The Best Way to Evaluate a Crypto Protocol
🎯 Summary
Podcast Summary: The Best Way to Evaluate a Crypto Protocol
Crypto Focus Area: The episode delves into the evaluation metrics for blockchain protocols, particularly focusing on the transition from Total Value Locked (TVL) to revenue as a more significant metric. It discusses the broader implications for DeFi and Web3, highlighting the need for a more nuanced understanding of value creation in blockchain ecosystems.
Key Technical Insights:
- Revenue as a Key Metric: Lily Liu argues that revenue should be the “north star” metric for evaluating blockchain protocols, as it provides a clearer picture of value creation than TVL, which can be easily manipulated.
- Mechanisms of Value Creation: The podcast explores how utility and usage on a blockchain translate into value and price creation for token holders. It emphasizes the importance of understanding the flow from transaction volume to fee revenue and its impact on protocol value.
- Revenue Components: The discussion breaks down the sources of protocol revenue into inflation, base fees, and priority fees, highlighting how these contribute to the overall revenue model and value capture for token holders.
Market/Investment Angle:
- TVL vs. Revenue: The episode critiques the reliance on TVL as a primary metric, suggesting that it does not necessarily correlate with actual value creation or capture. It highlights the importance of revenue as a more reliable indicator of a protocol’s economic activity and potential for growth.
- Investment Implications: By focusing on revenue, investors can better assess the long-term sustainability and profitability of blockchain protocols, moving beyond superficial metrics like TVL.
Notable Crypto Projects/People:
- Lily Liu: President of the Solana Foundation, she provides insights into the evaluation of blockchain protocols and the importance of revenue as a metric.
- Solana and Ethereum: These protocols are mentioned in the context of their revenue models and inflation rates, providing examples of how different blockchains approach value creation.
Regulatory/Policy Discussion: The episode does not delve deeply into regulatory or policy issues, focusing instead on the internal metrics and evaluation frameworks within the crypto industry.
Future Implications:
- Evolving Metrics: The conversation suggests a shift in the industry towards more sophisticated metrics for evaluating blockchain protocols, moving beyond TVL to focus on revenue and other indicators of real economic activity.
- Innovation and Revenue: The discussion acknowledges the tension between innovation and revenue focus, suggesting that successful protocols will balance these aspects to drive long-term growth.
Target Audience: The episode is particularly valuable for investors and analysts in the crypto space who are interested in understanding the deeper metrics of blockchain valuation. Developers and protocol designers may also find the discussion on value creation mechanisms insightful.
Main Narrative Arc and Key Discussion Points: The episode centers on the need to move beyond TVL as a primary metric for evaluating blockchain protocols. It argues for revenue as a more meaningful indicator of value creation and explores the mechanisms through which blockchain utility translates into economic value. The discussion highlights the limitations of TVL and the importance of understanding the revenue model of protocols to assess their true potential.
Technical Concepts, Methodologies, or Frameworks Discussed: The podcast introduces a framework for evaluating blockchain protocols based on revenue components, including inflation, base fees, and priority fees. It emphasizes the need to distinguish between different layers of blockchain ecosystems—network, applications, and asset layer—and their respective revenue models.
Business Implications and Strategic Insights: The episode provides strategic insights for investors and protocol designers, emphasizing the importance of focusing on revenue as a metric for long-term sustainability and growth. It highlights the need for a shared language around blockchain business models to facilitate better evaluation and investment decisions.
Predictions, Trends, or Future-Looking Statements: The conversation predicts a shift in the industry towards more sophisticated evaluation metrics, with revenue taking center stage as a key indicator of protocol success. It suggests that protocols that can effectively capture and demonstrate revenue will be better positioned for future growth.
Practical Applications and Real-World Examples: The discussion uses Solana and Ethereum as examples to illustrate different approaches to revenue generation and value capture. It provides practical insights into how these protocols manage inflation and transaction fees to drive economic activity.
Controversies, Challenges, or Problems Highlighted: The episode highlights the challenge of gaming metrics like TVL and the need for more reliable indicators of value creation. It also addresses the potential for revenue metrics to be manipulated through practices like wash trading.
Solutions, Recommendations, or Actionable Advice Provided: The podcast recommends focusing on revenue as a key metric for evaluating blockchain protocols and encourages the development of a shared language around blockchain business models. It suggests that investors and analysts should look beyond TVL to assess the true potential of protocols.
🏢 Companies Mentioned
đź’¬ Key Insights
"blockchain ecosystems have three components stacked on top of one another: the network, called the chain; the applications, which often have their own tokens; and the asset layer"
"If you compare the TVL rankings with protocol revenue rankings, you can see examples where someone might say 'I've got $2 billion of TVL.' Yes, but your protocol revenue is $2,000"
"I think blockchain ecosystems have three components: the network, the applications, and the asset layer"
"If you look at chain revenue, you've got three sources of revenue for holders: inflation, base fee, and priority fee"
"Now there's overall the bifurcation where you've got Bitcoin, the asset, and everyone else trying to compete in the financial infrastructure."
"These chains are new entities that don't have a direct corollary in the financial world or tech world"