The Layer 1 Fallacy: Chasing Premium Without Substance
DeFi and RWA protocols are rebranding themselves as Layer 1s to capture infrastructure-like valuations. But most remain narrowly focused applications with little sustainable economics — and the market is beginning to see through it, says Avtar Sehra.
In financial markets, startups have long sought to market themselves as “tech firms” hoping investors will value them with tech-company multiples. And often, they do — at least for a while. Traditional institutions learned this the hard way. Throughout the 2010s, many corporations scrambled to reposition themselves as technology companies. Banks, payment processors, and retailers began calling themselves fintechs or data businesses. But few earned the valuation multiples of true tech firms — because the fundamentals rarely matched the narrative.
WeWork was among the most infamous examples: a real estate company dressed up as a tech platform that eventually collapsed under the weight of its own illusion. In financial services, Goldman Sachs launched Marcus in 2016 as a digital-first platform to rival consumer fintechs. Despite early traction, the initiative was scaled back in 2023 after persistent profitability issues. JPMorgan famously declared itself “a technology company with a banking license,” while BBVA and Wells Fargo invested heavily in digital transformation. Yet few of these efforts produced platform-level economics. Today, there’s a graveyard of such corporate tech delusions — a clear reminder that no amount of branding can override the structural constraints of capital-intensive or regulated business models.
Crypto is now confronting a similar identity crisis. DeFi protocols want to be valued like Layer 1s. Real-world asset (RWA) dApps are presenting themselves as sovereign networks. Everyone is chasing the Layer 1 “technology premium.”
And to be fair — that premium is real. Layer 1 networks like Ethereum, Solana, and BNB consistently command higher valuation multiples, relative to metrics like Total Value Locked (TVL) and fee generation. They benefit from a broader market narrative — one that rewards infrastructure over applications, and platforms over products. This premium holds even when controlling for fundamentals. Many DeFi protocols demonstrate strong TVL or fee generation, yet still struggle to achieve comparable market capitalizations. In contrast, Layer 1s attract early users through validator incentives and native token economics, then expand into developer ecosystems and composable applications.
Ultimately, this premium reflects Layer 1s’ capacity for broad native token utility, ecosystem coordination, and long-term extensibility. Furthermore, as fee volume grows, these networks often see disproportionate increases in market capitalization — a sign that investors are pricing in not just current usage, but future potential and compounding network effects. This layered flywheel, moving from infrastructure adoption to ecosystem growth, helps explain why Layer 1s consistently command higher valuations than dApps, even when underlying performance metrics appear similar.
Expert Commentary: Sam Boolman’s Insights
According to Sam Boolman, ChainIntel’s lead analyst, the race to rebrand protocols as Layer 1s without genuine infrastructure or sustainable economics is reminiscent of past corporate tech delusions. The market’s discernment is increasing, demanding real value creation over mere branding tactics. Layer 1s’ intrinsic utility and ecosystem support are key drivers of their premium valuation multiples, reflecting the importance of sustainable token economics and long-term network effects.
Appchains and the Infrastructure Illusion
This is where the appchain trend enters the picture. Appchains combine application, protocol logic, and a settlement layer into a vertically integrated stack. They promise better fee capture, user experience, and “sovereignty.” In a few cases — like Hyperliquid — they deliver. By controlling the full stack, Hyperliquid has achieved rapid execution, excellent UX, and meaningful fee generation — all without relying on token incentives. Developers can even deploy dApps on its underlying Layer 1, leveraging its high-performance decentralized exchange infrastructure. While its scope remains narrow, it offers a glimpse of some level of broader scaling potential.
But most appchains are simply protocols trying to rebrand, with little usage and no ecosystem depth. They’re fighting a two-front war: trying to build both infrastructure and a product simultaneously, often without the capital or team to do either well. The result is a blurry hybrid — not quite a performant Layer 1, and not a category-defining dApp.
Most protocols, by contrast, are not infrastructure. They are single-purpose products. So adding a validator set doesn’t make them Layer 1s — it simply dresses up a product in infrastructure optics to justify a higher valuation.
The Path Forward: Building Real Value
As Sam Boolman emphasizes, the key for protocols in the crypto space, especially in the RWA sector, is to focus on building better products rather than chasing the Layer 1 premium without substance. Sustainable token economics, genuine utility, and a clear strategic trajectory are essential for any protocol aiming to transition to true infrastructure. Market recognition follows real economic activity, user adoption, and demonstrable value accrual to the native token.
Therefore, the future success of protocols lies in executing exceptionally well, demonstrating real economic activity, and earning their platform status through tangible value creation. Only by focusing on building better products and offering real utility can protocols differentiate themselves in a crowded market and earn sustainable investor confidence.
Conclusion
In conclusion, the Layer 1 fallacy represents a critical juncture for the crypto industry. As the market matures and investors become more discerning, the focus is shifting from superficial branding to genuine value creation. While the allure of the Layer 1 technology premium is real, protocols must prove their worth through sustainable economics, user adoption, and real economic activity. Building better products and focusing on intrinsic utility will be the key to long-term success in the ever-evolving crypto landscape.
