The Internet stack, in terms of how value is distributed, is composed of “thin” protocols and “fat” applications.

This relationship between protocols and applications is reversed in the blockchain application stack. Value concentrates at the shared protocol layer and only a fraction of that value is distributed along at the applications layer.

by replicating and storing user data across an open and decentralized network rather than individual applications controlling access to disparate silos of information, we reduce the barriers to entry for new players and create a more vibrant and competitive ecosystem of products and services on top.

an open network and a shared data layer alone are not not enough of an incentive to promote adoption. The second component, the protocol token[1] which is used to access the service provided by the network (transactions in the case of Bitcoin, computing power in the case of Ethereum, file storage in the case of Sia and Storj, and so on) fills that gap.

some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens.

There are two things I want to point out about this feedback loop. First is how much of the initial growth is driven by speculation.

Sometimes interest grows a lot faster than the supply of tokens and it leads to bubble-style appreciation.

Speculation is often the engine of technological adoption

The boom attracts financial capital through early profits, some of which are reinvested in innovation (how many of Ethereum’s investors were re-investing their Bitcoin profits, or DAO investors their Ethereum profits?), and the bust can actually support the adoption long-term adoption of the new technology as prices depress and out-of-the-money stakeholders look to be made whole by promoting and creating value around it

When applications begin to emerge and show early signs of success (whether measured by increased usage or by the attention (or capital) paid by financial investors), two things happen in the market for a protocol’s token: new users are drawn to the protocol, increasing demand for tokens (since you need them to access the service — see Albert’s analogy of tickets in a fair), and existing investors hold onto their tokens anticipating future price increases, further constraining supply.

the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer

The combination of shared open data with an incentive system that prevents “winner-take-all” markets changes the game at the application layer and creates an entire new category of companies with fundamentally different business models at the protocol layer.