Continue Capital Webinar: Where is the Exit for Blockchain Business Models?

Original Author: Pima, ContinueCapital Co-founder

The Value Journey of Blockchain Investment

What are you buying in the public chain market or, more broadly, in the blockchain industry? Or where is the way out for blockchain business models?

The underperformance of the altcoin market has raised industry doubts for many. In a complex environment with varying stages of industry development, increasing investment difficulty is inevitable. However, the fundamental issue lies in finding a business model for projects that can sustain long-term growth.

After a decade, I have found that many people, even those who have been in the industry for a long time, still do not quite understand why public chains have consistently dominated the TOP 100 list and why leading public chains with billions or even trillions in market capitalization attract so much attention, while your coin, even with only millions or tens of millions, struggles to gain recognition. Personally, I prefer to simplify complex things, so I try to dissect this.

Starting from first principles, P=E*PE, where Price=Earnings*Price-to-Earnings Ratio (PE), thus, in the long term, the factors influencing price are only earnings and valuation;

Firstly, the valuation PE. This is quite complex, with numerous influencing factors such as growth potential, interest rates, penetration rates, industry space, central bank liquidity injection levels, monopoly, etc., all of which determine why people assign different valuations to different stocks at different times. Warren Buffett, the idol, said he doesn't buy BTC because BTC does not have cash flow (you can think of cash flow as earnings). In the long term, I think what he said is mostly correct. However, in the aforementioned price formula, only earnings E are considered, without taking into account the valuation PE. So, from another perspective, MEME/BTC are in the same category, both falling under the PE factor. As long as your MEME continues to attract people and there are constant buyers, your MEME can rise without the need to generate cash flow, but there is a very important premise: within a certain market cap range. The larger the market cap, the more people you need to attract. Without sustained cash flow support, it is very difficult to last.

Secondly, earnings E, which is what we mainly want to discuss. Earnings come from revenue, so for the price to rise, revenue must increase. So where does revenue come from? It comes from the business model, which is defined as a business activity that generates profit by providing goods or services to others. In simpler terms, it's how your company makes money. In 2006, Duan Yongping spent $620,000 to have lunch with Buffett and asked a question that had been bothering him for a long time: What is the most important thing in investment? Buffett's answer was the business model. A company cannot sustain long-term development if it doesn't know how to make money. The core driving force behind the continuous rise of the seven tech giants in the US stock market is profit, not other short-term factors.

So, what is the business model in the cryptocurrency industry?

In my personal opinion, it boils down to: Block Space Fee; SWAP Fee, i.e., exchanges, including DEX/CEX; Lending, Interest Rate Spread; Stablecoin, Slippage; MEV, Parasitic Extraction on Block Space. Everything else is easy to understand, except for the Block Space Fee.

What's actually very concealed is that the crypto world has created a brand-new business model: selling block space, meaning a public chain prices and collects a Block Space Fee based on GAS. Global consumers purchase access and storage rights to global compute/bandwidth resources at the base price per transaction.

I used to not understand a few words before, like what is the "Value" Internet. We know that most of the internet's information is free, such as images/text/videos, etc. An information can be infinitely copied. Therefore, in the early days of the internet, people didn't know how to make profits. Through subsequent exploration, the internet's business models, including earning money through SaaS subscription services, advertisements, transactions (e-commerce), etc., were gradually discovered.

So, what is the business model of blockchain? I later understood the crypto world's "Value" Internet, which is a Pay-Per-Click Internet, where you need to pay GAS every time you click. The original intention of blockchain is to solve the problem of the attributes of money, which is quite different from the free internet. You can't infinitely duplicate a unit of money and repeatedly pay it to others; the free internet cannot solve the monetary problem. Therefore, in the process of transitioning from currency to a public chain, its unique aspect is that it makes consumers bear the cost of accessing block space. Over the past few decades, enterprises on the internet leased machine compute resources to pay AWS bills to provide products and services to customers, thereby charging fees to make profits. But on blockchain-based applications, it's different: users pay fees for project operating costs. Every year, global consumers pay tens of billions to hundreds of billions of dollars in GAS fees, which is the revenue of public chains. If the annual revenue is 10 billion, with a 5% government bond yield, a 20x PE ratio is a market value of 200 billion, 10x PE is a trillion-dollar market, and 50x PE would be a 500 billion market, showing the fundamental enormity of the public chain market.

For example, the USDT circulation on TRX has reached 60 billion, occupying half of the USDT market. I looked into TRX's annual revenue of about 400-500 million, with 75% of it from USDT transfers, i.e., a profit of 400 million. Assuming a 20x PE, a valuation of 8 billion for TRX is reasonable. Of course, this is not the focus, the key question is, can this data grow tenfold or more in the next ten years? How much incremental market share can SOL's payment/Open Finance, which is gaining momentum, capture in the future? This is getting off topic; we won't delve further into the scalability issue here.

You need to understand that I'm just trying to explain why the public chain market is huge; in other words, I'm only stating the existing phenomenon of your willingness to pay for GAS fees. I haven't delved further into why you pay GAS and why more people will pay GAS in the future. Is it for transfer payments? To get rich quick (hoarding GAS)? Entertainment needs (paying for a specific DApp)? The demand for token-to-token swaps/commodities/stocks/SWAPs? Remember, if in the future no one pays for GAS fees, the public chain market would cease to exist.

So now many times we see some fancy-sounding terms. I don't know if it's because the cryptocurrency industry is in its early stages of development or if it's due to the difficulty of implementation. The promotion tends to focus on abstract terms that the average person finds hard to understand: scalability, ZK technology, L2, UTXO, chain abstraction, modularity, homomorphic encryption, parallel EVM, and so on. Since I did not participate in the early development of the Internet, it was not until later that I learned that terms like modularity/monolithic chain all originated from Internet technology. However, in the Internet field, few people mention them, whereas in the cryptocurrency industry, they are repeatedly highlighted. I now have a strong aversion to using these terms in narratives. Basically, once I understand the basic concepts, I immediately ask: with this technology, how much revenue can it generate for me? How much profit can it enable me to repurchase? Otherwise, where does your technology fit in the market? I can support the long-term development of foundational technology/foundational disciplines, but tell me, how long will it take to obtain a clear business model? Two years, ten years, or twenty years? How can future revenue and GAS fees be increased, and who can capture the majority market share? These more complex questions are what you should be focusing on. Even though I have already chosen $SOL.

Therefore, since a public blockchain is a product with revenue, cash flow, and profit, its business model is clear, viable, and the remaining task is to decide how to expand revenue, increase market share, and reduce costs, taking actions that align with the business development path.

Many projects in the cryptocurrency industry lack a business model. They themselves don't know how to make money. Even among the Fortune Global 500 companies, the survival rate is only 3%. Investment is about whether you can find these 3% projects and hold onto them for the long term. Many investment principles are very simple, but implementing them is very challenging. With tens of thousands of projects in the cryptocurrency industry in the future, how do you see the value for investment? Be serious about it.

When will the river be clear again, and how long can people live? It's better to avoid being overly mysterious and unrealistic, tread solid ground more often; otherwise, you won't have much time left.

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