L1 & L2 Token Value Capture - DBA

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

Let’s look at Solana validator economics here as an example just to get some order of magnitude ideas. Solana is more expensive for validators to run compared to most networks. The resource requirements are higher than average, but it’s certainly not as unattainable as is commonly believed. You can run a Solana validator full node for as low as $35... See more

In a cryptonetwork, token holders would also be unwilling to supply capital at a loss indefinitely if the token’s only value is derived from its ability to generate profits in the future. However, this gets into the unique properties and value capture mechanisms of crypto – tokens may have value capture outside of their ability to produce income.

Interestingly, Ethereum’s rollup-centric roadmap is implicitly a gambit in this direction. ETH is sacrificing REV to its L2s rather than capturing it all to itself, in return for spreading the moneyness of ETH the asset. It’s unclear if its L2s will win out, or if they’ll continue to aggressively use and spread ETH in the future, but it’s clearly t... See more

For our purposes here, we will just draw a simple distinction between L1s and L2s:

• L1 – Network relies on its own dedicated operators.


• L2 – Network relies on the operators of another network. It may or may not have its own dedicated operators in addition to these.

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

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

In PoW, this isn’t too complex. Miners directly receive all TEV, of which issaunce is a real non-cash expense to token holders, similar to stock-based compensation in traditional finance. Miners are incentivized to expend an amount of energy (and money) which is roughly equivalent to the TEV available.