Frax Founder: In the AI Memecoin craze, how to properly evaluate the value of "L1 tokens compared to L2 and equity tokens like DApps"?

Original link: 《 the proper way to value the crypto assets: L1 tokens vs 'type 2' aka dapp/L2/'equity' tokens 》

Original author: Sam Kazemian, Frax Finance

Compiled by: Xiyou, ChainCatcher

Edited by: Nianqing, ChainCatcher

On October 24, Sam Kazemian, founder of Frax Finance, wrote an article discussing how to properly assess the value of crypto assets . He primarily categorized crypto market assets into two main types: "L1 tokens (type 1)" and "Dapp and L2 equity tokens (type 2)," and explained the differences between L1 tokens and DApp/L2 tokens. In the article, he emphasized that the value of L1 tokens is more akin to sovereign assets, as they exist at a premium due to being "productive assets"; Dapp and L2 tokens resemble equity assets, which seem to have no more value beyond generating cash flow.

ChainCatcher has translated and organized the content as follows:

1. There has been much discussion about how to assess the value of different crypto assets, especially in light of the recent frenzy around AI/meme coins. But I want to explain how to properly evaluate the value of the most important large crypto assets: the comparison between L1 tokens and "type 2" tokens (i.e., dapp/L2/"equity" tokens).

2. L1 tokens often have a mysterious "L1 premium," but no one has systematically explained this. Many believe it to be a speculative Ponzi scheme, but the truth is quite the opposite; the L1 premium is more fundamental than most people realize.

3. L1 assets (such as ETH, SOL, NEAR, TRX, etc.) are the "sovereign scarce assets" of the on-chain economy, and they are the most liquid assets in that economy. Other projects accumulate these assets to build infrastructure/decentralized finance (DeFi) and incentivize liquidity through them, making them a safe haven asset in times of crisis.

4. Whenever this happens, these assets become "yield-bearing" by distributing tokens from other projects to holders of scarce assets. The distribution methods include liquidity provision, initial coin offerings (ICOs), decentralized finance (DeFi), airdrops, and other innovative means.

@DefiIgnas provides a good explanation: L1 tokens are productive assets that can be used to obtain ecosystem airdrops, staking rewards, and their value increases with the expansion of the ecosystem. When considering airdrops received from holding ETH, SOL, NEAR, etc., L1 tokens typically outperform spot prices.

Conversely, L2 tokens are non-productive assets that cannot earn native rewards through staking and usually cannot be used as fee tokens (though there are a few exceptions), and they also experience higher inflation due to unlocking. Additionally, L2 ecosystem protocols rarely reward L2 token holders (through airdrops and other means).

1. In a sovereign economy (i.e., a blockchain) system, scarce L1 assets represent the interest generated from labor in building a digital economic nation (blockchain), while decentralized application (Dapp) tokens often represent the actual labor/ gross domestic product (GDP) performed by humans in that economy.

2. This is why "type 2 tokens" (i.e., dapp/L2 tokens) are typically compared to "equity" and valued through price-to-earnings (P/E) cash flow discounted (DCF) models, while fundamental analysts remain puzzled by the mysterious "L1 premium." This is not necessarily an L1 premium, but rather a premium for sovereign economic assets.

3. Many may know that I do not quite agree with signals released to the market by ETH KOLs like @justindrake, which value ETH assets as a P/E business selling block space and data. This is transforming ETH into a type 2 token, but this currently dominant trend seems to be succeeding.

4. Although L2 tokens have elements like blockchain and active builders/workers, they are generally not considered sovereign scarce assets in their digital economy, but rather fall under the P/E cash flow discounted (DCF) valuation model, i.e., "type 2" equity tokens. In fact, some L2s do not even have tokens, such as Base. In contrast, L1 tokens, as sovereign assets of digital nations, possess greater strength.

5. SOL, as an L1 token, performs excellently not because of an increase in total value locked (TVL) or because people expect billions of SOL to be burned or generate income in some distant future year. While ETH already has billions in income/burn amounts, its performance is not better than SOL.

6. SOL rises because it has multiple uses within the Solana sovereign economy; users need SOL to participate in the Solana ecosystem, including liquidity pools, meme coin trading, and decentralized finance (DeFi).

7. In fact, people are tokenizing their labor by converting it into type 2 tokens (i.e., Dapp/PE tokens) to distribute interest/rewards to SOL holders/stakers/liquidity providers (LPs). Meanwhile, KOLs of Ethereum (ETH) are attempting to transform ETH into DCF equity tokens, which have no other value besides the cash flow generated from sales by the Ethereum Foundation (EF).

8. As @MustStopMurad said, the best products do not need tokens, and the best tokens do not need products. Sovereign scarce assets (type 1/L1 tokens) are a kind of meme coin; they do not have funny pictures of cats/dogs, but they possess powerful meme power. This power is gradually being understood and is influencing the development of the cryptocurrency space.

9. @balajis has discussed the concept of network states in detail. Therefore, type 1 (L1) and type 2 (PE/equity/labor/L2) tokens are fundamentally different, and the power of sovereign memes is beginning to be understood. Communities can transform one type of token into another, but this is a long process.

10. At the same time, people are also realizing, as @danrobinson pointed out: fees + staking security is a technical signal that reflects a social consensus about what sovereign scarce assets are, but it is not a characteristic that can capture significant value by itself.

11. Therefore, I believe that the crypto market will ultimately only have two types of tokens: type 1 (L1) and type 2 (PE/equity/labor/L2). Among them, L1 tokens, as sovereign assets of digital nations, possess the strongest power and the most fundamental value. In the future, how to transform type 2 tokens into sovereign assets will become an important topic in the cryptocurrency space. For example, the upcoming 2030 vision roadmap from @fraxfinance reveals strategies for transforming type 2/L2/governance/PE tokens into sovereign assets, and this strategy is expected to lead many "type 2" tokens to follow suit.