Amidst the bustling world of cryptocurrency, a new narrative is emerging that challenges the very foundation of valuation models within the industry. As of August 2025, the so-called “Layer 1 Fallacy” has captured the attention of market analysts, with many questioning the sustainability of chasing the elusive “technology premium” often associated with Layer 1 blockchain networks like Ethereum, Solana, and BNB.
The Technology Premium: A Mirage?
Layer 1 networks have long been the darlings of the crypto market, consistently commanding higher valuation multiples relative to operational metrics such as Total Value Locked (TVL) and fee generation. The allure is understandable. These networks are seen not merely as blockchains but as foundational ecosystems — akin to AWS or Apple’s App Store in traditional tech sectors. They promise scalability, diverse application potential, and robust network effects. But here’s the catch: many decentralized finance (DeFi) protocols and real-world asset (RWA) dApps are now attempting to mimic this premium, positioning themselves as equivalent sovereign networks.
Yet, as the market matures, skepticism grows. “The narrative of being a Layer 1 without the requisite fundamentals is a common pitfall,” says crypto analyst Jamie Patel. “Simply adding a validator set doesn’t transform a protocol into infrastructure.” This sentiment echoes the past missteps of traditional financial firms, like WeWork’s infamous attempt to masquerade a real estate venture as a tech platform — a strategy that eventually unraveled. For more on how infrastructure plays a crucial role in crypto, see our coverage of Stablecoins Speed Up Thanks to ‘AWS of Crypto’ Alchemy’s Latest Upgrade.
The Appchain Dilemma
Enter the appchain trend, where protocols strive to integrate application logic and settlement layers into a unified stack. On paper, this sounds promising. By controlling the entire stack, some appchains, like Hyperliquid, have showcased impressive performance, offering rapid execution and meaningful fee generation. Nevertheless, these successes are exceptions, not the rule.
Most appchains find themselves in a precarious position, battling on two fronts: building both infrastructure and product without the necessary resources. The result? A hybrid that fails to deliver the performance of a Layer 1 or the value of a defining dApp. As Patel notes, “It’s like a bank with open APIs pretending to be a fintech giant — the core business remains unchanged.”
This phenomenon mirrors historic trends in financial services, where companies like Goldman Sachs attempted to adopt digital-first strategies with platforms like Marcus, only to scale back after facing persistent profitability challenges.
Real-World Assets: A Cautionary Tale
The RWA sector offers a stark illustration of this conundrum. In the rush to capitalize on the Layer 1 narrative, many RWA protocols are branding themselves as infrastructure for tokenized finance. However, without meaningful differentiation or sustainable user adoption, these efforts often fall flat. The majority lack a compelling need for a sovereign settlement layer, and their tenuous economics can’t support lofty valuations.
As the story goes, the key isn’t to feign infrastructure status but to excel as a product. DeFi protocols such as MakerDAO and Uniswap exemplify this approach, transitioning towards appchain-style models while maintaining strong ecosystems and clear monetization strategies. In contrast, the RWA space has yet to demonstrate durable traction, with many rushing to launch appchains backed by fragile economics. For insights into how some networks are leveraging technology to capture market share, see our article on GOAT Network Bets on Fast ZK Proofs to Capture Bitcoin Layer 2 Yield.
A Path Forward?
So, what lies ahead? For crypto protocols eyeing the Layer 1 mantle, the path is clear: focus on real economic activity. TVL alone won’t suffice. Instead, sustainable fee generation, user retention, and genuine value accrual to native tokens are paramount. If developers are building on your protocol because it’s genuinely useful — not just because it claims to be infrastructure — the market will eventually recognize the value.
In the words of Patel, “Platform status is earned, not claimed.” The fog of storytelling is lifting, and investors are becoming more discerning. Buzzwords like “appchain” and “Layer 1” no longer hold sway without substantiated value propositions and sustainable token economics. What the crypto market needs, especially in the RWA sector, isn’t more Layer 1s. It needs better products — and those who build them will be the ones rewarded.
As crypto continues to evolve, the lessons from traditional markets remain ever-relevant. Investors and developers alike must navigate the hype with clarity and focus, ensuring that the narratives they weave are grounded in tangible, verifiable value. The road to genuine infrastructure status is long and fraught with challenges, but for those who persevere, the rewards could be substantial.
Source
This article is based on: The Layer 1 Fallacy: Chasing Premium Without Substance
Further Reading
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Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
