The question of where value will ultimately accrue within the blockchain stack can be reduced to a simple framework. For each respective layer of the crypto stack, ask yourself the following question:
If a product within this layer increases its take rate, will users leave for a cheaper alternative?
In other words, if Arbitrum increased its take rate, will users leave for another protocol like Base and vice versa? Similarly at the application layer, if dYdX increased its take rate, will users leave for the nth undifferentiated perps DEX?
Downstream of this logic, we’re able to identify where switching costs are highest and thus who has asymmetric pricing power. Similarly, we can use this framework to identify where switching costs are lowest, and therefore which layer of the stack will become increasingly commoditized with time.
While historically, protocols have had disproportionate pricing power, I believe this is changing. There are three structural trends today that are increasingly “thinning-out” the protocol layer:
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Multi-chain apps and chain-abstraction: Most apps today do not simply exist on one chain but rather multiple chains. As multi-chain becomes table stakes for apps to remain competitive, the user experience across blockchains will become increasingly indistinguishable, and in turn, switching costs at the protocol layer will only get lower. Moreover, chain-abstraction will further compress switching costs by abstracting away bridginging. As a result, apps will no longer remain beholden to the network effects of one chain, but instead, chains will become increasingly beholden to the distribution of front-ends.
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Maturation of the MEV Supply Chain: While MEV will never be entirely eliminated, there are numerous initiatives, both at the application layer and closer to the metal, that will increasingly redistribute the amount of MEV extracted from end-u
