Here’s one way to think about the differences between the Internet and the Blockchain. The previous generation of shared protocols (TCP/IP, HTTP, SMTP, etc.) produced immeasurable amounts of value. Still, most of it got captured and re-aggregated on top at the applications layer, mainly in the form of data (think Google, Facebook and so on). 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 with the applications layer. It’s a stack with “fat” protocols and “thin” applications.

We see this clearly in the two dominant blockchain networks, Bitcoin and Ethereum. The Bitcoin network has a $10B market cap. Yet, the largest companies built on top are worth a few hundred million at best, and most are probably overvalued by “business fundamentals” standards. Similarly, Ethereum has a $1B market cap even before the emergence of a real breakout application on top and only a year after its public release.

There are two things about most blockchain-based protocols that cause this to happen: the first is the shared data layer, and the second is the introduction cryptographic “access” token with some speculative value.

By replicating and storing user data across an open and decentralised 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. As a concrete example, consider how easy it is to switch from Poloniex to GDAX, or any of the dozens of cryptocurrency exchanges out there, and vice-versa largely because they all have equal and free access to the underlying data, blockchain transactions.

Here you have several competing, non-cooperating services that are interoperable with each other by building their services on top of the same open protocols. This forces the market to find ways to reduce costs, build better products, and invent radical new ones to succeed.

But an open network and a shared data layer alone are not enough of an incentive to promote adoption. The second component, the protocol token[1], 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.

When a token appreciates in value, it draws the attention of early speculators, developers and entrepreneurs. They become stakeholders in the protocol itself and are financially invested in its success. Then 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, recognising that its success would further increase the value of their tokens. Then some of these become successful and bring in new users to the network and perhaps VCs and other investors. This further increases the value of the tokens, drawing more attention from more entrepreneurs, leading to more applications, and so on.

There are two things to point out about this feedback loop. First is how much of the initial growth is driven by speculation. Because most tokens are programmed to be scarce, as interest in the protocol grows, so does the price per token and thus the network’s market cap. Sometimes interest grows much faster than the supply of tokens, leading to bubble-style appreciation.

With the exception of deliberately fraudulent schemes, this is a good thing. Speculation is often the engine of technological adoption [2]. Both aspects of irrational speculation — the boom and the bust — can benefit technological innovation. The boom attracts financial capital through early profits, some of which are reinvested in innovation (how many Ethereum investors were reinvesting their Bitcoin profits, or DAO investors their Ethereum profits?). The bust can support the long-term adoption of the new technology as prices depress. Out-of-the-money stakeholders look to be made whole by promoting and creating value around it (look at how many of today’s Bitcoin companies were started by early adopters after the crash of 2013).

The second aspect worth pointing out is what happens towards the end of the loop. 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) and existing investors hold onto their tokens anticipating future price increases, further constraining supply. The combination forces up the price (assuming sufficient scarcity in new token creation), the newly-increased market cap of the protocol attracts new entrepreneurs and new investors, and the loop repeats itself.

What’s significant about this dynamic is its effect on how value is distributed along with the stack: 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. And again, increasing importance at the protocol layer attracts and incentivises competition at the application layer. Together with a shared data layer, which dramatically lowers the barriers to entry, the result is a vibrant and competitive ecosystem of applications and the bulk value distributed to a widespread pool of shareholders. This is how tokenised protocols become “fat” and their applications “thin”.

This is a significant shift. Combining shared open data with an incentive system that prevents “winner-take-all” markets changes the game at the application layer. It creates an entirely new category of companies with fundamentally different business models at the protocol layer. Many established rules about building businesses and investing in innovation don’t apply to this new model; today, we probably have more questions than answers.