This story was delivered to BI Intelligence " Fintech Briefing " subscribers. To learn more and subscribe, please click here . When it comes to Internet technologies, most of the value is distributed at the application layer rather than the protocol level. But for blockchain technology, it’s exactly the opposite, according to a blog post from Union Square Ventures analyst Joel Monegro. The protocol layer is the underlying technology that makes a network run — it’s the rails and the governing rules. The application layer is made up of technologies that ride on those rails. For Internet technologies, many applications have become valuable by capturing data from users. Because this data is siloed, it’s scarce and therefore, valuable. This is the model behind Google and Facebook, for example. And because the value is concentrated in the application layer, these companies will often invest in developing underlying protocols. In contrast, blockchain technologies rely on shared information. This means that the data itself isn’t very valuable because everybody has it. As evidence, Monegro points out that the Bitcoin network has a market capitalization of $10 billion and Ethereum — which is early on in development at the application level — is valued at about $1 billion, while even the top blockchain-focused technologies at the application layer are worth $100 million at best. The value of blockchain technologies is rooted in the scarcity of tokens. The tokens — Bitcoins, for example — initially attract speculative value because they are scarce, and those who invest become stakeholders in the protocol itself. As demand grows, these tokens appreciate in value and that encourages investment in technology at the application layer. As value at the application layer grows, it creates even more demand for the tokens at the protocol level. In this way, the value […]
