This episode dissects the fundamental nature of Layer 1 (L1) tokens, exploring whether they function as companies, commodities, or money, and critically examines how their value accrues in the evolving crypto landscape.
Understanding L1 Tokens: Beyond Corporate Analogies
- The discussion kicks off by challenging the notion of L1 tokens (native cryptocurrencies of foundational blockchains like Ethereum or Solana) as equity in a company.
- Jonah asserts that L1 tokens align with the "explicit definition of money" or a commodity-money, emphasizing they do not accrue value like a traditional company.
- Dan concurs, highlighting a core distinction: "a company is a single entity... and a blockchain is a network of different stakeholders that come together to actually form and operate the network."
- Validators: Entities running physical machines to process transactions and achieve consensus (agreement on the state of the blockchain).
- Token Holders: Divided into unstaked holders and stakers (those who lock up tokens to support network security and earn rewards).
- Infrastructure Providers: Entities like Flashbots (a research and development organization focused on Miner Extractable Value - MEV - on Ethereum) or Jito (JTO) (providing MEV infrastructure for Solana), and staking operators such as Figment or liquid staking providers like Lido (which allows users to stake tokens without losing access to their liquidity).
- This decentralized network structure, with multiple participants sharing roles and rewards, fundamentally differs from the centralized, legally liable structure of a company.
The "Money-ness" of L1 Tokens: Current Use vs. Future Potential
- Dan agrees that L1 tokens fit the definition of money, particularly for paying transaction fees on the network.
- However, he draws a distinction between their current primary uses—such as trading memecoins, NFTs (Non-Fungible Tokens, unique digital assets), facilitating DeFi (Decentralized Finance, financial applications built on blockchain), and the emerging RWAs (Real-World Assets, tokenized versions of tangible assets)—and a hypothetical future where they settle large-scale global trade.
- Dan suggests that if L1s were used for "oil trades between countries being settled on [chain]", their monetary characteristic would become far more pronounced.
- For now, Dan finds the Store of Value (SOV) aspect the most compelling commodity-like driver: "I want to use this vehicle to transport wealth through time. That's the most interesting commodity-like aspect in my mind."
Payment Abstraction and the True Unit of Account
- Jonah addresses the concept of payment abstraction, where the user might not directly handle the settlement currency (e.g., using a USD credit card in Europe, where the merchant receives Euros).
- He clarifies that despite user experience, "the settlement, the currency of settlement between you and the good or service provider is euro. That is the unit of account."
- This principle applies to L1 tokens: the core claim is not that off-chain goods will be bought with on-chain money, but that on-chain goods and services (i.e., transactions themselves) are settled using the L1's native token.
Value Accrual: Transaction Fees vs. SOV and DeFi Demand
- Jonah points out a critical dynamic for L1 token valuation: while block space (the capacity of a blockchain to include transactions in a block) scales rapidly, leading to decreasing transaction fees (potentially "more than 100% a year"), this is deflationary for value accrual from fees alone.
- The primary value accrual, according to Jonah, stems from other use cases:
- Staking the token to earn native yield (rewards paid in the L1 token itself).
- Using the token in DeFi as collateral for loans or as a liquidity pair.
- Crucially, "the supply of the token does not scale as demand for those two use cases of the token scales."
- Jonah invokes a "golden rule of commodities investing": "supply is the enemy of price."
- L1s present a unique scenario:
- For payments (transaction processing), the supply of block space can scale significantly.
- For SOV and DeFi utility, the token supply is relatively fixed or has predictable, limited inflation (e.g., ETH's low inflation/deflation, Solana's ~10% inflation), while demand for these uses can grow "100-200% year-over-year."
- Jonah concludes, "That's really where we see the meat of the monetary value accruing... this is really the main the core of the bet that we're making when we buy a token."
Strategic Implications for Crypto AI Investors & Researchers
- Understanding L1 tokenomics is crucial, as many AI projects will be built upon or integrate with these foundational layers. The economic health and value drivers of the underlying L1 can impact the ecosystem built on top.
- Investors should analyze the demand drivers for an L1 token beyond just transaction fees, focusing on its utility in staking, as collateral in DeFi, and its overall attractiveness as a store of value.
- Researchers should monitor the evolving balance between L1 scalability (affecting transaction costs) and the demand for the L1 token in financial applications, as this tension is key to value accrual.
Conclusion
This discussion highlights that L1 token value is driven less by direct transaction fees and more by their utility in staking and DeFi, where demand outstrips the relatively fixed token supply. Crypto AI investors and researchers must grasp these nuanced L1 economic models to assess the foundational layers supporting emerging AI applications.
