Valuing Ethereum Comprehensively

Transcript

[applause] >> Thank you. Hi everybody. So, I'm going to reframe how we value Ethereum. Not just as any blockchain based on any metric, but I'm going to talk to you about how to value Ethereum properly and comprehensively as a public goods infrastructure. And why it's important to use the right framework, because if we don't use the right framework, we're going to misprice Ethereum as it has been mispriced recently.

We only have 20 minutes, so I'm giving you an executive summary of the report that I published last December with some updates. So, if you really want to dive deep into it and understand the whole valuation methodology, go to the website ethmrc and you'll be able to download the report. It's about 40 pages, very easy read, and I would encourage you to do that. So, what drove me to this report specifically?

I've been in the space for a very long time, and there's something very vexing right now that's going on in the space. A lot of the crypto tokens and uh the valuations are not driven by fundamentals, and that is wrong. I kept asking myself, "How come the fundamentals are not driving crypto valuations?" If you think about it, if you've been in the space, you look at what's going on, just about anything that is not related to crypto is driving crypto prices.

One day it's the war in the Middle East, another day is inflation, another day is the strength of the US dollar, or it's whatever Nvidia did or the Nasdaq. It's a lot of external factors, liquidity availability, and so on. Why is it like this? Why should we accept having been in the in the industry for 14 years now? Why should we accept that? So, I looked at the space and one of the answers is that there is no one-size-fits-all. And when I segmented the space, uh it turned out that the DeFi the DeFi space is the most advanced in terms of being very specific in quantifying fundamentals that can drive market

prices. DeFi protocols are more advanced because you can look at some metrics, for example, the total value locked is kind of reflective of assets under management. We understand that. Then you have the fees. Fees is equivalent to revenues. That is something we know how to understand. The treasury is like a reflection of the strength of the balance sheet. We know that. Transaction volumes uh in terms of activity user activity, that's a reflection of product to market fit. It means the thing is working.

So, DeFi is a bit ahead. It's not perfect, but it's directionally correct. Then we have what I call the revenue chains. These are the likes of the Tempo and the Solana of the world. And their obsession is on fees. And they are very centrally uh run and managed. So, I they they are different from truly public credibly neutral chains. And they are a segment on their own. They like to be measured based on discounted cash flow, which is fine. That's their cup of tea. And then we have Bitcoin, obviously, and Bitcoin likes to be seen as a special snowflake.

It likes to be seen as a hedge against inflation. It likes to be seen as a digital gold. Although lately it has not done a very good job at it. It's questionable. And then we have our beloved blockchain Ethereum, which in my opinion is also another special snowflake of a different kind. And one of the mistakes that people that pretend to know how to value Ethereum is they try to dissect ETH, the assets from Ethereum the platform. And especially recently, there's been a narrative that yeah, Ethereum can do well as a

platform, but it's not translating itself into value for ETH. That is not correct. That is the wrong lens. The reality is that there is four E's. And there is the Ethereum the platform, there is ETH the asset. There's the Ethereum Foundation, obviously, and there's the ecosystem. And all of these four E's work together synergistically. So you really have to see the whole thing working together to really understand how Ethereum is to be valued, how Ethereum is to be perceived.

I'm going to draw a lot of analogies to the internet because that is really what you should be comparing Ethereum to. If you're in the web space when it started in 1995, and I was there from the very early days, my first book was an internet book called Opening Digital Markets. And at the time in 1995, we did not know how to measure and how to value internet companies. Now, you know what the most important metric was back then? It was eyeballs.

We were measuring eyeballs. We were measuring uh ad impressions. And it's very different than what it is today. Over the years, the evaluation methods evolved. After the crash, uh we started to see more revenue, so we started to be able to look at companies based on revenues, margins profits. And then recently, it's even more sophisticated with companies like Facebook, Google, Uber. Uh they are more like platform companies. And we measure them based on the strength of the ecosystem, revenues of course, but they have a moat. And and that's very different than how it started. So, the point of this slide is to let you know that it takes a while

for us to mature the valuation models. And we're still very early in understanding the valuation models in blockchain unfortunately. The other lesson from the internet, as far as Ethereum is concerned, is that Ethereum, from a structural perspective, from an infrast- from an architectural perspective, is very similar to the internet. You can too put the both the two two of them side by side, and you can see the similarities. At the layer one level, that's the that's the you that's the the public infrastructure that's available to everybody.

And both internet and Ethereum run on the the common layer that is available to all to all. But then you have the layer twos. And you have the access networks. On the internet, you have to pay to have internet access. Um the comparison is that it becomes more like a club kind of membership in terms of instead of a a pure public good that is very cheap. And then you have private goods, the applications, the application layers, the institutions.

And if you look at this uh chart, you'll realize uh that value over time, over time, more value is created at the application layer than it is at the base infrastructure layer. If you look at the internet companies today, of course, the value of all of the internet companies together is a lot greater than the value of inter- the internet itself on its own.

And the same thing might happen to Ethereum. They're like what what right now Ethereum is number two. Uh Tether, for example, is number three, very close to it. And some people will say, "Well, at one point in time, Ether might overtake Ethereum from a market cap perspective." I wouldn't be too upset if that happened. That means that Ethereum is doing his his job in in allowing big companies to be created on top of it. And that would be a a measure of success.

I would like to see more companies eventually, if you go back if you go forward 5 to 10 years from now, it wouldn't be inconceivable to have a number of companies with market caps bigger than Ethereum that are based on Ethereum. Ethereum will continue to grow commensurably, but it will also create more value than it captures. That is a very important fact. And there has been some very uh credible studies that analyzed how we evaluate the internet specifically.

And the way it's done is by dividing this into three different parts. There's the visible value. It's all of the companies that are based on the internet, uh like the Googles, the Facebooks, and so and so on, the Ubers. All of these companies would not exist without the internet. And they have a valuation. That's one way. The second part is the the digital economy slice that the internet captures. And there's been some very valid studies that said that the internet is responsible for 15% of the world GDP. The world GDP is about a hundred trillion dollars.

And if the internet captures 15% of it and even if half of it now is directly related to it then you capitalize that and you get a big number, 160 trillion. And then thirdly, there's the what is called the consumer surplus. It's the unpriced value um of using the internet. And and it can be quantified as well. What are the big big applications of the internet? Search and email. Search engines, the value of 17,500. This is a US value, a US number.

That's how much you have to pay a user to give up a search engine. Email on average, somebody would have to pay you $8,000 a year to give it up. That's been kind of analyzed. So that has a value and we have to to quantify that. Um I've been talking a lot about public goods. Why is it important? Because public goods have three properties that are common to all to all of them. There is no uh rivalry, meaning if somebody uses it it doesn't make the other person lesser able to use it.

It's available to everybody. It's a non-excludable. If you If I use it, it doesn't mean the other person is not going to be able to use it. And then it's also systemically enabling, meaning that it's creating more economic value than it's capturing. And that's why it's difficult to quantify public goods uh that have the systemic property where the benefits are really to all, for all. And the the long-term effect is really it takes time to see the uh actual benefit unravel.

If we apply the same methodologies that we did for the internet to Ethereum, we have the same three buckets, but they are a little bit different in terms of what's underneath. First, there's captured value. That is what we see right now. This is where you could put in the fees. The fees are in there. Then there is the economic flow because ETH is is a currency. Um think of it like digital oil. It has to flow in between different buckets of of wealth, different buckets of value, and that has a a meaning. That has value as well.

It's like the GDP equivalent. And then there's the trust surplus using the same analogy as we used for the internet, but it's a bit different. And the start uh the trust surplus is what users would have paid minus what they actually pay, and that has a number. Uh in the Ethereum space, uh we're not at the $1,000 level yet. Uh but there's clearly, on average, it's been estimated uh I estimated that to be a 50 to 150 net trust surplus per user. And there's 20 to 30 million users right now meaningfully, and you do the math, and you get a number. But that's at the user level. There's also at the systemic level Ethereum

brings efficiencies when there is settlement on Ethereum, uh when there is uh uh fraud reduction specifically, when there is less counterparty risk, and so on. You can quantify at each step of these specific processes how much you're saving by using a network of trust like Ethereum. And you have you have the number, you capitalize it. So, you use that modeling same way that we did for the internet for the uh Ethereum space, and you can do a low case, an average case, and a more uh aggressive case, and depending where you

land, uh we get into the trillion of dollars. And if you extrapolate that over the number of years, it is clearly clearly the case that Ethereum is very undervalued at this point in time. Uh Currently, today, it should be valued at least at $1 trillion in terms of token price is the equivalent of $8,000. So, at least four times what it is right now.

And that is the battle we have right now is we have to make sure we can explain why Ethereum is valued and is to be valued that much. Uh Again, the internet the analogy is that it took a long time for the internet to be understood and to be valued as well, especially before the crash. At some point in time, even around the year 2000, there were a lot of people that were doubting the value of the internet. Some people thought that it won't be any more valuable than the effect of the fax machine, and look where it is today. So, it takes a long time for us to wrap our heads around it, because it's many

things, and Ethereum is also many different things. It's not just one thing. Uh why markets continue to misprice it? Uh they look at the token supply. Some people who that, but it doesn't say anything about how the system works. Uh you look at the decentralization aspects of the Ethereum Foundation, for example, and it gets a lot of criticism. But people don't understand that this this is not a corporation. Uh there is the L2 L1 relationship, and some people say, "Well, it's taking value out of the L1." But no, it's making the market bigger. So, this dependency is hard to understand.

And uh you don't see the flows between institutions. Currently, uh Ethereum settles $3 trillion in stable coins transfers, $3 trillion per month. That is the case right now. You don't see it, but it happens day in, day out. And because of history, we know that its real valuation is going to trail uh its economic role, but over time, it's going to reveal itself. So, we have to shift the paradigm of thinking about how we value Ethereum. It's not a fee-based valuation model. It's more flow-based. It's kind of the flow of

money because ETH is like the US dollar. Why is the US dollar so valuable? Because it's the main currency for paying for oil. It's the main currency for paying for trade. It's really in demand for many external reasons, not just within the US, but outside of the US as well. And the same thing has to be thought about for ETH. It is becoming a very valuable currency outside of the Ethereum ecosystem. Forget the TPS comparisons of transactions uh per seconds. That's not about speeds and feeds.

It's about the economic settlement. Ethereum can settle $3 trillion of stable coins per month without That's the most without being the fastest. So, you can tell which is more important. Uh don't look at short-term revenue like at long-term trust minimization is what is a trust surplus. And let's look at the GDP aspect. So, the value and the valuation of Ethereum is not really about the sum of its revenues like some people want to just look at revenues. Imagine it would be like trying to value the internet based on packet fees.

You know, there are packet fees, but we don't think of we don't think of packet fees. The The network providers have to pay each other packet fees, but that's like the least aspect of the value of the internet. The value of the internet is based on how much the world depends on it. And the same thing for it Ethereum. The value of Ethereum is on how much we depend on it. And at the end of the day, the paradigm shift is about trust. The architecture of trust is changing.

It's breaking, and Ethereum is rebuilding it in many different places. And that is the theme and the thesis of my next book that's is going to come out in the fall uh called rightfully so trust shift. I coin those two terms into one word. And it's really going to be all about Ethereum and the reinvention of trust. If you take that uh QR code, uh I'll be sending some early content to those that sign up uh to the mailing list.

Uh and uh it it's going to be a deep uh treatises into uh looking at the practical aspects of Ethereum as a major enabler of how trust is shifting from institutions, from the old models to the new models. So, thank you very much and I'll see you later on when you connect with me over the book.