How to value public chain tokens such as Ethereum?

Valuation indicators such as price-earnings ratio and market-sales ratio are not applicable to the underlying public chain (L1) tokens. The value of the company is the discount of future cash flow, while the value of the blockchain comes from how much economic (transaction) activities the token holder supports , Rather than the proportion of gas fees for trading activities that are drawn by the platform as “profits.”

The underlying (L1) token should be valued as the currency of the “cryptocurrency country”. The larger the blockchain platform, the more it resembles a sovereign economy. Its native token is a real currency. The currency exchange rate model is more useful than the stock model when valuing L1 tokens. The author draws on the currency quantity model to evaluate the token exchange rate framework, the formula is:

Money Supply (M) Velocity of Money (V) = Price (P) Real GDP (Y)

 The token price can be expressed as:


How to value public chain tokens such as Ethereum?

Using this model, one can estimate the exchange rate between two currencies:

How to value public chain tokens such as Ethereum?

Assuming that country A = the United States and country B =  Ethereum , the exchange rate of ETH against the US dollar will appreciate under the following circumstances:

Ethereum GDP (Y_ETH) grows faster than US GDP (Y_US); US money supply (M_US) grows faster than Ethereum money supply (M_ETH); U.S. dollar currency velocity (V_US) grows faster than ETH currency Velocity of circulation (V_ETH);

Take the money supply as an example. Since last year, the Fed’s balance sheet has expanded on a large scale, as exemplified by the sharp rise in the dollar price of ETH.

Similarly, there should be a one-to-one relationship between the growth rate of Ethereum GDP (total economic output of Ethereum) and the price of ETH. Although no Bureau of Statistics has compiled the “GDP” for the “Ethereum Country”, it is possible to infer GDP growth indirectly from the growth rate of transactions, wallets, and total lock-up value (TVL). The growth of the wallet can be regarded as the increase of the country’s “working population”, and the growth of TVL reflects the growth of the financial sector in the economy.

The empirical data confirms the relationship between these variables and the token/dollar exchange rate. The growth of transaction volume and the price of ETH are almost linearly correlated. A 10% increase in transaction volume means an average price increase of 13%:

How to value public chain tokens such as Ethereum?

Similarly, a 10% increase in the total number of wallets means an average price increase of 7%:

How to value public chain tokens such as Ethereum?

What is amazing is that there is almost a 1:1 relationship between the acceleration of wallet growth (that is, the growth rate of new wallets) and the growth of ETH price:

How to value public chain tokens such as Ethereum?

Software development in the virtual world is like the construction industry in the real economy—a leading indicator of GDP growth. The activities of developers on the L1 platform are more predictive of upcoming economic expansion than transactions or wallets.

Searching for “ethereum” and “solana” on Github in May 2021, the former returned 65 times as many repo results as the latter. By October, the multiple had shrunk to 17 times-positively correlated with the rapid growth of the “Solana Country”.

For digital currencies, the above currency exchange rate model does not consider another key variable: the stability of the cash flow of the blockchain platform, which is very important for the stability of the L1 token.

It is no accident that the government became the monopoly issuer of currency. There are many private currencies in history, but they have never lasted for a long time, and they have always been eliminated by government currencies. Among the many problems of private currencies, the lack of a “fiscal basis” is the most serious one.

The government can protect the value of its currency through taxation, which is the most stable and almost guaranteed income. Even if the fiat currency is “unsupported,” the government can raise resources through taxation and use these resources to buy/sell its currency to defend its value. This can bring trust to currency holders, but non-governmental currencies cannot.

However, it is different now.

Incorporating transaction costs into every economic activity on the platform and used for token destruction or mortgage rewards, the currency of the “blockchain country” is receiving financial support similar to government currency. Although these cash flows cannot determine the price of tokens, in the long run, they help keep the exchange rate stable.

But for the price of tokens, the most important thing is still the GDP growth of the cryptocurrency “country”. Since the meta universe is only at the primitive stage, the story has just begun.

Posted by:CoinYuppie,Reprinted with attribution to:
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