Focus on "on-chain businesses" with growing markets, increasing market share, and strong token buyback programs. Aave (AAVE) is a prime example in the DeFi lending space, reportedly using fees to conduct around $1 million in buybacks per week. Consider Hyperliquid, an efficient derivatives platform that uses 98% of its fees for buy

Investment Framework: Evaluating "On-Chain Businesses"

The central theme of the discussion is that investors should stop treating altcoins like speculative lottery tickets and start evaluating them as "on-chain businesses." A three-part framework was proposed to identify fundamentally sound projects.

• The Three-Question Framework:
  • Is the Total Addressable Market (TAM) growing? The overall industry or sector the project operates in must be expanding.
  • Is the project taking an increasing share of that market? The project must be a winner within its sector, actively growing its user base and market dominance.
  • Is there sustainable value accrual back to the token? The business must have a mechanism to return profits to token holders. The speaker expressed a strong preference for buybacks over staking rewards, as buybacks create a consistent buying pressure on the token's price.

Takeaways

• Shift in Valuation: The crypto market has matured. Valuations, which were once 250x sales in 2021, have compressed to be in line with traditional stocks (around 20-25x sales). This means fundamentals like revenue and profitability are now much more important.
• Focus on Winners: Most crypto projects will fail, just like traditional startups. The key is to be selective and invest in the businesses that are efficiently scaling, capturing market share, and returning value to their token holders.
• Holding is an Active Choice: If you are holding a token that you would not buy today at its current price, you should reconsider your position. Holding is the same as actively choosing to buy it every day.

Bitcoin (BTC)

• Bitcoin is described as being in a class of its own, separate from the "on-chain business" framework used for altcoins.
• The market treats Bitcoin as "levered tech." It has been observed to trade almost one-to-one with the IGF ETF, which is a software-as-a-service tech fund.
• The speaker views this as a reasonable valuation approach, as Bitcoin is fundamentally a technology.

Takeaways

• Bitcoin should not be analyzed with the same revenue and cash-flow metrics as altcoins. Its value proposition and market behavior are different.
• Investors should view its price action as being closely correlated with the broader technology sector, particularly software companies.

Ethereum (ETH)

• Bullish Case: Ethereum's total addressable market is growing. It is considered the primary hub for major narratives like Real World Assets (RWAs), ETFs, and tokenization.
• Bearish Case: The speaker expressed significant concerns about Ethereum's ability to capture value and market share.
  • It is losing market share to other Layer 1 blockchains like Solana.
  • Layer 2 solutions (L2s) have been "cannibalistic," taking revenue and activity away from the main Ethereum chain. The creator of Ethereum, Vitalik Buterin, was even quoted as saying the L2 roadmap was potentially wrong.
  • There is a lack of direct value accrual to the ETH token. While applications on Ethereum like Uniswap and Lido are profitable, that value goes to the applications themselves, not back to ETH holders beyond basic transaction fees.

Takeaways

• While Ethereum is at the center of many important crypto trends, there are serious questions about its long-term investment viability based on the proposed framework.
• The primary risk is that value is being captured by applications and competing chains, not by the ETH token itself. Investors should be cautious and monitor whether changes are made to improve value accrual for ETH holders.

Aave (AAVE)

• Presented as a "good example" of a project that successfully meets all three criteria of the investment framework.
• Growing Market (TAM): Operates in the DeFi lending space, which is growing as more RWAs come on-chain. This enables the "Buy, Borrow, Die" strategy used by the wealthy to leverage assets without selling them.
• Increasing Market Share: Aave is a dominant player, holding approximately 60% of DeFi TVL.
• Value Accrual: The protocol generates significant fees and uses them for token buybacks. It was stated to be conducting around $1 million in buybacks per week.
• Key Metrics Mentioned: $43 billion in Total Value Locked (TVL) and $530 million in annualized fees.

Takeaways

• Aave is highlighted as a fundamentally strong on-chain business due to its market leadership, position in a growing sector, and direct return of value to token holders through buybacks.

Sky (formerly MakerDAO, MKR)

• Another project presented as a strong example that fits the investment framework.
• Growing Market (TAM): It is fundamentally a stablecoin business, and the market for stablecoins is experiencing significant growth and adoption.
• Increasing Market Share: Sky's own stablecoin is growing its market share within this expanding sector.
• Value Accrual: The protocol has a mechanism for "direct value accrual" back to the token.

Takeaways

• Sky's strong performance relative to the market is attributed to its solid business fundamentals. It is a good case study of a project succeeding by growing its product in a growing market while ensuring value flows back to its token.

Hyperliquid

• Highlighted as an extremely efficient on-chain business and a very strong example of the framework in action.
• Growing Market (TAM): The market for on-chain derivatives trading is growing, with an increasing ratio of volume moving from centralized exchanges (CEX) to decentralized exchanges (DEX). Hyperliquid is also expanding the market by listing new assets like Silver, where it briefly captured 3-4% of global trading volume.
• Value Accrual: The protocol has "enormous direct value accrual." 98% of all fees are used to buy back its token. On a recent volatile day, it generated $6.5 million in fees, which were used for buybacks.
• Efficiency: Described as potentially the "most efficient company in the world" based on revenue per employee.
• Risk Mentioned: The buyback program is not coded into the protocol and could theoretically be turned off by the team at any time.

Takeaways

• Hyperliquid is presented as a top-tier on-chain business due to its explosive growth, market expansion, and aggressive buyback program that directly benefits token holders.
• Despite the strengths, investors should be aware that key features like the buyback mechanism are subject to team discretion and are not immutable.

Maple (MPL)

• Mentioned as another interesting example that fits the three-part framework.
• Growing Market (TAM): Operates in the institutional private credit market, a sector that is increasingly moving on-chain.
• Increasing Market Share: The protocol has seen enormous growth, with its assets under management (AUM) growing by 10x.
• Value Accrual: 25% of protocol revenue is used to buy back the MPL token.

Takeaways

• Maple represents a successful business bringing traditional financial services (private credit) on-chain. Its rapid growth and token buyback program make it a project worth analyzing further.

Pump.fun (PUMP)

• Presented as a more nuanced case study that only partially fits the framework, highlighting potential risks.
• Increasing Market Share: It has successfully dominated the "meme launchpad" space, fending off all competitors.
• Value Accrual: The project has conducted "enormous" buybacks of its token.
• Growing Market (TAM) - The Problem: The speaker is skeptical that the market for meme coins is growing. They see it as a highly speculative niche where traders chase hype. For Pump.fun to have long-term growth, it needs to expand into a new, larger market, such as the social media platform it has proposed. This future is uncertain.

Takeaways

• Pump.fun demonstrates that strong market share and buybacks are not enough if the core market itself is not growing.
• The investment thesis for PUMP is dependent on its ability to successfully pivot and capture a new, larger market. The market is currently pricing in this uncertainty, as the token price has not responded strongly to the large buybacks.