Fat Protocol Thesis was disproven. Even its inventor abandoned it. And for those that don’t know, Fat Protocol Thesis is best explained in reverse:
Think of the internet. Now think of Google, Amazon, Facebook, etcetera. These are the internet’s applications, and make up its application layer. Value flows from the protocol layer (the internet) to the application layer. Over time, these applications have absorbed so much value, that they're now the largest companies in the world, some worth well over $1T. But the internet itself (the protocol layer) has absorbed no value.
With blockchains, this process is reversed, or so the theorem posits. Value flows from the application layer to the protocol layer, thus the term “fat protocol”.
The measure of this theory unsurprisingly was against Vitalik Bueterin’s blockchain. It made perfect sense right? It’s a smart contract platform with a ton of decentralized applications (Dapps). But in the end, we saw little evidence of the protocol layer absorbing the majority of the application layer’s value as time went on.
There’s something hiding in plain sight though, something nobody seemed to consider: tokens, tokens, tokens, with no consensus on what money is.
DeFi and what’s dubiously called Web 3.0 is a tokenized dystopia on Buterin's blockchain. It’s an orgy of swaps, wraps, burns, mints, and stakes. Dapps are DINO (decentralized in name only) and serve zero purpose other than optimizing interactions with ever more tokens to keep the orgy going. Too, there are so many different stablecoins mixed in with the cornucopia of tokens and NFT’s, that it’s impossible to tell what money tastes like. Money certainly isn’t TPS, TX cost, or throughput. Those are all features of a blockchain. The entire virtual machine is suffering from an acute case of what economists call Gresham’s Law. This is where bad money drives out good money.
So it’s impossible for Fat Protocol Thesis to have any directional velocity. It’s caught in a tokenized crossfire of swaps, wraps, mints, burns, and stakes.
But here’s my question: What would happen if none of the Dapps had tokens? If their products and services were legitimate, and all priced in the same global and stateless money? I posit that the protocol layer would absolutely explode in value, because its monetary energy should naturally begin trying to peg itself to global GDP. Fat Protocol Thesis will be proven right, but only with Bitcoin.
Think about the Lightning⚡️Network. The thing is going parabolic right now. I remember just a few months ago my node with .25 BTC on it made about 2000 SATS every thirty days in routing fees. Now it’s over 15,000 SATS a month and I haven’t changed anything. We have Lightning apps like STRIKE exploding in popularity. We have thousands of new nodes coming online each week. We have the Panamanian government holding meetings and considering a Lightning rollout like El Salvador early next year. Lightning is turning a corner and there’s still only a paltry 2900 BTC amongst the 27,000 nodes. Imagine once that hits 1M nodes and 100,000 BTC. Why not? That’s less than one-third of how much is wrapped on Vitalik Buterin’s blockchain currently, and the LNRR (Lightning Node Reference Rate) will probably match the wrapped Bitcoin return average in terms of APY, with the crucial difference being one is custodial, expensive, and risky, while the other is the holy grail: non-custodial APY. What about 1M BTC amongst 10M nodes? Shit, I haven’t even gotten into the BTC-denominated DeFi that will get built over ⚡️.
This Lightning P2P scaling solution, at least to my ears, is sounding more and more like that one person that starts clapping, before suddenly the entire congregation takes the cue and joins in. I believe this vibrating critical mass globally detonates in the summer of 2023 and never looks back. Which company wouldn’t want to use it as a practical matter? Think about it, settlement is instantaneous and tx fees a penny or less. How much do Visa, Mastercard, and American Express charge? About 2-3.5%, and settlement can take weeks, which is to say nothing of fraud, which is a going concern. Amazon could add 1% to their bottom line. The velocity of money would be insane, generating economic gains in the most unlikely of places.
While all this is happening, BTC will become scarcer, whole coins tough to come by, which only miners will possess in sufficient quantity to auction off to governments and businesses, as CEX’s won’t have them consistently. CEX’s will mostly die a miserable death, drowning in a bloody pool of red ink, having dumped too many resources into the wrong business: PoS nodes and shitcoin peddling. They’ll try fighting down regulation with renewed claims of a coming technological revolution as Bitcoin’s political revolution of separating money from State accelerates. DINO Shitcoins which VC enablers helped boast of TPS, cheap transactions, and throughput, will be abolished, their advantages gone, their truths lain bare, skeletons undressed by Bitcoin like she was a patient vulture. The crypto-asset space will watch in horror as the global billionaire mob hellbent on Bitcoin’s success talk Satoshi Standard, a Standard they can no longer ignore, as it’s already spread voluntarily amongst users, non-custodial wallets, and nodes. NFT avatars will vanish entirely like bootcut jeans, such cringe only getting brought out for a cruel and unfriendly laugh. A brief period of extraordinary and final volatility will arrive as wealthy families, nation states, and businesses late to bitcoin scramble and fight for the last big chunks of UTXO land on its blockchain. The price (already well over $1M) will rocket $1M and crash $1M in the same day. And how soon feet will thrash in regret above floors, notes on nightstands nearby telling of a time they ignored SATS at .00056 USD. The NYT described that year succinctly in their January 1st paper:
“When the Winklevoss twin’s net worth surpassed Zuckerberg’s, the dollar peg broke, and somewhere Satoshi’s laugh frightened children."
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