L1 & L2 Token Value Capture - DBA

PoS – Imagine a PoS network with 1mm validators, costing $100mm p.a. to run. Users pay $200mm p.a. in REV, and the chain issues $800mm in tokens p.a. to stakers. Operators take a 10% cut on TEV ($100mm here). The “profit = fees – issuance” proponents will say this is unsustainable: $200mm fees – $800mm issuance = $600mm loss! This doesn’t hold up.

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Bitcoin is the clearest example – BTC holders are willing to accept inflation as a pure expense with no expectation of future income rights. You could also easily imagine Bitcoin having a 1% inflation tail programmed from the start, and perhaps BTC holders would happily hold it. That would happen because BTC holders derive sufficient utility from h... See more

When people argue that “issuance is a cost” in PoS networks, it’s usually a fuzzy attempt to get at “isn’t inflation bad for token value capture somehow? It seems like it should be bad, right?” However, the only real expense to token holders in aggregate is the payment made to operators. This is usually seen in staking commissions in PoS vs. PoW wh... See more

So as funny as it may sound, it should be clear now that issuance to stakers is not a “cost to the network”, even if it has potential associated “sell pressure.” Look, none of this is to say that inflation doesn’t matter. It does! That’s all the more reason why we need to start explaining it logically. Stop saying that inflation is a cost to the pr... See more

The sillier conversations have been happening on the PoS side. There are a lot more variables at play to get confused over, and we all want our own bags to be special. But we need to stop looking at silly metrics then drawing incorrect conclusions around sustainability. It’s silly to say that Solana is unprofitable or unsustainable. At most, you ca... See more

There exists no meaningful technical barrier between BTC vs. the field. Most other networks are obviously even technically more advanced. But we’re focused on the dollars and cents outcome here. Will any of these other assets be used in a similar manner over time as BTC, justifying valuations far in excess of their intrinsic value from producing in... See more

The biggest misconception to dispel is that L2s are a magically profitable design vs. L1s because they don’t have to pay inflation. If you’ve read the article up to here, this should be clear to you why this is incorrect. As we have established, PoS issuance is not a “cost to the network.” It isn’t even a net expense to tokenholders in aggregate.

PoW assets tend to be more commodity-like relative to PoS assets which tend to be more equity-like. So at times, these PoW metrics will seem a bit silly in the way that calculating the income of holding gold would seem silly. Nobody buys gold or BTC looking for the most productive income-generating asset. Nonetheless, it’s helpful to include both P... See more