually be an indication of inefficiency and/or some other advantage.

Now the key arguments against Fat protocol layers (blockchain networks) accruing more value than application layer are:

  • The protocol-application boundary is an abstract separator between two sections of the functionality stack.
  • Much value generated within decentralized networks will never make it down into the base protocol layers.
  • We can regard a large number of decentralized applications (DApps) or platforms as protocols in their own right.

credit: CoinFund

If we draw a boundary between Ethereum as the protocol and Augur as its application, then Ether gives exposure to the utilization of Augur but not its value. This is merely a projection of value flow from Augur onto Ethereum. If one wishes to capture the fundamental value of the Augur platform, she should probably hold REP.
In case of TruStory I think TruStory will accrue value in the beginning as an application/product which crowdsources validating internet claims in crypto space using token economies relying on any of the fat protocol below (blockchain network). Using interoperable blockchain network like Cosmos make it place higher up in the general protocol stack. Eventually, TruStory itself can derive a successful model or protocol to validate any claims on the internet with a decentralized claim validation protocol and other applications/products can build on top of it. For E.g. Someone can build a browser plugin which uses TruStory protocol to display TruStory score for internet claim links. The value will keep accruing to the base protocol here.


Thank you for this post. The comparison of stock flow ratio of bitcoin and gold makes for a compelling argument.