Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
TLDR:
Still today, critiques (some valid) of the digital asset space broadly generalize specific downsides of Bitcoin to every other digital asset, in effect discounting all the innovation and development across the industry through a single myopic and outdated viewpoint.
This is important: digital assets are more than just Bitcoin the coin.
In our last post, we buried the lede slightly when suggesting a new viewpoint through which to evaluate Bitcoin and other blockchain networks, while making the case that digital asset networks absolutely have intrinsic value. We defined blockchains as value transfer platforms, flagged the immense ecosystem of Ethereum and performance potential of alternative L1s like Solana, referred to multiple 10-billion-dollar layer 2 networks, and introduced on-chain computation with Turing-Complete virtual machines. We also highlighted protocols already being explored by the world’s largest financial institutions.
That is to say, the digital asset industry is far more than Bitcoin the coin, and in this post, we’ll explain how digital assets are fundamentally productive assets in an increasingly internet-native world before double clicking on the platform nature of these networks.
First comes first: digital assets are productive assets
Holding a share of a stock does not on its own make that stock a productive asset. Rather, buying a share represents a capital injection of cash into the company that can be directed towards generating value, which ideally results in a dividend paid out in the future or someone else buying that stock at a higher price because the business has grown. Similarly, holding a rock does not on its own make that rock a productive asset. Rather, extracting ore from that rock to use as a resource in the production of something else of higher value does.
Digital assets are no different. A useful lens is viewing them as commodities, not money, commonly defined as an asset that is consumed in the production of goods or services. Holding BTC or ETH on their own does not make them productive assets. Rather, provisioning them to participate in consensus or chain security (a process called staking) to enable network functionality and in turn receiving network fees and new issuance, or burning them to access compute resources, absolutely turns them into productive assets.
For almost all base-layer blockchains and for many layer 2 and now layer 3 chains, the native asset on that chain (e.g. BTC on Bitcoin, Ether on Ethereum) are required to use the resources of that network as well as enable the security, consensus and value transfer functionality (execution) of that network. For Ethereum, this is through its ‘gas’ mechanism. In essence, users must pay Ether to have their transactions executed on the network - the cost of accessing blockspace, Ethereum’s ‘product’. This fee is directed in essentially 2 ways: a portion goes to the roughly 1 million validators that participate in running the network, and another portion is consumed as a cost to access the computational resources of the Ethereum Virtual Machine.
That is, ETH the asset is used in the provision of decentralized computational capabilities – both through direct consumption as a network cost (gas) and by validators staking ETH to participate in consensus. Is it productive in the pre-internet sense of iron ore being turned into a shovel? No. But in an internet-native value transfer platform, the digital-asset ETH is far more useful of a commodity than a rock could ever be. To understand the value of digital assets, one’s perspective needs to be digital-first.
Pop Quiz - through what medium does Visa’s network coordinate transactions: telegram, telephone, or internet? Though silly to ask, it’s important to remember that at the most basic level Visa needs 30,000 employees in offices around the world to put code on servers in a few data centers. But it is ultimately that code that facilitates the Visa network.
There is no doubt that Visa absolutely provides a valuable service and that investing in Visa is investing in a productive operation. We already established that blockchains provide an even more valuable version of what Visa provides. It is wholly illogical to simultaneously argue that Visa provides a valuable service and blockchains do not. It then follows that an asset necessary to provide the services that blockchains provide is similarly inherently a productive asset.
Interestingly, post EIP-1559 and the switch to Proof of Stake, ETH is also largely a deflationary asset, meaning more ETH is burned from transactions than is newly issued, resulting in a net reduction in supply of 457,600 ETH to date (~$1.6B at current prices), all viewable directly on chain. Specifically, Ethereum generated almost $370M in profit in 1Q 2024 alone. In a traditional sense, this is akin to Visa consistently buying back and permanently removing its shares from circulation with every single transaction.
That means, even without staking one’s ETH, the proportion of total network value that a unit of ETH represents naturally increases over time. Further, staking ETH, or depositing it for a liquid staking token, provides the user a real yield paid out in ETH of 3-4% per year in exchange for contributing to the network. These features make ETH undeniably a cash-flow generating, productive asset – but only through active contribution, not passive free-riding.
What does this mean in practice? That Ethereum’s buyback yields, as a <10 year old “startup” is already matching the top tech and finance companies on the planet. Naturally, it can’t keep pace in terms of dividend payouts, but there is a straightforward path towards growing its buybacks to a level that makes its total payout ratio comparable - as demand for Ethereum blockspace grows, so too will that ratio, programmatically.
Blockchains as Value Transfer Platforms
We’ve established that digital assets are commodities in an internet-native world. But what exactly is being produced with these commodities? For the first time ever, internet-native value transfer platforms.
Many unfamiliar with blockchains and digital assets simply equate them to ‘cryptocurrencies’. With this mindset, it often naturally follows that ‘cryptocurrencies’ are just ‘currencies onchain’, and thus just used for paying for things much like traditional currencies are. While this is indeed entirely possible – two USD-pegged stablecoins, USDT and USDC, are currently on pace to facilitate $14 trillion in combined payments this year, $2 trillion more than Visa in 2023 – this is only a single example of what a few smart contracts (e.g. applications) enabled by blockchain-based value transfer platforms can do. In fact, the issuer of Tether earned $2.9B in profit in 4Q 2023 - with less than 50 employees - compared to Visa’s $4.7B with 30,000 employees. Visa, building on these networks and using these stablecoins, tracks this activity closely.
Smart contracts are snippets of deterministic code that interpret the instructions conveyed by the transactions submitted onchain, cannot be deleted, and with which interactions are irreversible. With these contracts – processed via Turing complete virtual machines such as the Ethereum VM and Solana VM - anybody can build and deploy complete applications, games and even entirely new networks on top of blockchains. That is, much like anyone today can build entire businesses online at any time, anyone can deploy an application on these blockchains and immediately tap into the network’s users and capital base.
The proliferation of use and demand for block space has naturally led to network congestion and increased costs to transact, especially on Ethereum and increasingly other chains. This is where the platform vs. simple network distinction really bears fruit. Because Ethereum is not a single closed network but rather an open platform, dozens of organizations have sprung up to build additional scaling networks on top of Ethereum (called layer 2 networks) that offload the actual transaction execution from Ethereum mainnet, and instead periodically post batches of transactions back to Ethereum.
Several of these, such as Arbitrum, Base, zkSync and Starknet, have millions of users themselves or are valued at $10-$20B on their own. Entire ecosystems of applications and games live on each of these new L2 chains now too, separate from the Ethereum mainnet, but entirely compatible and interoperable. A subset of this development is shown below, and each of these networks has its own ecosystem with hundreds or thousands of unique projects building:
Coinbase, one of the largest exchanges in the world, understands this value. It recently launched its own layer 2 chain called ‘Base’, utilizing yet another layer 2’s technology stack (the Optimism Stack). On Ethereum, Base competes with other open-source networks for users by incentivizing developers to build on their chain and driving innovation around user experience. Even though there may be dozens of chains directly competing for Ethereum users, they all ultimately settle their transactions down to Ethereum mainnet itself.
Coinbase is a leading example of how ‘traditional’ companies are beginning to blur the lines between centralized and decentralized activities by integrating blockchains – and it is paying off. Base has attracted 4M monthly active users since going live last summer, generating almost $27M in profit that flows straight to its bottom line. Currently, this represents an annualized $275M in new revenue and almost $20M per month in profit, or $200M+ per year. All derived from activities on Base, built on the open Ethereum platform.
Bitcoin enters the platform game
Great, so does Bitcoin have smart contracts too? Short answer: no. Bitcoin’s script is very limited and does not allow for nearly as complex interactions as Ethereum and most other blockchains, and thus cannot enable the same types of applications and use cases natively. Most ‘L2’ development on Bitcoin historically, such as Lightning, came in the form of better payment functionality at lower costs. Through most of Bitcoin’s history, this has been the biggest reason why critics have had grounds to argue that “Bitcoin is not a productive asset” in the narrow sense that it cannot generate cash flows or other yields. We have already dispelled the ‘not a productive asset’ myth ad nauseum in this post and last, but this lack of yield-generation argument has undeniably been true. That is, until Segwit, Taproot and surprisingly, Bitcoin inscriptions.
What started as an off-the-cuff experiment – a new way to etch code to Bitcoin, and specifically, tying that to the smallest unit of Bitcoin called a ‘satoshi’ – has given rise to an entire resurgence in Bitcoin development. In fact, it is near impossible to keep up with the pace of development around Bitcoin, new protocols, standards and layer 2 networks. Hundreds of millions, if not billions, in new funding has flowed into projects building on Bitcoin, all vying to be the first ecosystem to truly tap into the $1.5 trillion of latent BTC capital on the chain. Ethereum has established itself as a bonafide value transfer platform since its launch in 2015, but Bitcoin has largely laid dormant in terms of applications and L2 network development.
That is all changing, and projects such as Babylon will soon enable BTC holders to earn payments for contributing their BTC to the security of new applications and networks through staking (a la Eigenlayer), much the same way that proof-of-stake networks use their native assets to secure their networks. In short, Bitcoin has the potential to become a $1.5 trillion yield-generating productive asset, and Bitcoin the network, may soon become the world's largest value transfer platform.
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The $450 billion-dollar question. What is the value of ETH the native asset.
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