Given their high valuations, consider reducing exposure to major Layer 1 blockchains like Ethereum (ETH) and Solana (SOL). The most compelling investment opportunities may be in the application layer, which captures the majority of network fees at a fraction of the market capitalization. Focus on protocols with strong revenue and reasonable valuations, a strategy that favors investing in profitable businesses over the underlying infrastructure. For example, Ethena (ENA) was highlighted as a specific opportunity, noted for its fast growth and sensible 8x price-to-sales ratio. This approach suggests better risk-adjusted returns can be found in DeFi applications rather than the Layer 1 tokens themselves.

Layer 1s (L1s) - General Theme

This debate centers on the fundamental question of how to value Layer 1 blockchains like Ethereum and Solana. The core disagreement is whether they are overvalued based on traditional financial metrics or if they represent a new type of exponential technology that requires a different valuation model.

• The Bearish Case (Santiago):

  • L1s are grossly overvalued when analyzed with traditional metrics like the Price-to-Sales (P/S) ratio.
  • The primary use case for L1s is currently speculation, described as a "casino." This makes their revenue highly volatile and not sticky.
  • There is a "demand problem" for block space outside of speculation. Real-world, durable economic activity has not yet arrived at scale.
  • Value is not being captured effectively at the L1 layer. Instead, it's accruing to Layer 2s (L2s) and applications (like DeFi) built on top.
    • A cited report from 1KX states L1s represent 90% of the crypto market cap but only generate 12% of the fees, whereas DeFi protocols generate 73% of fees with less than 10% of the market cap.
  • The market is becoming fatigued with the constant launch of new L1s, and there isn't enough demand to absorb all the new tokens at high valuations.

• The Bullish Case (Haseeb):

  • Using P/S or P/E ratios is the wrong mental model. L1s are exponential technologies, similar to the early internet or e-commerce, and should be valued on future growth potential, not current revenue.
  • A better analogy is to view L1s as cities or states (e.g., Singapore). They are currently in a growth phase, intentionally keeping "taxes" (fees) low to attract "capital" (Total Value Locked - TVL) and "citizens" (users and developers).
  • These "digital states" can choose to increase taxes and monetize their moats later, once they've reached scale. Tron (TRX) is used as an "existence proof" of an L1 that has successfully chosen to monetize by raising fees.
  • Top L1s like Ethereum and Solana have powerful moats (network effects, developer communities, sticky capital) that lead to long-term stability and value.
  • The market is not dumb; the high valuations reflect the massive future potential of crypto becoming the settlement layer for all global financial assets.

Takeaways

• This debate highlights two distinct frameworks for evaluating L1 investments. Your investment thesis will depend on which argument you find more compelling.
• If you align with the bearish view: You might consider reducing exposure to major L1 tokens like ETH and SOL due to their high valuations and questionable value capture. Instead, you might look for opportunities higher up the stack in the application layer (DeFi), where projects may have more direct revenue and trade at more reasonable multiples.
• If you align with the bullish view: You would view the current low revenue of L1s as a feature, not a bug, representing a focus on long-term growth. You would continue to hold major L1s as a bet on the exponential growth of the entire crypto ecosystem, believing that value capture will be solved in the future. You might use metrics like TVL growth and developer activity as key indicators instead of fee revenue.

Ethereum (ETH)

Ethereum was the primary subject of the valuation debate, serving as the main example for both the bull and bear cases.

• Santiago's Bearish View on ETH:

  • At a $380 billion valuation generating about $1 billion in fees, ETH trades at a 380x Price-to-Sales (P/S) ratio, which is considered extremely high compared to even high-growth tech companies like Amazon (AMZN), which peaked at a 28x P/S ratio during the dot-com bubble.
  • He believes ETH is "totally cooked" and will be like Cisco (CSCO) stock, which never recovered its dot-com bubble all-time high.
  • Ethereum's value capture is fundamentally broken because most of the economic activity and fees are migrating to Layer 2s (L2s), which do not share enough of that revenue back to the Ethereum L1.
  • Ethereum has a poor "go-to-market" strategy and is failing to attract real-world businesses to build directly on the L1.

• Haseeb's Bullish View on ETH:

  • The 380x P/S ratio is irrelevant because Ethereum is not a company; it's a developing digital nation focused on growth.
  • Ethereum has an enormous moat in terms of capital, users, and developer activity, which has been maintained despite slow execution in recent years.
  • The recent price recovery from lows around $1,600 was a critical moment. It showed that ETH holders have ultimate control and can force the protocol to focus on value capture and L1-centric growth when necessary, disproving the idea that it's a "socialist paradise" that will never monetize.
  • Ethereum is like a state with a low tax rate (low fees) to encourage economic growth. It retains the option to raise taxes later, just as a government can in times of need.

Takeaways

• An investment in ETH is a bet on Haseeb's "digital state" thesis. You believe that its strong network effect and vast pool of capital (TVL) will eventually be monetized, and its current valuation is justified by its potential to become a foundational layer of the future financial system.
• Avoiding or selling ETH aligns with Santiago's view. You believe its valuation is unsustainable, its value capture mechanism is flawed, and better risk-adjusted returns can be found in applications built on top of it or in other ecosystems.

Solana (SOL)

Solana was frequently mentioned alongside Ethereum as another major L1 with a high valuation.

• At a $75 billion valuation, its P/S ratio was cited as being around 75x (or 42x on a circulating basis later in the debate), which is still considered very high.
• Santiago characterized Solana's on-chain activity as being even more speculative and "casino-like" than Ethereum's.
• Haseeb noted that despite its focus on execution, it remains a clear "titan" of the industry with a strong, stable moat.

Takeaways

• The bull and bear arguments for L1s apply directly to SOL.
• A bearish investor might be particularly wary of SOL if they believe its revenue is even more tied to volatile, speculative activity (like memecoin trading) than Ethereum's.
• A bullish investor sees SOL as another major "city" in the crypto world, attracting users and developers with its high performance and low fees, positioning it for long-term growth.

Tron (TRX)

Tron was presented as a fascinating and important case study in L1 monetization.

• Tron is considered one of the most profitable L1s in crypto.
• The Reason for its Success: Tron solved the "demand problem" by becoming the dominant platform for Tether (USDT), especially in emerging markets in Asia and Africa. This was attributed to founder Justin Sun's business acumen and focus on user adoption.
• Monetization: Because Tron has a captive user base that needs USDT, Justin Sun was able to "jack up the fees" to capture significant revenue. This demonstrates that L1s can monetize their moats if the political will is there.
• Valuation: Tron was noted as trading at a 41x P/S ratio, significantly cheaper than Ethereum or BNB Chain.
• The Risk (Haseeb's view): Tron may be over-monetizing too early, which could cause it to lose market share over time as competitors with lower fees emerge.

Takeaways

• Tron serves as the primary real-world example for Haseeb's thesis that L1s can choose to "raise taxes."
• For investors, TRX presents a different value proposition than ETH or SOL. It's less of a bet on future exponential growth and more of an investment in a profitable, cash-flowing network with a proven business model, albeit one with its own risks regarding competition and sustainability.

Application & DeFi Layer (ENA, AAVE, etc.)

Santiago argued that the most attractive investment opportunities are in the application layer, not the L1 infrastructure layer.

• The Core Thesis: Applications and DeFi protocols are capturing the majority of the fees (73%) but represent a small fraction of the total market cap (<10%). This suggests they are undervalued relative to the L1s they are built on.

• He believes in the "user aggregation theory," where value accrues to the platforms that own the user relationship (e.g., wallets, exchanges, and top applications), while infrastructure becomes a commodity.

• Specific Opportunities Mentioned:

  • Ethena (ENA): Described as a fast-scaling on-chain credit fund. At the time of the podcast, it was trading at a sensible 8x P/S ratio (or 4x at another point). It is seen as well-positioned for a risk-on environment.
  • Hyperliquid: A derivatives exchange noted for trading at a 10x P/S ratio.
  • Aave (AAVE): A long-standing DeFi lending protocol with significant TVL, representing a durable application.
  • Pump.fun: A platform for launching memecoins, mentioned as trading at a very low 2.5x P/S ratio.

Takeaways

• Investors who find Santiago's arguments compelling should research opportunities in the DeFi and application layer.
• The strategy is to find protocols with strong product-market fit, direct user relationships, and significant fee generation that trade at reasonable Price-to-Sales or Price-to-Earnings multiples.
• This is a "picks and shovels" approach, but instead of buying the land (L1s), you are buying the profitable businesses (applications) built on that land. The risk is that the revenue of these applications can also be highly dependent on overall market activity and speculation.