Forget Fat Protocols: Who Makes Money in Modular Blockchains?
Assessing Value Accrual in the Future of Layer 1s
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If someone told you a product that makes $260M in fees will be worth half of a product that generates $8.6M in fees, you might call them crazy.
In crypto, they’d make billions.
Fat Protocols is likely one of the most successful investment theses of all time. In the expanse of a few years, investors in multiple layer 1s generated returns upwards of 3,000x on multiple Layer 1 bets since 2017, prompting more capital to flow into infrastructural companies in crypto.
Even in the current bear market, one look at the rankings for cryptoassets tells you that Fat Protocols - the idea that the lower in the technical stack a project is the more value it captures - is alive and well. The most valuable networks today are virtually all Layer 1s (e.g. Ethereum ($150B), Polkdaot ($75B), Solana ($11.1B)) whereas even the most popular applications are valued at a fraction of that (e.g. Uniswap, at $5.2B).
The logic for Fat Protocols goes like this: everything that happens on a blockchain requires fees to be paid in its native token. Applications on a blockchain drive adoption of the blockchain’s token, which drives its price, increasing the value (and security) of the network, hence attracting more applications.
Recently, however, a wave of new protocols are launching that are splitting apart the functions performed by “monolithic” smart contract platforms like Ethereum into separate layers. These protocols might shift us from the “Fat Protocols” era into a new investing paradigm: Modular Blockchains.
This week, we’ll cover:
What is a Modular Blockchain? And Why You Should Care
Modular Blockchain Fee Model
MEV on Modular Blockchains