The Fat App Thesis (a mini-essay):
The damage from the “Fat Protocol Thesis” on this space has been immense and set us back years.
The thing is—I actually love the Fat Protocol Thesis, and if you haven’t read it, you should. I’ll include a link below.
The simple version of the thesis is that protocols (ie chains) will capture more value than the apps built on them. Why? Well partly crypto apps have weak moats (they can be forked). But mainly, the success of apps will drive users to accumulate protocol tokens to use them, generating network effects for chains as every app drives up the token price of whatever chain it’s built on.
This was, in 2016, an extremely prescient argument. And I’d add my own argument for why protocols can have far greater value than apps too: protocol tokens operate like national currencies for a digital nation, underlying transactions within an ecosystem both as a medium of exchange as well as a representation of a legal order (smart contracts) that will guarantee the transaction’s validity, all while collecting tax for that ecosystem. Apps, meanwhile, are plain-old businesses generating revenue.
Of course, the market cap of a currency, which largely correlates to the GDP of everything built on top of it, tends to be much greater than the market cap of a company. This is why, I think, protocols have tended to be much more valuable than apps.
Which is the point. The past ten years have in many ways vindicated the “Fat Protocol Thesis,” reaching its culmination in the past year. Everyone knows this: the market cap of chains has crushed the market cap of apps. Protocols consistently raise at valuations of hundreds of millions of dollars pre-product, while apps with dedicated users struggle to raise at all.
To judge how much the market has bought into the Fat Protocol Thesis—to the point of complete irrationality—you just have to look at the valuations of many of the latest interchangeable, random L2s.
These L2s don’t fulfill any of the requirements of the Fat Protocol Thesis since their tokens don’t need to be used in transactions at all—in fact, these L2s often don’t even need to have a token in the first place. But narrative is often stronger than sense in crypto, and many of these L2s have comfortably reached 9-figure valuations while apps have struggled to get any kind of valuation in the first place.
(There are, I think, some L2s that will be genuinely valuable, like @mega_eth and @movementlabsxyz, but that’s a story for another time. My bags, my bags!)
There is, of course, a very simple explanation for why all this Chain Supremacy shit is problematic that we’ve all heard ad nauseam: a chain is only valuable if it has valuable apps. You’ll hear this from the chains themselves as they tout their massive performance improvements. “Of course we need to scale blockspace,” they say, “because the next top apps will need it.” But in a world where apps have failed for a full decade, only the insane among us actually want to build or fund more apps.
That’s great and all. But unfortunately, the logic that we need to fund apps in order for chains to be successful is never going to be compelling enough to get VCs to fund a whole category they still think will lose. It’s compelling to think that apps will help chains to become valuable, but it’s not compelling enough if nobody thinks that apps themselves have value of their own.
So I want to counter that with what I’m calling the “Fat App Thesis.” And I want to claim something that’s been true for the duration of the internet to the point that I think it should be boring to claim.
*Actually, most of the value to be found in crypto today is to be found in apps.*
There’s three reasons for this, in ascending order of importance.
1.
The first, most speculative reason, is simply historical cycles. Apps are massively undervalued and protocols are massively overvalued for the reasons above. The internet tends to shift between decade-long infra and app cycles, and we’re reaching the tailend of a massive infra boom in which we’ve created extraordinary tech that finally works (which was not the case even two years ago). It’s apps’ time to shine, and they’ve never been more undervalued than now.
2.
The second reason, more compelling reason, is that apps and protocols have switched places since the “Fat Protocol Thesis” was coined in 2016. And that point, apps were all largely interchangeable forks of each other’s trading tools, while chains were walled gardens with massive liquidity moats. But oh, how things have changed. Today apps have all failed to fully fork each other (see: Sushiswap) because their real moat is users.
Chains, meanwhile, don’t even need much liquidity to power the future of social apps unless they’re targeting DeFi apps that require it (like @berachain). But more importantly, liquidity itself is collapsing as a moat for most chains as interop solutions and chain abstraction enable users to use apps and bridge between ecosystems seamlessly without even knowing what chain they’re on. It’s the chains, today, that are largely interchangeable—not the apps.
But this leads to the third, most important reason for why most of the value to be found in crypto today is to be found in apps.
3.
When liquidity isn’t the moat, the user is. Uses spend their time where other users spend their time. And this is why only a few apps ever win—because users will ultimately all draw each other to a few distinct cities on the internet.
This is also, paradoxically, why I suspect everyone (in and out of crypto) is so bearish on apps today: a few apps won a decade ago, and it’s been impossible to compete with their users’ attention ever since. Honestly, it’s been *hard* for anyone to come up with new ideas for apps within the limits of web2 constraints—namely app store fees, closed APIs, and the inability to spend money in a tap.
But onchain rails enable entire new types of app experiences with financial and reputational upside that was never possible before: they get rid of the app store fees, open the API on public blockchains, and let users spend and store money easily. So this is my theory. A few of these, too, will win. And as always in the history of the internet, they will become mega-apps that consume the majority of blockspace.
I could be wrong, very wrong. This era could be different. We could see the flourishing of millions of mini-apps, like all the apps in telegram, and I’d be thrilled about that.
But I suspect we’re in an ephemeral app era because the design space for new apps has only opened up in the past two years—and because crypto apps built entirely on token-price-going-up will ultimately collapse as token-price-goes-down. We don’t talk about it enough, but we have every sign now that that era is ending. The really exciting thing about the state of crypto apps today is that the next generation of prediction markets, contests, nfc chips, depin, and even vapes does not depend on token price going up as the use case. For the first time, crypto is the means, not the end.
What I mean is that apps can actually win longterm and start claiming all that blockspace we’ve been generating for years. And what happens then? Well, these apps can do novel things. They can return money to users rather than to the Apple app store to incentivize their growth. They can collect revenue from every tap. And they can, ultimately, generate vast revenue, of which only a tiny fraction will go to the chain.
I said before that chain’s don’t need vast revenue to receive vast valuations since they should be valued on something like GDP. But when most of that GDP is being generated by a few apps, it is worth asking: who really is the fattest of the stack? Is it still the chain? Or is it, far more likely, the app?
Let me end by saying that I’m not pessimistic on chains—at all. Many chains are *not* interchangeable, alternately because of unique VMs or opcodes (like @solana @irys_xyz @movementlabsxyz @eclipsefnd), native incentives (@berachain), high-level performance in familiar VMs (@mega_eth @monad_xyz), or enabling specific permissioning (@repyhlabs @celestiaorg). Apps built on these chains could only be possible on these chains. And ultimately, even if just a few apps win market share, investing in a chain is by far the best way to index on all the apps that will be built on top.
We like to think that infra and apps are at war with each other as they fight for funding from private markets. But there’s no real war for value between the two—each builds the value for the other and could not survive without each other. Besides, most apps will, I suspect, operate like protocols themselves for others to build on.
Still, though, we’ve behaved not only as though there’s a war, but as though infra has won. We’re realizing that’s deadly to infra. But what we need to realize is that it’s also a huge missed opportunity.
The next major wave of value will go to apps, and only a very few people in this ecosystem are willing to take the slightest risk to try to capture it.
The damage from the “Fat Protocol Thesis” on this space has been immense and set us back years.
The thing is—I actually love the Fat Protocol Thesis, and if you haven’t read it, you should. I’ll include a link below.
The simple version of the thesis is that protocols (ie chains) will capture more value than the apps built on them. Why? Well partly crypto apps have weak moats (they can be forked). But mainly, the success of apps will drive users to accumulate protocol tokens to use them, generating network effects for chains as every app drives up the token price of whatever chain it’s built on.
This was, in 2016, an extremely prescient argument. And I’d add my own argument for why protocols can have far greater value than apps too: protocol tokens operate like national currencies for a digital nation, underlying transactions within an ecosystem both as a medium of exchange as well as a representation of a legal order (smart contracts) that will guarantee the transaction’s validity, all while collecting tax for that ecosystem. Apps, meanwhile, are plain-old businesses generating revenue.
Of course, the market cap of a currency, which largely correlates to the GDP of everything built on top of it, tends to be much greater than the market cap of a company. This is why, I think, protocols have tended to be much more valuable than apps.
Which is the point. The past ten years have in many ways vindicated the “Fat Protocol Thesis,” reaching its culmination in the past year. Everyone knows this: the market cap of chains has crushed the market cap of apps. Protocols consistently raise at valuations of hundreds of millions of dollars pre-product, while apps with dedicated users struggle to raise at all.
To judge how much the market has bought into the Fat Protocol Thesis—to the point of complete irrationality—you just have to look at the valuations of many of the latest interchangeable, random L2s.
These L2s don’t fulfill any of the requirements of the Fat Protocol Thesis since their tokens don’t need to be used in transactions at all—in fact, these L2s often don’t even need to have a token in the first place. But narrative is often stronger than sense in crypto, and many of these L2s have comfortably reached 9-figure valuations while apps have struggled to get any kind of valuation in the first place.
(There are, I think, some L2s that will be genuinely valuable, like @mega_eth and @movementlabsxyz, but that’s a story for another time. My bags, my bags!)
There is, of course, a very simple explanation for why all this Chain Supremacy shit is problematic that we’ve all heard ad nauseam: a chain is only valuable if it has valuable apps. You’ll hear this from the chains themselves as they tout their massive performance improvements. “Of course we need to scale blockspace,” they say, “because the next top apps will need it.” But in a world where apps have failed for a full decade, only the insane among us actually want to build or fund more apps.
That’s great and all. But unfortunately, the logic that we need to fund apps in order for chains to be successful is never going to be compelling enough to get VCs to fund a whole category they still think will lose. It’s compelling to think that apps will help chains to become valuable, but it’s not compelling enough if nobody thinks that apps themselves have value of their own.
So I want to counter that with what I’m calling the “Fat App Thesis.” And I want to claim something that’s been true for the duration of the internet to the point that I think it should be boring to claim.
*Actually, most of the value to be found in crypto today is to be found in apps.*
There’s three reasons for this, in ascending order of importance.
1.
The first, most speculative reason, is simply historical cycles. Apps are massively undervalued and protocols are massively overvalued for the reasons above. The internet tends to shift between decade-long infra and app cycles, and we’re reaching the tailend of a massive infra boom in which we’ve created extraordinary tech that finally works (which was not the case even two years ago). It’s apps’ time to shine, and they’ve never been more undervalued than now.
2.
The second reason, more compelling reason, is that apps and protocols have switched places since the “Fat Protocol Thesis” was coined in 2016. And that point, apps were all largely interchangeable forks of each other’s trading tools, while chains were walled gardens with massive liquidity moats. But oh, how things have changed. Today apps have all failed to fully fork each other (see: Sushiswap) because their real moat is users.
Chains, meanwhile, don’t even need much liquidity to power the future of social apps unless they’re targeting DeFi apps that require it (like @berachain). But more importantly, liquidity itself is collapsing as a moat for most chains as interop solutions and chain abstraction enable users to use apps and bridge between ecosystems seamlessly without even knowing what chain they’re on. It’s the chains, today, that are largely interchangeable—not the apps.
But this leads to the third, most important reason for why most of the value to be found in crypto today is to be found in apps.
3.
When liquidity isn’t the moat, the user is. Uses spend their time where other users spend their time. And this is why only a few apps ever win—because users will ultimately all draw each other to a few distinct cities on the internet.
This is also, paradoxically, why I suspect everyone (in and out of crypto) is so bearish on apps today: a few apps won a decade ago, and it’s been impossible to compete with their users’ attention ever since. Honestly, it’s been *hard* for anyone to come up with new ideas for apps within the limits of web2 constraints—namely app store fees, closed APIs, and the inability to spend money in a tap.
But onchain rails enable entire new types of app experiences with financial and reputational upside that was never possible before: they get rid of the app store fees, open the API on public blockchains, and let users spend and store money easily. So this is my theory. A few of these, too, will win. And as always in the history of the internet, they will become mega-apps that consume the majority of blockspace.
I could be wrong, very wrong. This era could be different. We could see the flourishing of millions of mini-apps, like all the apps in telegram, and I’d be thrilled about that.
But I suspect we’re in an ephemeral app era because the design space for new apps has only opened up in the past two years—and because crypto apps built entirely on token-price-going-up will ultimately collapse as token-price-goes-down. We don’t talk about it enough, but we have every sign now that that era is ending. The really exciting thing about the state of crypto apps today is that the next generation of prediction markets, contests, nfc chips, depin, and even vapes does not depend on token price going up as the use case. For the first time, crypto is the means, not the end.
What I mean is that apps can actually win longterm and start claiming all that blockspace we’ve been generating for years. And what happens then? Well, these apps can do novel things. They can return money to users rather than to the Apple app store to incentivize their growth. They can collect revenue from every tap. And they can, ultimately, generate vast revenue, of which only a tiny fraction will go to the chain.
I said before that chain’s don’t need vast revenue to receive vast valuations since they should be valued on something like GDP. But when most of that GDP is being generated by a few apps, it is worth asking: who really is the fattest of the stack? Is it still the chain? Or is it, far more likely, the app?
Let me end by saying that I’m not pessimistic on chains—at all. Many chains are *not* interchangeable, alternately because of unique VMs or opcodes (like @solana @irys_xyz @movementlabsxyz @eclipsefnd), native incentives (@berachain), high-level performance in familiar VMs (@mega_eth @monad_xyz), or enabling specific permissioning (@repyhlabs @celestiaorg). Apps built on these chains could only be possible on these chains. And ultimately, even if just a few apps win market share, investing in a chain is by far the best way to index on all the apps that will be built on top.
We like to think that infra and apps are at war with each other as they fight for funding from private markets. But there’s no real war for value between the two—each builds the value for the other and could not survive without each other. Besides, most apps will, I suspect, operate like protocols themselves for others to build on.
Still, though, we’ve behaved not only as though there’s a war, but as though infra has won. We’re realizing that’s deadly to infra. But what we need to realize is that it’s also a huge missed opportunity.
The next major wave of value will go to apps, and only a very few people in this ecosystem are willing to take the slightest risk to try to capture it.
still one of the best essays on tech you'll ever read —
the fat protocol thesis:
usv.com/writing/2016/0…
the fat protocol thesis:
usv.com/writing/2016/0…
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