How to properly value L1 assets?

By Sam Kazemian, Frax Finance & Translated by Alex Liu, Foresight News

A lot of people have been talking about how to value different assets in crypto, especially recently with the AI ​​memecoin craze. But I want to talk about my approach to valuing the most important crypto assets: L1 tokens vs. "Type 2" (dapp/L2/"equity" tokens).

L1 tokens have a mysterious "L1 premium" that no one has systematically explained. Many people think this is a speculative Ponzi scheme, but the opposite is true. The L1 premium is a very important and fundamental property.

L1 assets (ETH, SOL, NEAR, TRX, etc.) are the "sovereign scarce assets" corresponding to the blockchain economy. They are naturally the most liquid assets in the chain economy. Other projects accumulate it, build products/DeFi with it, and incentivize its liquidity, making it a safe-haven asset in a crisis.

The asset will "earn interest" by issuing tokens of other projects to scarce asset holders through innovative methods such as liquidity + ICO + DeFi, airdrops, etc. @DefiIgnas explains it well: “L1s are productive assets: you can use them to get ecosystem airdrops, stake them for rewards, and their price goes up as the ecosystem expands. Plus, they outperform spot price if you count airdrops from holding ETH, SOL, NEAR, etc. In contrast, L2s are non-productive assets. You can’t use them to get native rewards, you can’t use them as gas (except STRK, MNT, METIS, and now ZK?), and the inflation from unlocking is usually too high. Their own ecosystem protocols rarely reward holders of L2 tokens (via airdrops).” dapp tokens in a sovereign economy (chain) represent actual human labor/GDP performed in that economy. Scarce L1 assets will harvest interest from the labor of people building the digital national economy (chain).

This is why "Type 2 tokens" (aka dapp / L2 tokens) are often compared to "equity" and valued via P/E DCF models, while fundamentalists are still confused by the mysterious "L1 premium". It doesn't need to be called the "L1 premium", but rather the asset premium of the sovereign economy.

Many of you may know that I don't like ETH KOLs, such as @justindrake, who collectively signaled to the market to treat ETH assets as a business that sells block space + blobs and needs to calculate a P/E ratio. They are turning ETH into a "Type 2" token. Unfortunately, they succeeded.

L2 tokens are generally not sovereign scarce assets of their digital economies, despite having chains and vibrant builders. They belong to "Type 2" and fall into the P/E DCF valuation model. In fact, some L2s don't even have tokens! Like Base.

SOL is doing really well, but not because its TVL is up, but because people expect SOL to be burned/earned billions of dollars in some distant future year. ETH has already had billions of dollars in earnings/burns, but it's not doing any better than SOL. SOL is up because Solana's entire economy uses it in liquidity pools, in memecoin transactions, in DeFi, and you need it to participate in the Solana network.

People are actually working to build things, tokenizing their labor (as "Type 2", i.e. dapp/PE tokens) in order to issue interest/rewards to SOL holders/stakers/LPs, while ETH KOLs are trying to turn ETH into a DCF equity token with no value other than the cash flow generated by the Ethereum Foundation selling products.

@MustStopMurad put it elegantly, the best products don’t need tokens, the best tokens don’t need products. Sovereign scarce assets (L1 tokens) are meme coins, and this is a serious meme, without pictures of cats/dogs (cats/dogs living in digital nations). Balajis discussed the concept of cyber nations at length. 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 into another, but it’s a long process.

The bottom line is: the security provided by Gas + staking is a technical signal of a social protocol built on sovereign scarce assets, and is not itself a significant value capture feature. People are finally realizing this, including the legendary @danrobinson.

So there is no so-called “L1 premium”, but rather the sovereign assets of digital nations, namely Type 1 tokens. It’s arguably the most powerful, most fundamentals-focused meme out there, no funny pictures, it’s real economics but with powerful meme-ness. My take: there are only these two types of tokens.

Next month, @fraxfinance will make its biggest announcement yet, our 2030 Vision Roadmap. One of the biggest things we’ll be launching is how to turn “Type 2” L2/Governance/PE tokens into sovereign assets. I expect many “Type 2” tokens will use this as a guide.