The author of this article is Pima, co-founder of Continue Capital, and the source is the author’s Twitter @LeePima
What are you buying in the public chain market or the blockchain industry? Or where is the way out for the business model of the blockchain?
The unsatisfactory performance of the cottage market has raised doubts among many people in the industry. In a complex environment with different stages of industry development, the difficulty of investment is inevitable. However, the fundamental problem is that you need to find a business model for the long-term sustainable development of the project.
For ten years, I have found that even many industry insiders who have been in business for a long time do not quite understand why public chains have always dominated the TOP100 list and why the top public chains attract so much funding in the hundreds of billions, while your coin, even if it’s just a few million, is hardly noticed. I like to simplify complex things. I try to dissect it by starting from first principles, P=E*PE, that is, Stock Price = Profit * Valuation. Therefore, in the long run, the influencing factors of stock price are only profit and valuation.
First, the valuation PE. This is quite complex, with many influencing factors, such as growth rate, interest rate, penetration rate, industry space, central bank liquidity, monopoly, and so on. These factors determine the valuation given to different stocks by people at a certain period of time. Warren Buffett said he doesn’t buy BTC because BTC doesn’t have cash flow (you can think of cash flow as profit), and in the long run, I feel that most of what he said is correct. However, in the above stock price formula, only profit E is considered, not valuation PE. Therefore, from another perspective, MEME/BTC are of the same kind and can be categorized under the PE factor, as long as your MEME continues to attract buyers without creating cash flow, it can rise to a certain stage. But there is an important premise: within a certain market value. The larger the market value, the more buyers you need to attract. Without continuous cash flow support, it is very difficult to sustain it.
Second, profit E, this is what we mainly discuss. Profit comes from revenue, so for the stock price to rise, revenue must go up. And where does revenue come from? It’s the business model, which is defined as the business activity that makes a profit by providing goods or services to others. Simply put, it’s how your company makes money. In 2006, Pang Yinpeng spent $620,000 to buy Buffett’s lunch. He asked a question that had been bothering him for a long time: what is the most important thing in investment? Buffett’s answer was the business model. A company cannot survive in the long run if it doesn’t know how to make money. The core reason for the continuous rise of the FAANG stocks in the US stock market is profit, not other short-term factors.
So what is the business model of the cryptocurrency industry? In my opinion, it is nothing more than: block space fees; SWAP fees, that is, exchanges, including DEX/CEX; lending, interest rate differential; stablecoins, fees; MEV, which is parasitic on block space. Other aspects are easier to understand, but let’s focus on block space fees.
In fact, very hidden is that the cryptocurrency industry has created a new business model: selling block space, that is, public chains price and charge block space fees in GAS fees.
Global consumers purchase access to and storage rights for global computing/bandwidth resources based on the basic price of each transaction.
In the past, I didn’t understand a few words, such as “value” internet. We know that most of the information on the Internet is free, such as images/text/videos, etc. The same information can be copied infinitely, so in the early days of the Internet, people did not know how to make a profit. In the subsequent exploration, they gradually discovered the business model of the Internet, including making money from SaaS subscription services, advertising, and transactions (e-commerce).
So where is the business model of the blockchain? I later understood the “value” internet of the cryptocurrency industry. It is a paid internet, where you have to pay GAS every time you click.
The original intention of blockchain was to solve the currency attribute problem, which is very different from the free internet. You cannot spend a dollar multiple times and pay it to others repeatedly, so the free internet cannot solve the currency problem. Therefore, in the process from currency to public chain, its uniqueness lies in the fact that it makes consumers bear the cost of accessing block space. In the past few decades, companies in the Internet space have rented computing resources and paid AWS bills in order to provide products and services to customers and collect fees for profit. In applications on the blockchain, users pay for the running costs of the project. Each year, global consumers pay tens of billions to hundreds of billions of dollars for GAS, which is the revenue of the public chain. If the annual income is 100 billion, with a 5% bond yield and a 20 times PE, the market value is 200 billion; with a 10 times PE, it is a market value of 100 billion; and with a 50 times PE, it is a market value of 500 billion. This is the fundamental reason for the huge public chain market.
For example, the USDT issued on TRX has reached 60 billion, occupying half of the entire USDT market. I looked at the annual income of TRX in 23 years, which is about 400-500 million USD, 75% of which is USDT transfer income, meaning that the profit is 400 million USD. If we give a 20 times PE, an 80 billion valuation for TRX is reasonable. However, the focus is not on this, but rather on whether this data can be increased tenfold or more in the future? How much incremental market share can the payment/open finance of SOL, which is gaining momentum, capture? That’s going too far, and I won’t go into further expansion of this topic here.
You need to understand, I’m just trying to explain why the public chain market is huge, that is, I’m just explaining the existing phenomenon of your willingness to pay for GAS, and I have not gone further into why you need to pay GAS and why more people will pay GAS in the future. The demand for transfer payments? The demand for getting rich (hoarding GAS)? The demand for entertainment (paying for a DAPP)? The demand for currency exchange/trading commodities/stocks/SWAP? Keep in mind that if no one is willing to pay for GAS, the public chain market will cease to exist.
So, many times, when you see some flashy terms and don’t know if it’s because of the early stage of development in the cryptocurrency industry or the difficulty in landing and concretizing, these are all abstract terms that are difficult for ordinary people to understand: scalability, ZK technology, L2, UTXO, chain abstraction, modularization, homomorphic encryption, parallel EVM, etc. Because I did not participate in the early development of the Internet, it wasn’t until later that I realized that terms like modularization/single-chain all originated from Internet technology, but you rarely hear people mention them in the Internet field. Instead, they are repeatedly used as key publicity points in the cryptocurrency industry. I am now resistant to these terms. Basically, after familiarizing myself with the basic concepts, I directly ask: how much revenue can this technology bring me? And how much profit can it generate for me to buy back? Otherwise, where is the market fit for your technology? I can support long-term deep cultivation of basic technology, but tell me how long it will take to get a clear business model? Two years, ten years, or twenty years? How to increase revenue from GAS and who can occupy the leading market share in the future? These more complex questions are what you should focus on, even though I have already chosen $SOL.
Therefore, since the public chain is a product with revenue, cash flow, and profit, its business model is clear and has a way out. What’s left is how you choose to expand revenue, increase market share, and reduce costs, etc., in line with the path of business development.
Many projects in the cryptocurrency industry do not have a business model, meaning they themselves do not know how to make money. The survival rate of the Global Fortune 500 is only 3%. Investment is about finding these 3% of projects and holding them for the long term. Many investment ideas are very simple, but it’s very difficult to put into practice. With tens of thousands of projects in the crypto industry in the future, how can you invest if you can’t see the value? Invest seriously, and invest in things that are real.
How long will the clear business model take? Two years, ten years, or twenty years? How can you increase revenue from GAS and who can occupy the leading market share in the future? These are the more complex questions you should focus on. So, the public chain market is huge because of its clear business model. If you don’t pay attention to the time, you won’t have much left.
