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panek @panekkkk
, 22 tweets, 7 min read Read on Twitter
1/ Hey #CryptoTwitter, grab a glass of vino and come sit by the fire so we can discuss your narrow-minded views on FAT PROTOCOL THEORY.

See what I did there -- how I juxtaposed "narrow" with "fat"?


Just shut up and drink your wine. 👇
2/ First, let's acknowledge it as a "theory" even though it wasn't clearly labelled as such.

A theory is just a plausible principle offered to explain phenomena.
3/ In Joel's case -- @jmonegro penned the original theory -- he was observing the phenomena that #Bitcoin and #Ethereum both had market caps that far exceeded the value of applications built on top of either protocol.
4/ -- Wait a minute, did you just say #Bitcoin!?

Yes, you steak-huffing ignoramus, Joel's original post considered #Bitcoin a fat procotol or did you not read the thing!?

Don't answer that. We both know you didn't.
5/ So let's define the theory.

"The market cap of the [base] protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer."
6/ Now let's put our steaks down and do some napkin math.

- Is $BTC valued more than apps on top? ✅
- Is $ETH valued more than apps on top? ✅
- Are all other protocols with apps valued more than their apps? ✅
7/ So you mean to tell me that all observable data actually *supports* fat protocol theory!?

I know, fucking awkward right?
8/ Now, this doesn't mean the theory is correct, or that new theoretical or observed data shouldn't force us to re-examine or re-think it.

So how can we refine our theory?
9/ First, let's discuss what we mean by the "combined value of the applications built on top".

Do we mean their token values?
Do we mean the market caps of the companies developing apps?
Do we mean applications in the sense of software apps?

What about apps like decentralized lending that create value but don't necessarily capture it?
What about broader economic or societal value?
Are mining companies like Bitmain "applications"?
What if those companies have other revenue streams unrelated to blockchain?
11/ The answers to these questions will greatly affect the nature of the theory as well as its correctness.

So let's treat these questions as rhetorical for now.

Instead, let's discuss *why* such a theory might be correct.
12/ In doing so, we enter into a broader discussion of value that's being hotly debated in our space.

Here we encounter a few other theories that I'll only briefly touch on:

1. Fat monies theory
2. Utility hypothesis
3. Store of economic security
13/ Let's start with "fat monies":

If we consider base layer protocol tokens like $BTC and $ETH as "base monies", then it follows that the value of base money could be enormous.…
14/ Note how this isn't actually in-congruent with fat protocol theory. It's simply a re-framing that attempts to explain why what we observe might be correct for certain assets.
15/ There is also a prevalent "utility hypothesis" that I tend to support.

In fact, I think "fat monies" and "utility" are not mutually exclusive and that $ETH is an example of a token that straddles both.

...but that's a whole other discussion.…
16/ Finally, I've also written about the "store of economic security" theory that posits that the security that base protocols -- whether #Bitcoin or #Ethereum -- provide for apps on top might *reinforce* their value and drive future investment.

17/ So, if we really want to re-frame fat protocol theory, it's important to clarify a few things:

1. Clarify what we mean by applications
2. Clarify what we mean by value
3. Attempt to explain why this theory may prove correct
18/ As a general theory, I tend to think that base protocols *may* exceed value in the narrower software application sense but certainly not in the broader societal and economic value sense.
19/ Attempting to explain why is arguably more important and where things get complex so I'll end by saying it seems unlikely that a single theory is going to perfectly capture the complexity of base layer protocol token valuation for several reasons:
20/ Cryptocurrencies

- Are emergent commodity monies wrapped in tech
- Their tech is evolving
- The tech around them is evolving
- They have emergent cryptoeconomic properties that are subject to extra-protocol forces (such as access to hardware and cheap electricity in PoW)
21/ What matters then is to stop treating theories as gospel and refine as new data emerges. We're all learning together and we're all going to be wrong at times.

The open-minded will adapt their thinking based on new evidence.

The close-minded will deride and be forgotten.
22/ Original theory here:…
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