ROUNDTABLE: The REV Debate: Real Metric or Fake News? Jon, Bread, & Andy8052

Welcome, Bankless Nation. Back to the roundtable. Back here with me today is the man with glutinous glutes 0x Bread Guy. Good to see you.

Yo yo.

And Crypto's chief lowercase R Rev researcher, John Sharponeau.

How's it going?

Rev searcher, maybe.

Rev searcher, yeah. And then last but not least, the world's most Zen Djinn. Andy 8052. Welcome back.

Hello?

Okay, so Crypto Twitter is talking about ReV, and I don't exactly know why we picked this week to talk about REV, but I think it has to do with John Sharponot over here, who put out a tweet, and then all of a sudden the meta for this week started talking about ReV, which means that we just had nothing better to talk about, I would assume. John, why why are we talking about REV?

Yes, sure. And yeah, I definitely do think it's a sign that we don't have anything better to talk about because none of none of this is honestly.

Think so.

I think it's good.

I think

It's it's it's good stuff, but none of it's that new. The only new thing was so I put out this tweet on Saturday morning, and that was kind of what kickstarted everything. I'm showing it on my screen

screen for the viewer.

first. Yeah.

I'd basically just done the back of the envelope math of I was I was curious what it looked like, just looking back at the amount of fees and MEV generated by these platforms. So our REV, the way that we're using it here, is real economic real economic value. It's just all the network fees and MEV tips that users are paying for a given network. And

I kind of realized I was curious.

Most people are saying that most of these networks have traded on completely irrational valuations. I was curious what the biggest ones have traded on historically. And if you look back, ETH, when it traded at its all-time high price, which was in late 2021, and Seoul when it traded at its all-time high price in January this year, both of them actually traded pretty much the exact same multiple to Rev if you annualize what their REV was at that time. And both of them were at their all-time highs of generating RAV at those points. So I tweeted that out intentionally, also not really tweeting an interpretation of that, just to let people make their own interpretations of that of is this a correlation versus causation? Because I think you can make both arguments. I mean, the really strong fundamental argument would be more in the direction of, oh, see, the market is trading very rationally. They were making money, and that's why the price went up. The other side of this would be much more of, oh, it's a correlation. Yeah, obviously people were paying a bunch of money to use the chains at the time of the all time high prices because that's when on chain activity is crazy. People just want to throw money at things, people feel rich. And so they correlate a lot. And so they just ended up lining up cleanly.

There's probably some degree of both.

I think the market is starting to price it or at least ask for a little more of these signs of, hey, show me that users are willing to pay the network. While I don't think that people are valuing very literally and very explicitly something like solder ETH as strictly based on cash flows, certainly as they are traditional equities, it's starting to at least become one of multiple factors that people are taking into account when they are looking at these larger tokens.

And so the the question is kind of going forward how much of a factor does that become?

Because you really do kind of have this spectrum of equities that that is the majority of what you're talking about when you're talking about valuing any of these large equities is obviously just how much money are they making, how much money can they make in the future. Whereas for these large crypto assets, there's some spectrum of how much of the picture is that. And it's at least becoming more of a part of the picture going forward. And so that's the question of where it goes. The the quick, I guess, terminology history on it for people, because also I saw a bunch of people confused about that. There's a different RAV that I saw people confused about today, which was it was realized extractable value, which is something that Flashbots had written about a few years ago, which is supposed to be the actual captured subset of MEV versus MEV, which is the theoretical bigger number of everything that can be captured. REV is the captured amount. So this is just a different mechanic than that. It's just the same acronym.

Unrelated. We're measuring two different things, right? It just coincidence that it's the same name.

Yeah, they end up being s somewhat overlapping measures obviously just because they're touching REV and stuff like that. But for example, the other one doesn't include base fees. For example, is one of the gigantic differences between it, which if you look at Ethereum is the majority of their REV historically. So the the metrics are just completely different.

How would you explain like I'm five y the version of REV that we want to talk about?

Yeah. So the the the the one that we are talking about here is this is also the one where people probably started seeing it around the end of last year. Dan tweets from Lockword tweets out these dashboards of looking at all the different chains. How much REV do you get from all of them? That

the other confusing terminology thing was they initially called it TEV. I was writing a post at the same time. We both agreed that TEV you should include an inflation number in a total and then real. You just kind of needed a separate formula to take out inflation.

But basically what this number is trying to capture here, I'd say there's two ways to look at it, both of which are actually pretty analogous to a lot similar Trad5 metric Trad5 meters, is one, you can view this as a value capture metric, particularly in a proof-of-stake network. We'll put aside proof of work because all of that just goes to the miners effectively in something like Bitcoin. But in a proof-of-stake network, you can view this as a value capture metric, where if you're a token holder, in one shape or another, you are entitled to receive all of the REV that is coming into the network in some form. That could be a burn, it could be a dividend that's paid out as stakers. So there could be different allocations between holders and stakers, but in some form, the token holders are owed all of this. So it's a value capture metric that looks like a top line revenue metric for a traditional company.

To an equity holder. The other part of it is, and and this is this is useful for everyone, but even more useful, particularly if you're on the side of, hey, we don't want to think of these L1 tokens as equities. We care about them as more currency commodity looking things, is it's a it's a helpful demand indicator, regardless of this is very literally what are users willing to pay to give a you uh uh to use a given network. Because this explicitly is not counting app level fees. This isn't including, you know, the fees that I pay under the Uniswap front end or the pump swap or anything like that. This is the actual network level fees and MEV tips that you are paying. So it's actually going to the salt to look and holder. This is, you know, this is what I care about using.

Solana over some other network. It's like effectively, why should my application be there? So those are kind of the dual parts that it's capturing. Is this looks a lot like revenue, particularly to proof of stake network? It's very analogous to revenue in an equity context of this is kind of the top value, top line value of what users are paying in, which is a good value capture mechanism for token holders, and it's also just a good demand signal. Same way you're looking at any startup, you know, or any company. Revenue is useful as a demand signal, and it's also literally the value capture for that company.

So every blockchain has like kind of two halves with it. It has its native asset and then it has its block space. And with smart contracting platforms, the block space has some amount of utility value. Like Solana block space, Ethereum block space, even Bitcoin block space has some amount of utility value baked into the block space itself, which is also kind of like downstream of the apps on that block space. So Ethereum has value because of Ave and MakerDAO and Uniswap and Morpho and Pendle and its app ecosystem. And Solana BlockSpace is valuable because it has Pump Fun and Drift and its applications. And so there's some unique value represented by the block space. And I think that more strongly correlates to what you're talking about with Rev and the equity-like part of the valuation of an ecosystem. And I don't think that that does too much to talk about the native asset side of things because Bitcoin has zero rev, but it is valued the most. And so for Bitcoin, like Rev is like, as a metric, not totally relevant here. But for smart contracting platforms, the concept of Rev, because of the utility value of smart contracts of a smart contracting block form uh blockchain, I think it is much more relevant into the total valuation of a chain. And now, John, I think why, understanding that, where we are only talking about like the utility value of a block space, I think one of the reasons why this tweet.

Set fire in the crypto Twitter community is because you're kind of dog whistling that the utility value of the block space is the thing to focus on because the native demand of an asset that's outside of the utility value block space is just not even relevant in your tweet. It's not even addressed. And so, like, yes, you're being neutral about just like, is it correlation, is it causation? But I think you're also kind of dog whistling towards like the towards the ETH crowd to point to them that there's this one valuation metric called Rev. It's related to DCF, and this other ecosystem is doing better than Ethereum in it in recent times. And so I think I I know that it's I think you can say that it is neutral. I think you can also say that you're doing a little bit of a silent dog whistle and like hiding behind the neutrality a little bit.

Gotta have some fun on the weekends.

the most interesting thing to all this is I remember that when the original article came out with the the Tev versus Rev and all this stuff. And it actually kind of fired me up in the sense that it shows how nascent this industry is. And like

n I think it's important to call out that literally no one knows how to value this shit. No one, no one has any idea of how to properly do that. And even if you think back to tar uh trad fi, like.

No one used to know how to do that, but eventually enough models came forward. People put in enough effort to create these things that people kind of said, okay, yeah, I can kind of, I can kind of see this. And then you kind of coalesce around that. And then the market just continues to move in that direction using multiples, using DCF, using all this shit, right? So I think it's important to note that like.

No one knows what they're talking about in our industry. And we're all just doing our best to try to figure out like, okay, how do you quantify whatever the hell it is that we are building? And like, where are we going to go as a collective? Like, what do you buy into? What makes sense? What's rational? What's irrational? And you know, this is this is an attempt at that. I think I think it's an earnest attempt. I think I like the Blockworks guys. I think Dan did a great breakdown of this at the DAS summit. If you guys like that and want to actually like see how they actually talk about there's a YouTube video of him, him breaking it down and saying, like, oh yeah, like if you just do some traditional calculations, you're actually missing a subset of the people that actually are are are like some of the flows in the ecosystem. And you should be capturing that if you do want to try to articulate GDP or just like general demand on block space. So

Yeah, I just want to like point out that we don't know what the fuck we're talking about either, but we're trying our best. And I think like you can squint and you can see something here and say like, yeah, okay, like this this seems like it can hold up. There's some rationale here.

The one other thing I I would still stress a bit is I I think most of the stuff that we talk about with Bitcoin and the monetary properties of any of these types of crypto true currencies, I would agree that there is a very high degree of we just don't really know

to some extent what what the reality of this is, and we are working on that. What are the right mental models?

This is the one thing which is different of I would say cash flows is this is actually the minimum intrinsic value of these assets. Because fundamentally, what a DCF tells you at the end of the day is.

I don't care if anyone else in the world agrees with me. If this asset is actually generating this much cash flow per year, I'm not just buying this thing to sell it to you at a higher price. I can literally just hold this asset and it will make me more money than it than an alternative investment. You know, the the simple test is like, you know, would you buy this asset at this price if you could never sell it? Would you buy, you know, Warren Buffett has the famous, I would never buy all of Bitcoin for $25 because I he's to him as a value investor, there's no utility in this thing. I get nothing out of it. The only thing, the only reason for you to hold this is I sell it to you at a higher price. Versus any human being in the world would buy Apple for $25, even if you could never sell it, because you would literally get your $25 back in about a few milliseconds, because that is just how much money the company is generating. So that is the one thing to separate for this. And basically the question is are we going to end up gravitating towards that baseline for a lot of these assets? Which is obviously what equities in general tend to do, is they gravitate towards what is their baseline intrinsic value over a long enough time period that is usually the trend. And most of these large crypto assets are still pretty divorced from that at the moment. So do do we get closer towards that?

If you consider these metrics, like I I I extrapolated on his. He did these two for just the the top two, but Blockworks actually has it for I think it's like five or six different assets. You know, Aptos, I think, was one Avalanche. And I was like, all right, a Tron was on there. It's like fuck it. Let's see, let's extrapolate this over to the other ones and see how they're doing. And yeah, at peak, these two were at like 26, was the multiples between the annualized Rev and their actual price of the time. But then you get like Aptos, Aptos is at a thousand. Was it a Tron was at like, I don't know, like 48, which is actually pretty impressive. And then you have like Avalanche, 136 times multiple. So it's like, yeah, like if you think utility and like the actual intrinsic value of these things is where this stuff is going to go, you start squinting, you look around, you're like, all right, maybe

maybe we're we overshot a little bit on some of these, and you're you're pricing in a lot of growth.

Pricing and a lot of growth. Yes. And I would say like the fact that the fact that they're all divorced from that,

it can tell you, okay, that these things are all overvalued. Or it can also tell you that in the global equation for how to value a layer one asset, REV is only one part of that. And we are missing the other part. So I put out like this tweet of the classic how to value, how to like the three blind men filling up an elephant, and one's feeling the two elephants. It's like a rope.

That's a very funny way to say it. Feeling up an elephant. That's right. And then the other, the other one is feeling the trunk, and it's like it's like a snake or something. And like we're we have, I think we have REV down. We have that one nailed. And it's nice because of how objective it is. It is just how much people are paying for block space in that present moment. And that is doing the, I think it's setting the floor, is doing the DCF, the equity side of all of these projects are kind of like businesses in a way, but it's also completely missing other things that we know are out there because Bitcoin is the way that it is, and all these other things are divorced from DCF in a particular way. So there are other things out there that we haven't quite figured out that I think are worth investigating. Me and Ryan, and then a guest are gonna do a live stream on Friday because this particular guest thinks that he has at least another component to this puzzle, but I'm not ready to share any of that here. But like I think if you are, if you just say that like

Rev is what it is, then you're just bearish about crypto as a whole. And you have to, you're, you just go short all of these businesses because they're never going to return you an investment. But none of us are doing that for some reason, and it's because we know that like ReV is not the complete story.

Yeah, I mean, you could it's particularly for our infra, right?

Yeah, exactly. That's what I was gonna say. It's not it's not all tokens. I think you probably take the view that most of these large smart contract platforms are increasingly difficult to hold. That is what I think it actually comes down to. Because RAV can approach zero while app fees go crazy because people bunch of uh build a bunch of great apps. And then the things that you should own are what's the good DeFi protocol? Where are people launching tokens? Where are people staking all of that? That that's what actually owns this user. And these large smart contract platforms are the thing that's difficult to hold.

Wait, so you're saying that like say say there's

say there's you know, there's Ethereum, and I think Ethereum's most valuable application is Ave. I would say that's probably true. Followed by Maker Dow. May maybe Maker Dow once upon a time came first.

Is there stable coins applications? Or is that infra?

Both.

Both. But but say okay, so say Ethereum gets like eight more Aves. At the same time, all of the Aves learn to recapture all of their apps, all their fees. So zero fees go to the blockchain, goes goes to Ethereum. Is that bullish Ethereum? Is that bullish ETH? Or is that bearish ETH? Because like now now the art rev is at zero, but it has eight Aveys. Like, how how do you how do you think about this thing, John?

I don't think that we know the answer. I I think at least in the short term, it would definitely be a positive. I I think that it is possible in the long term, if we actually get to the state where these assets are more rationally valued at this minimum intrinsic value, then yeah, it's negative. It does it where it just doesn't matter.

The way that the market is pricing these things today is Rev is a component of how you're valuing these things, but it's not the entire thing. So at minimum, it is positive for all of these other components. And it probably gives you some future expectation of there's some other way to monetize this in the future, which is generally a positive thing if you have a stronger market position. It's generally how I view it. It would still generally be a positive, but yeah, it's not as clear anymore.

Well, and I kind of think too, like the one other part of that is just like if you're a normal consumer and maybe not thinking about Ave, but thinking about like

you know, like

NFTs when they were really big or like meme coins if you pretended that PubFund made no money or whatever. Like if it also is just the default currency that people are using to use these apps, that has value that