We are often asked about the difference between value accrual to computational protocols, i.e., L1s, or DeFi applications. You are probably more used to understanding businesses and projects, not networks and ecosystems.
So let’s play a game of measuring things according to their stored energy consumption. Think, nature’s money.
A worker bee needs 11 mg of sugar each day. There are 4 calories in 1 gram of sugar, or 4/1000 in a milligram. That means a bee needs 44/1000 calories per day, or 16 calories a year. There are two trillion bees in the world. This super organism consumes somewhere between 30 and 50 trillion calories per year.
Now, what do bees pollinate? A lot of stuff actually.
Ok. Let’s take Apples.
Apple trees consume sunlight and generate apples through photosynthesis. It’s super hard to derive an amount of calories that a tree absorbs from the sun per day, in part cause this framing of the question is super wrong and we aren’t experts. But according to this thread, let’s say somewhere between 500 and 20,000 per day, or 5,000 for fun, for a total of 1.5 million per year.
There are 10 billion apple trees in the world, which suggests an annual caloric consumption of 15 quadrillion. Let’s give it a range of 2–50 quadrillion.
So now we ask the question. What’s “better”? The bee, with its 50 trillion calories of energy. Or the apple tree, with its 15 quadrillion. In which do you want to “invest”.
The bee is the application, switching amongst different protocols. The bee can pollinate the Apple protocol, or the Blueberry protocol, or the Pumpkin protocol. It is a multi-protocol bee. It is multichain, with $CAL 50T value locked per year.
The Apple protocol is pretty valuable from an energy point view, certainly relative to the Bee application, maybe between 25x to 1000x more valuable. But it doesn’t just help the Bee subsist in its particular function. It also helps the Human, and the Cow, and the Ant, and the Worm.
It is a protocol that is *bridged* into the rest of its ecosystem. It is connected to its nature.
The tree will open up its flower as reward, full of pollen. Full of ecosystem grants.
The bee will bring that pollen between the trees, giving them life. Liquidity.
They all need each other, recursively.
Reflexive and Recursive
We want to take a quick aside here. It’s fun to talk about self-referential, recursive systems that bootstrap through a symphony of interplay between different factors.
It’s why a cashflow-based fundamental value spreadsheet doesn’t make sense for analyzing the launch of a protocol meant to power an economy. The value creation is from the novelty of bouncing around between unexpected ecosystem participants, not about the mechanistic printing of hallucinated Internet money.
If you haven’t read, here’s some reminders…
Food for Thought: The Grand Theory of the Universe
Food for Thought: The nature of Consciousness, artificial intelligence, and how we see Finance
Food for Thought: A meditation on capitalism, the grey goo, and the Borganisms
But there’s a difference between (1) things that are endlessly, abstractly recursive, and (2) things that are real and have some physical limit. That physical limit might be actually constructed from human imagination (i.e., we can’t work with infinity), or it might be the nature of the world in which the thing is instantiated.
Here’s a quick example. The fractal below is infinitely repeating its patterns, no matter how much you zoom in.
While the fern is a fractal, which stops.
It may display self-similarity, but it has no need to endlessly loop forever and ever.
Subnets and Supernets, Parachains and Shards
Ok, what a strange start we had today!
First, we established the relationship between Apples and Bees. Or perhaps, Ethereum and Uniswap.
Then, we established that there’s a limit to self-similarity. Some things will naturally repeat at the macro and micro level, and perhaps that’s even pleasing aesthetically and mathematically, but there are limits from function.
So let’s take a look at the news that Polygon launched a new infrastructure called a Supernets and will invest $100MM in projects that use it.
The idea is to have a launcher of chains that all connect to a single infrastructure, including a set of professional validators, but generate separate chains. What we can potentially see from this product is the launching of many distinct chains of similar architecture targeted for various industry uses. In a sense, there could be standardization of semi-private or semi-public networks, with the Polygon validator set and the Matic token benefitting by capturing these industry use cases.
You can see a bit of this recursive thinking we talked about. Polygon itself is a permutation of Ethereum, referencing and repeating at a smaller scale Ethereum’s economy, and bridging back through applications. Then these Supernets are a permutation of Polygon, for likely smaller, more niche uses. Will the Supernets have Micronets, and the Micronets have Millinets, and so on? Maybe, but probably not, because there is a physical limit to useful fractals.
Another one to flag is subnets on Avalanche. In fact, the company has a $290 million fund to increase the number of subnets on the blockchain.
The platform chain can have any number of subnets, which are custom sets of validators that may have particular rule-sets for participation. So you can have a rule that validators are in a certain country, or are behind KYC/AML checks, or hold a certain license. If that sounds like an investment banking regulator dream, you’ve got that right.
Of course this all points to the ideas in Polkadot, with its Parachains …
… and the designs of Ethereum’s Shard chains.
We have reasoned by metaphor and analogy to give the less technically minded reader — such as ourselves — a way to understand the market impact of these technological innovations in a way that can create an intuition for the generation of value.
It appears that there is a fractal design pattern for the overall crypto ecosystem, and especially with decentralized computation. The ability to shard, supernet, subnet, or parachain you major computational chain is going to be standard. It might evolve by market evolution, such as with what has grown on top of Ethereum as connected, L1s and L2s, or it may come packaged within the design of the system itself, as we are now seeing the Polkadot concept applied in Avalanche, Polygon Supernets, and elsewhere.
This is a winning combination, because it is both self-similar, leveraging past standards, as well as sufficiently loose to create differentiation. And differentiation leads to evolution, competition, and innovation.
Further, we can understand the role of businesses or DeFi applications or NFT marketplaces or DAO — let’s think of them as the Bees of economic activity, carrying around value rather than pollen-based calories — to be one of moving towards the most productive, multichain use.
And so the investment thesis shouldn’t be “just” the expanding fractal infrastructure layer. And it shouldn’t be “just” some highly optimized Bee getting all the pollen in 2022. Rather, it should be an observation of the reflexive nature of the ecosystem, and an attempt at correct sequencing of its growth.