The crypto economy is undergoing a massive transformation from speculative experiments to revenue-generating business and on-chain economies.
Author: Ryan Watkins, Co-founder of Syncracy Capital
Compiled by: 1912212.eth, Foresight News
There is a popular view in the industry that apart from Bitcoin and stablecoins, there are no other valuable applications. The previous cycle was entirely driven by speculation, and since the 2022 crash, there has been almost no progress. The industry's infrastructure is oversaturated, and the VCs that funded them may have to pay the price for misallocating capital.
While the latter part of this statement holds true as the market starts to punish blind infrastructure investments and winners emerge on the back of crypto economies, the first part does not hold up when we look at the data. Relative to infrastructure, applications are scarce, and there has been almost no progress since the last cycle.
Contrary to the popular narrative, the age of applications has arrived, and many applications' revenues have surpassed that of infrastructure. Mainstream platforms like Ethereum and Solana have a wealth of applications generating revenues in the tens to hundreds of millions, growing at triple-digit percentages annually. However, while these numbers are impressive, the trading multiples of applications remain far below that of infrastructure, with the latter commanding around 300x higher average revenue multiples. While infrastructure assets at the center of smart contract ecosystems like ETH and Solana may maintain a store of value premium, non-monetary infrastructure assets (such as Layer 2 tokens) may see their multiples compressed over time. Syncracy believes the market has not fully recognized this reality, and as capital flows into non-monetary infrastructure, leading applications will be primed for re-pricing upwards.
The inflection point for future trends may be when applications capture a larger share of the blockchain fee pool and generate more revenue than most infrastructure assets. Data from the mainstream application ecosystems of Ethereum and Solana already shows applications are capturing a slice of the revenue from the platforms they are built on. As applications occupy a greater economic share and achieve vertical integration to better control the user experience, this trend may accelerate further. Even Solana-synchronized composable Solana applications are retaining some operations off-chain and pushing their off-chain execution, utilizing L2 and sidechains for scaling.
The Rise of Fat Applications
Is the Rollapp thesis inevitable? As applications strive to overcome the limitations of a single global state machine, unable to efficiently process all on-chain transactions, modularization across blockchains seems necessary. For example, while Solana's performance is impressive, in April, it began to experience issues due to just hundreds of thousands of users transacting MEME daily. While Firedancer may help, it is unclear if it can provide the order-of-magnitude performance boost required for billions of daily active users (or more, including AI agents and enterprises). As mentioned, Solana's modularization has already begun.
The real question is to what extent this transformation will evolve, and ultimately, how many applications will move operations off-chain. Running the entire global financial system on a single server, the fundamental premise of any integrated blockchain, will require full nodes to operate in hyperscale data centers, making it virtually impossible for end-users to independently verify the chain's integrity. This would undermine the fundamental properties of a globally scalable blockchain to ensure robust property rights and resist manipulation and attacks. In contrast, Rollups allow applications to distribute these bandwidth demands across independent sequencer collectives, which can achieve hyperscale performance while ensuring end-user verifiability through the underlying base layer's data availability sampling. Furthermore, as applications scale and begin to establish tighter relationships with users, they may demand the underlying infrastructure provide maximum flexibility to best serve user needs.
This is already happening in the most mature on-chain economy, Ethereum, where leading applications like Uniswap, Aave, and Maker are actively developing their own Rollups. These applications are pursuing not just scalability - they also require customized execution environments, alternative economic models (like native yields), enhanced access controls (like permissioned deployments), and tailored transaction ordering mechanisms. This allows the applications not only to enhance user value and reduce operational costs but also to gain greater economic control relative to their base layer infrastructure. Chain abstraction and smart wallets will only make this application-centric world more seamless, reducing frictions between the current siloed blockchain spaces over time.
In the near term, next-generation data availability (DA) providers like Celestia and EigenLayer will be key drivers of this trend, providing applications with greater scale, interoperability, and flexibility while ensuring cheap verifiability. However, in the long run, it is clear that any blockchain aspiring to be the foundation of the global financial system will need to ensure cheap end-user verifiability while scaling bandwidth and DA. For example, while Solana is conceptually integrated, it already has teams exploring light client verification, zero-knowledge compression, and DA sampling to achieve this ultimate goal.
To reiterate, the focus here is not on specific scaling technologies or blockchain architectures. It is likely that for integrated blockchains, token scaling, co-processors, and Rollups will be sufficient to achieve scalability and provide the necessary customizability for applications without compromising their composability. Nonetheless, the future trend is towards applications continuing to gain greater economic control and technical flexibility. The inevitability of application revenues exceeding their underlying infrastructure seems clear.
On-Chain Value Capture
The critical question now is how value will be distributed between applications and infrastructure as applications gain more economic control in the coming years. Will this transition become an inflection point, causing applications to generate results similar to infrastructure in the coming years? Syncracy believes that while applications will continue to capture a larger share of the global blockchain fee pool over time, the underlying infrastructure (L1) assets may still generate the most significant outcomes, albeit with a smaller number of participants.
The core argument supporting this view is that in the long run, all base layer assets, such as BTC, ETH, and SOL, will compete as non-sovereign digital stores of value - the largest TAM in the crypto economy. While Bitcoin is commonly viewed as analogous to gold, and other L1 assets as akin to equities, this distinction is primarily narrative-driven. Fundamentally, all native blockchain assets share common attributes: they are non-sovereign, non-seizurable, and can be transferred in a cross-border digital environment. In fact, these properties are essential for any blockchain aiming to establish an independent digital economy free from state control.
The key difference lies in their strategies for achieving global adoption. Bitcoin directly challenges central banks by attempting to replace fiat as the dominant global store of value. In contrast, L1s like Ethereum and Solana aim to establish parallel economies in the network space, creating organic demand for ETH and SOL as they grow. In fact, this is already happening. Beyond serving as mediums of exchange (fee payments) and units of account (NFT pricing), ETH and SOL are the primary stores of value within their respective economic ecosystems. As proof-of-stake assets, they directly capture the fees and maximum extractable value (MEV) generated by on-chain activity, and these assets provide the lowest counterparty risk on-chain, making them the preferred collateral. Meanwhile, as a proof-of-work asset, Bitcoin does not provide staking or fee rewards to holders, operating purely as a commodity currency.
Although the strategy of building a parallel economy seems ambitious and almost impossible to reach the ideal state, it ultimately proves that competing with the national economy, rather than directly confronting it like Bitcoin, may be easier. In fact, the approaches of Ethereum and Solana reflect how countries have historically vied for the status of reserve currency: first establishing economic influence, then encouraging other countries to adopt your currency for trade and investment.
While it is easy to overlook the immeasurable process of monetization and focus on the quantifiable process of value accumulation through fee generation, the latter may lead to disappointing results. In addition to the obvious circular complexity of blockchains generating fees from unsupported, self-issued currencies, the potential for fee capture may not be as large as imagined in the foreseeable future.
Take MEV as an example. MEV is unlikely to become a large enough industry to support current valuations, and its proportion of on-chain activity may decrease over time, with more of it accruing to applications. In traditional finance, the closest to MEV is High-Frequency Trading (HFT), with global revenue estimated between $10 billion and $20 billion. Furthermore, blockchains may currently be earning too much on MEV, and as wallet infrastructure and order routing improve, and applications work to internalize and minimize MEV, it may decline over time. Do we really expect the MEV revenue of any chain to exceed the entire global HFT industry, and 100% accrue to validators?
It is also worth noting that while execution and DA fees may be attractive revenue sources, if they cannot reach valuations in the hundreds of billions or even trillions of dollars in the near future, they may still not be enough to justify their reasonableness (there is only so much value on Earth that high-value organizations can have). Transaction volume needs to grow exponentially, while fees need to remain low enough to promote mainstream adoption - a process that may take a full decade.
So, what can provide enough value to validators to continue their crucial service? Like they have throughout history, blockchains can use monetary inflation as a perpetual subsidy, similar to a tax, to sustain themselves. Essentially, asset holders will lose a small portion of their wealth over time to subsidize validators, who provide ample block space for applications, thereby bringing monetary value to the blockchain's native assets.
In summary, it is worth considering a more pessimistic view that the value of blockchains should be assessed based on fees, and that as applications gain greater economic control over time, these fees may not justify the lofty valuations. This is not unprecedented - during the internet boom of the 1990s, telecommunications companies attracted excessive investment in infrastructure, but many ultimately commoditized. While companies like AT&T and Verizon adapted and survived, most of the value shifted to the applications built on top of that infrastructure, such as Google, Amazon, and Facebook. This pattern may be replayed in the crypto economy, with chains providing the infrastructure, but the value being captured and surpassed at the application layer. However, for now, in the speculative early stages of the crypto economy, it is a game of relative value - Bitcoin chasing gold, Ethereum chasing Bitcoin, and Solana chasing Ethereum.
The Application Era, the Crypto Era
From a broader perspective, the crypto economy is undergoing a massive transformation from speculative experimentation to generating revenue-producing business and a vibrant on-chain economy, which is bringing real monetary value to blockchain native assets. While current activity may appear small in scale, as these systems scale and provide more compelling user experiences, they are growing exponentially. Syncracy believes that in a few years, looking back on this era, we will chuckle at how many obvious macro trends were doubted at the time for their value.
The Application Era has arrived, and with it, blockchains will create more powerful non-sovereign digital stores of value than ever before.
Special thanks to Chris Burniske, Logan Jastremski, Mason Nystrom, Jonathan Moore, Rui Shang, and Kel Eleje for their feedback and discussions
