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DeFi at the present time has been, is and I believe will be one of the biggest use cases of Crypto. The market moves so fast that even if we don’t watch it for a while, we can easily miss trends like Curve Wars, Andre Gamethe strong growth of ecosystems,… and of course the great opportunities that come with it.
Having a wide perspective as I mentioned in the article “Crypto Market Forecast 2022” is a very important factor for you to choose the right investment branch, thereby doing little work.
In this article, I will introduce you to Fat Protocol Thesis and Baseplate thesis, which focus on finding where the most value is attracted in blockchain.
References are summarized at the end of the article.
What is Fat Protocol Thesis?
If you learn deeply about the market, you must be familiar with Fat Protocol Thesis introduced by USV in 2016.
The main points of Fat Protocol Thesis:
- In the traditional Web, the Protocol layer like TCP/IP, HTTP,… creates a lot of value, but the value is captured in Application Layer like Google, Facebook,… ⇒ The value will go to Application more than Protocol. .
- In Crypto, the Protocol layer captures more value, the more apps are developed on top of the protocol, the more value they attract ⇒ More value will go to Protocol than to Application.
The main reason for this is that in the traditional Web, the application can be easily profitable than the protocol with open source code and anyone can use it. As for Crypto, the protocol when creating value, the expectation of the token will increase and push more value to pour into the protocol.
This theory has taken the Crypto market by storm, especially in 2021 when the blockchain platform growing rapidly. For those who have read and applied Fat Protocol Thesis, the account must have increased a lot in 2021.
However, when I dig deeper, I find that the USV comparison of the blockchain-based protocol layer (Ethereum/Btc) with the web-protocol layer (TCP/IP) is not entirely correct, but instead the standard comparison object should be TCP/IP with Protocol Layer and Application with web-applicationthe cause lies in structure of blockchain (Outside the scope of the article, I will present it to you in the following articles).
If USV’s thesis is wrong, why are blockchains still the place to capture a lot of value and thrive?
Looking at it another way, blockchain can also be considered a protocol to some extent:
- They are the foundation on which dapps thrive.
- There is an element of making a profit from the token.
So more dapps grow ⇒ More value pours in ⇒ Tokens increase ⇒ Encourage more dapps to grow ⇒ …
According to the Fat Protocol thesis, Protocol is the place to get more value in the Crypto market. However, the Crypto market is a large market with many different development branches, each of which will require different factors to increase the likelihood of success for the project. Below I will introduce you to a thesis for the DeFi market – Baseplate thesis.
What is Baseplate Thesis?
The baseplate thesis is a thesis leveraged from Fat Protocol Thesis for DeFi, whereby the projects that capture the most value are open economy and foundational protocols. The main difference between the Baseplate thesis and the Fat Protocol thesis is that instead of focusing on letting value go to Protocol rather than Application, The baseplate thesis focuses on finding protocols that have an open economy and have the expected value for high protocol management (governance desirability).
From Application to Protocol
In order for you to have a better idea of the Baseplate thesis, I will take an example of Curve Finance. A successful project that has created a lot of buzz in the community over the past time. If you look at it from a different perspective, Curve has many similarities with a protocol.
Similarities of Ethereum and Curve:
- Ethereum: As a platform to operate decentralized smart contract protocols and have an economy that makes other parties (miners) compete for their own benefit.
- Curve: Being an AMM and having an economy for other parties (Yearn, Convex,…) to compete for their own benefits.
By not focusing on price but focusing on influence, Curve created an open economy that became the baseplate for other legos pieces to grow on.
Closed Economy vs Open Economy
- Closed-loop Economy: Closed-loop projects are projects that focus only on incentives for their own economy.
- Open-Loop Economy: Projects create incentives for other projects to grow their economy.
Below is a table comparing the economy of Sushi (a project with a Closed-loop) and Curve (a project with an Open-loop).
We can see that the two economies have a lot in common from staking tokens to receive xToken and veToken to locking, use case governance and revenue sharing.
The main difference lies in:
- Sushi does not have a factor for other projects to compete to own its token, the token is only an incentive for the pool to be reviewed by the Sushi team.
- In contrast to Curve, having a boosting and gauges mechanism has created an incentive for projects to compete for veCRV to maximize yield for their platform (Governance desirability).
Learn more: Analysis of Curve Finance’s operating model
Only a small factor in the design of the model created the impetus for Curve to attract other projects to develop above, thereby attracting a large amount of value to itself.
Summarizing the project is considered a baseplate when there are many satellite projects around, and integrates them into your economy. Baseplate creates value, not competes for more value for itself.
Baseplate Thesis Projections
Similar to Fat Protocol Thesis, with Baseplate Thesis, the protocol attracts more value than the application. The key to DeFi Apps becoming a protocol lies in designing an open economy and incentivizing projects to join and compete to extract the most value from that economy. There is a high possibility that in the future, there will be many projects moving to become a Baseplate.
Becoming a protocol brings great benefits, but turning an application into a protocol is very difficult. Fat Protocol Thesis has taken 6 years to be widely recognized, there is a big gap from theory to practice and requires us to have a proper assessment of the current situation.
In the Curve case study, the project itself can be seen as the main yield of DeFi on Ethereum, and Curve’s transaction volume and TVL are always at the top. With a design tokenomics The difference has made Curve lucky to become the selected project and gradually appear satellite projects.
Curve’s satellite projects are also among the top projects and have had a large number of users, such as Yearn, Convex, Frax, etc.
Another similar case is also very interesting that I see in the Solana system, Solana has many projects with satellites built around. The purpose is to optimize the yield source for users and they can do many tasks in an ecosystem of the project.
However, looking at the current results, we can see that the current results are not so good. The reason for this lies in:
- Solana is currently not attracting cash flow.
- Projects develop towards a harmonious ecosystem, lacking competition (something that Yearn, Convex,… did at the beginning).
- There are many projects that have not yet issued tokens ⇒ have not completed Ponzinomic.
Therefore a successful baseplate depends on many factors:
- Blockchain must have healthy cash flow.
- The project itself also needs to capture a significant market share.
- Having an open economy incentivizes other projects to grow on top and compete for the protocol’s value.
The Fat protocol thesis has proven correct to some extent. However, given the ever-evolving market landscape, more details will be needed to find out exactly where to attract the most value in each Crypto fork. With DeFi, the Baseplate thesis is a thesis that I appreciate, but there are still many elements that need to be improved.
With an ever-evolving and fast-growing space like DeFi, having an open economy offers greater expected value than a closed economy (something most projects are adopting today). ). Other branches of Crypto will also require an economy that matches them in order to stand out and capture the most value for themselves.
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