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Original title: The Layer 1 Fallacy: Chasing Premium Without Substance Original author: Alexandra Levis Original compilation: TechFlow   DeFi and RWA protocols are repositioning themselves as Layer 1s to gain valuations for similar infrastructure. But Avtar Sehra said most DeFi and RWA protocols are still confined to a narrow application area and lack sustainable economics — something the market is starting to see through. In the financial markets, startups have long tried to package themselves as "tech companies" in the hope that investors will value them in multiples of tech companies. And this strategy usually works – at least in the short term. Traditional institutions pay the price. Throughout the 2010s, many companies competed to reposition themselves as technology companies. Banks, payment processors, and retailers are starting to call themselves fintech companies or data companies. But few companies get valuation multiples of true tech companies – because their fundamentals often don't match the narrative. WeWork is one of the most iconic examples: a real estate company masquerading as a technology platform that eventually collapsed under the weight of its own illusions. In financial services, Goldman Sachs launched Marcus in 2016, a digital-first platform designed to compete with consumer fintechs. Despite some early progress, the project was scaled back in 2023 due to long-term profitability issues. JPMorgan Chase has high-profile claims to be a "technology company with a banking license", while the Spanish Foreign Bank (BBVA) and Wells Fargo have invested heavily in digital transformation. However, these efforts rarely achieve platform-level economic benefits. Today, these corporate tech delusions are in ruins – a stark reminder that no matter how you package your brand, you can't go beyond the structural constraints of capital-intensive or regulated business models. The crypto industry is facing a similar identity crisis today. DeFi protocols want to achieve valuations similar to Layer 1s. RWA decentralized applications try to shape themselves as sovereign networks. Everyone is chasing the "tech premium" of Layer 1. To be fair, this premium does exist. Layer 1 networks like Ethereum, Solana, and BNB have consistently enjoyed higher valuation multiples compared to metrics such as total locked volume (TVL) and fee generation. These networks benefit from a broader market narrative – one that leans more towards infrastructure than applications, and one that leans more towards platforms than products. Even if fundamental factors are controlled, this premium remains. Many DeFi protocols have shown strong TVL or fee generation capabilities, but they still struggle to reach market capitalization comparable to Layer 1s. In contrast, Layer 1s attract early users through validator incentives and native tokenomics, subsequently expanding into developer ecosystems and composable applications. Ultimately, this premium reflects Layer 1's broad native token utility, ecosystem coordination capabilities, and long-term scalability. Additionally, the market capitalization of these networks often shows a disproportionate increase in market capitalization as the fee size grows – indicating that investors are considering not only current usage but also future potential and compound network effects. This layered flywheel mechanism—from infrastructure adoption to ecosystem growth—is a good explanation for why Layer 1s are consistently valued higher than decentralized applications (dApps), even when the underlying performance metrics of both seem similar. This is the same way that the stock market distinguishes platforms from products. Infrastructure companies like AWS, Microsoft Azure, Apple's App Store, or Meta's developer ecosystem are more than just service providers—they're ecosystems. These platforms enable thousands of developers and businesses to build, scale, and collaborate with each other. Investors are giving these companies higher valuation multiples, not only for current revenues but also to support the potential for emerging future use cases, network effects, and economies of scale. In contrast, even highly profitable software-as-a-service (SaaS) tools or niche services struggle to achieve the same valuation premium – as their growth is limited by limited API composability and narrow utility. Today, this pattern is also being played out among large language model (LLM) providers. Most vendors are vying to position themselves as infrastructure for AI applications rather than simple chatbots. Everyone wants to be AWS, not Mailchimp. Layer 1s in the crypto space follow a similar logic. They are not just blockchains but coordination layers for decentralized computing and state synchronization. They support a wide range of composable applications and assets, and their native tokens accumulate value through underlying activities: such as gas fees, staking, MEV, and more. What's more, these tokens also act as a mechanism to incentivize developers and users. Layer 1s benefit from a self-reinforcing cycle – forming interactions between users, developers, liquidity, and token demand while supporting vertical and horizontal scaling across industries. In contrast, most protocols are not infrastructure but single-function products. Therefore, increasing validator sets does not make them Layer 1 - it only justifies higher valuations by cloaking products with infrastructure. This is the background to the emergence of the Appchain trend. AppChain integrates applications, protocol logic, and settlement layers into a vertically integrated technology stack, promising better fee capture, user experience, and "sovereignty." In a few cases – like Hyperliquid – these promises were delivered. By taking control of the full technology stack, Hyperliquid achieves fast execution, superior user experience, and significant fee generation – without relying on token incentives. Developers can even deploy dApps on their underlying Layer 1s, leveraging the infrastructure of their high-performance decentralized exchanges. While still narrow in scope, it shows some potential for broader expansion. However, most application chains are just trying to change their identity by repackaging the protocol, which lacks both practical use and deep ecosystem support. These projects are often stuck in a two-pronged struggle: trying to build both infrastructure and product, but often lack the capital or team to do either of them. The end result is a vague hybrid – neither like a high-performance Layer 1 nor a category-defining decentralized application. This is not the first time we have seen such a situation. A Robo-Advisor with a cool user interface that is still essentially a wealth management service; A bank with open APIs is still a balance sheet-based business; A coworking company with sophisticated applications is still renting office space at the end of the day. Eventually, as the market heat subsides, capital will reassess the value of these projects. RWA protocols are trapped in the same trap today. Many protocols have tried to position themselves as infrastructure for tokenized finance, but lack substantial differences from existing Layer 1s and lack sustainable user adoption. At best, they are just vertically integrated products that lack a real need for a separate settlement layer. To make matters worse, most protocols have not yet achieved product-market fit in their core use cases. They are simply additional infrastructure features and rely on exaggerated narratives to support high valuations that their economic models cannot support. So, what is the way forward? The answer is not to disguise itself as infrastructure, but to clarify its position as a product or service and make it the best. If your protocol can solve real problems and drive significant growth in total locked, this is a solid foundation. But TVL alone isn't enough to make you a successful appchain. What really matters is the actual economic activity: the total amount of staking that drives sustainable fee generation, user retention, and brings clear value accumulation to the native token. Also, if developers choose to build on top of your protocol because it is useful, rather than because it claims to be infrastructure, then the market will naturally reward. Platform status is won by strength, not by self-assertion. Some DeFi protocols – like Maker/Sky and Uniswap – are moving down this path. They are evolving towards an app-chain model to improve scalability and cross-network accessibility. But they do so based on their strengths: mature ecosystems, clear profit models, and product-market fit. In contrast, the emerging RWA sector has yet to show lasting appeal. Nearly every RWA protocol or centralized service is scrambling to launch application chains – which are often underpinned by fragile or untested economic models. Like leading DeFi protocols transitioning to an appchain model, the best path for RWA protocols is to first leverage the existing Layer 1 ecosystem to accumulate user and developer attraction to drive TVL growth and demonstrate sustainable fee generation capabilities, and then evolve to an appchain infrastructure model with clear goals and strategies. Therefore, for application chains, the utility and economic model of the underlying application must be verified first. Only after these foundations are proven will a move to an independent Layer 1 be feasible. This contrasts with the growth trajectory of general-purpose Layer 1s, which can prioritize building an ecosystem of validators and traders early on. The initial fee generation primarily relied on native token transactions, and over time, cross-market expansion expanded the network to developers and end users, ultimately driving TVL growth and diversifying fee sources. As the crypto industry matures, the fog of narrative is dissipating, and investors are becoming more discerning. Buzzwords like "appchain" and "Layer 1" no longer attract attention on their own. Without a clear value proposition, sustainable tokenomics, and a clear strategic path, the protocol will lack the necessary foundation to achieve the transition to true infrastructure. The crypto industry – especially the RWA space – needs not more Layer 1s, but better products. Projects that focus on creating high-quality products will truly win the market rewards. Figure 1. The market capitalization of DeFi and Layer 1 is the same as that of TVL Figure 2. Layer 1 is concentrated in places with higher fees, while dApps are concentrated in places with lower fees Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.   Click here to learn about ChainCatcher job openings   Recommended reading: Conversation with Wall Street magic operator Tom Lee: The corporate treasury model is better than traditional ETFs, and Ethereum will welcome Bitcoin-style explosive growth Conversation with Oppenheimer Executive Director: Coinbase's Q2 trading revenue fell short of expectations, which businesses will become new growth points? Conversation with TD Cowen, Head of Research: A deep dive into Strategy's Q2 earnings report, what's the key behind the $10 billion net income?