Pima: Analyzing the Business Models in the Cryptocurrency Space, the Value Path of Blockchain Investment
Author: Pima
What are you buying in the public chain market or the blockchain industry? Or where is the business model of blockchain headed?
The underperformance of the altcoin market has raised doubts among many in the industry. In a complex environment with different stages of industry development, the difficulty of investment is bound to increase, but the fundamental problem lies in finding a sustainable business model for long-term project development.
After ten years, I find that many people, even those who have been in the industry for a long time, still do not understand why public chains can dominate the TOP 100 list, why top public chains with billions or even trillions of funds attract so much attention, while your coin only garners a few million or tens of millions. Personally, I like to simplify complex matters, so I attempt to peel back the layers to analyze.
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, valuation PE. This is quite complex, with many influencing factors, such as growth potential, interest rates, penetration rates, industry space, how much the central bank is injecting liquidity, monopoly, etc. These are all factors that determine the different valuations given to different stocks at a certain time. The idol Buffett said he doesn't buy BTC because BTC has no cash flow (you can think of cash flow as profit). In the long run, I feel that most of what he said is correct; however, in the stock price formula mentioned above, only profit E is considered, and valuation PE is not taken into account. So from another perspective, MEME/BTC are of the same kind and can be classified under the PE factor. As long as your MEME keeps attracting buyers, it doesn't need to generate cash flow itself to rise to a certain stage, but there is one very important premise: within a certain market cap. The larger the market cap, the more people you need to attract; without continuous cash flow support, it is very difficult to sustain.
Second, profit E. We will mainly discuss this. Profit comes from revenue, so for the stock price to rise, revenue must increase. Where does revenue come from? It comes from the business model, which is defined as the commercial activity of making a profit by providing goods or services to others. Simply put, how does your company make money?
In 2006, Duan Yongping spent $620,000 to have lunch with Buffett. He asked a question that had troubled him for a long time: What is the most important thing in investing? Buffett answered that it is the business model. A company that does not know how to make money cannot sustain long-term development. The core driving force behind the continuous rise of the seven sisters of the U.S. stock market is profit, not other short-term factors.
So what is the business model in the crypto space?
In my view, it boils down to: block space fees; SWAP fees, which include exchanges, both DEX and CEX; lending, interest spreads; stablecoins, extracting fees; MEV, parasitizing block space. The others are easy to understand, but let's talk specifically about block space fees.
What is very subtle is that the crypto space has created a brand new business model: selling block space, which means public chains charge block space fees based on GAS fees. Global consumers purchase access rights to global computing/bandwidth resources and storage rights at a base price for each transaction.
I previously struggled to understand the term "value" internet. We know that most information on the internet is free, such as images, text, videos, etc. One piece of information can be copied infinitely, so in the early days of internet development, people did not know how to profit. Through later exploration, various internet business models were gradually discovered, including making money through SaaS subscription services, advertising, and transactions (e-commerce).
So where is the business model of blockchain? I later realized that the value internet of the crypto space is actually a paid internet; every click requires paying GAS. The original intention of blockchain is to solve the monetary attribute problem, which is very different from the free internet. You cannot take one amount of money and replicate it infinitely to pay others; the free internet cannot solve the monetary problem.
Therefore, in the process of extending from currency to public chains, its uniqueness lies in that it makes consumers bear the cost of accessing block space. For decades, companies in the internet era have rented computing resources and paid AWS bills to provide products and services to customers, thus charging fees to make a profit.
Now, with applications on the blockchain, it’s different: users pay for the operational costs of projects. Every year, global consumers pay billions to hundreds of billions of dollars in GAS fees, which is the revenue of public chains. If the annual revenue is $10 billion, with a 5% treasury yield and a 20x PE, that gives a market cap of $200 billion; a 10x PE gives a market cap of $100 billion; a 50x PE gives a market cap of $500 billion. This is the fundamental reason for the vastness of the public chain market.
For example, the issuance of USDT on TRX has reached 60 billion, occupying half of the entire USDT market. I looked at TRX's total revenue for 2023, which is about $400-500 million, of which 75% comes from USDT transfer income, equating to $400 million in profit. If we assign a 20x PE, an $8 billion valuation for TRX is reasonable. Of course, this is not the key point; the key point is whether this data can expand tenfold or even more in the next decade. How much market share can SOL seize in the future growth market of payments/open finance? I digress; we will not further elaborate on expansionary topics here.
You need to understand that I am merely trying to explain why the public chain market is vast. I am simply stating that you are willing to pay for GAS fees, which is an already existing phenomenon. I have not delved deeper into why you would pay GAS and why more people will pay GAS in the future. Is it the demand for transfer payments? The desire for wealth (holding GAS)? The need for entertainment (paying for a DAPP)? The demand for trading cryptocurrencies/commodities/stocks/SWAPs? You must know that if in the future no one pays for GAS fees, the public chain market will cease to exist.
So now, many times when I see some flashy terms, I wonder whether it is due to the early development of the crypto space or the difficulty of landing and visualizing these concepts. The promotions are filled with abstract terms that are hard for ordinary people to understand: scalability, ZK technology, L2, UTXO, chain abstraction, modularization, homomorphic encryption, parallel EVM, etc. Personally, I did not participate in the early development of the internet, so I only later realized that terms like modularization/monolithic chains originated from internet technology. However, in the internet field, very few people mention them, while in the crypto space, they are repeatedly emphasized as key promotional points. I am now quite resistant to these narrative terms; I basically familiarize myself with the basic concepts and then directly ask: How much revenue can this technology bring me? How much profit can it generate for me to buy back? Otherwise, what is the market fit of your technology? I can support the long-term cultivation of foundational technologies and disciplines, but tell me how long it will take to achieve a clear business model? Two years, ten years, or twenty years? The more complex questions of how to increase revenue from GAS and who can capture the leading market share are what you should focus on, although I have already chosen $SOL.
Therefore, since public chains are products with revenue, cash flow, and profit, their business model is clear and has a way out. The remaining task is for you to decide how to expand revenue, increase market share, reduce costs, and take actions that align with the path of business development.
Many projects in the crypto space lack a business model; they themselves do not know how to make money. The survival rate of the Fortune 500 is only 3% now. Investment is about finding these 3% projects and holding them long-term. Many investment philosophies are very simple, but they are very difficult to implement. With tens of thousands of projects in the crypto space, how can one see the value to invest? Be serious; it’s about investing.
When the river is clear, how long can life last? Do less of the pretentious and unrealistic, and be more down-to-earth; otherwise, time is running out for you.