Emergence of the ‘Fat App’ Thesis in Cryptocurrency
A rising perspective within the cryptocurrency sector suggests that a significant portion of crypto value is now found within applications rather than the foundational blockchains. This notion, gaining traction with the introduction of Hyperliquid, is expected to influence investor behavior in the near future, according to insights from a leading crypto executive. “The buzz surrounding the ‘fat app’ thesis is palpable among industry leaders, and it seems poised to become a prevailing theme in the upcoming months,” stated Matt Hougan, Chief Investment Officer at Bitwise, in a recent post on X. The ‘fat app’ theory posits that applications will increasingly capture more value than the blockchain protocols that support them.
Potential Shift in Investment Focus
Hougan believes that this thesis could soon gain mainstream attention, suggesting that investors should keep it in mind as they monitor developments in the crypto landscape. While certain layer-1 blockchains may still hold their ground, the overarching trend indicates that applications will play a more dominant role in value capture. This evolving perspective stands in contrast to the Fat Protocol thesis proposed by Joel Monegro in 2016, which contended that the majority of value is accrued at the base layer, specifically within chains such as Ethereum, Solana, or Avalanche. The new thesis argues that the real value is shifting towards applications, which are expected to generate greater revenue and attract more user interest than the underlying blockchains.
Controversy Surrounding the Fat Protocol Thesis
The Fat Protocol thesis has faced considerable scrutiny over the years. Jeff Dorman, Chief Investment Officer at a digital asset investment firm, pointed out in a 2021 report that the validity of the Fat Protocol thesis remains unproven. He suggested that the current market dynamics may not necessarily reflect true value capture but could instead be influenced by retail investors viewing layer-1s as straightforward index plays and venture capitalists betting on larger market potentials. Dorman expressed concerns that the Fat Protocol thesis has negatively impacted the crypto ecosystem, stating, “It drives every application to aspire to become a layer-1, channels all venture capital funds toward layer-1s, and inflates the perceived value of failing layer-1s.”
Market Trends Indicate a Shift
In a recent report, Starkiller Capital, an institutional investment firm, indicated that the narrative surrounding the Fat App thesis is already manifesting in market behaviors. They noted that the price movements of core blockchain tokens compared to application tokens over the past year reveal a clear trend. Major blockchains like Ethereum, Solana, and Avalanche have either stagnated or declined in value against Bitcoin, demonstrating a shift in market sentiment. The SOL/BTC ratio, which reflects Solana’s strength relative to Bitcoin, has dropped by 16.11% over the last year, according to TradingView. Starkiller Capital asserted, “The market has begun to express its preference; the most significant token gains have been observed in applications rather than protocols.”
Diverse Opinions on Layer-1 Tokens
Despite these observations, Hougan expressed a differing viewpoint regarding the perception of layer-1 tokens. He argues that major layer-1s are well-positioned for future growth, acknowledging the merit of the discussions surrounding the Fat App thesis. He highlighted Hyperliquid (HYPE) as a notable performer in the current crypto market, attributing its success to its strong demand at the application level, characterized by genuine user engagement, transaction activity, and robust token velocity linked to actual usage rather than merely serving as a fee for blockspace. HYPE has seen remarkable growth, trading at $55.56, reflecting an impressive 1,636% increase over the past year, according to CoinMarketCap.
