Research: Why Ethereum is growing from the perspective of network valuation

Next week, Ethereum, the world’s largest programmable blockchain, will go through a massive transformation. The Ethereum network will transition from an energy-intensive proof-of-work consensus mechanism to a sustainable proof-of-stake (PoS) consensus mechanism.

Dubbed The Merge, the upgrade is the first on the ethereum roadmap and will make the network’s infrastructure future-proof. This will be a historic moment for the nascent crypto industry and will set the stage for Ethereum to improve security, sustainability, and scalability.

Before the merger, let’s take a look at the factors that will contribute to Ethereum’s long-term growth and success. In previous articles, we discussed how network activity on Ethereum indicates its growing popularity and maturity, and how the merger will enhance the security of that network. This article will analyze how Ethereum compares to other Layer 1 (L1) networks in terms of its valuation.

This article is adapted from the “Institutional Impact of Mergers” report published recently by the MetaMask Institutional and ConsenSys Cryptoeconomic Research teams. You can find the full report here.

network valuation

Blockchain, quite simply, sells block space. Every blockchain has a method of pricing transactions contained in blocks. These methods vary from first-price auctions and second-price auctions to the target number of transactions per block. The transaction flow in the blockchain can be regarded as the total value of goods, that is, the total value of goods sold by a platform within a certain period of time.

Different blockchains are at different stages of their life cycle. PoS requires blockchain tokens to accumulate value to function optimally, and burning tokens is a popular value accumulation mechanism. It’s akin to making a profit through share buybacks. As a framework for valuing public blockchains, we examine CoinShares data on network fees, issuance costs, sustainability, and L1 value accumulation to arrive at assumed profit margins.

Network fees: Network fees are the amount the network sells its block space. It can be thought of as supply-side revenue, or the total fee paid by those users who wish to have their transactions included in the network. As shown in Figure 1, among the 6 networks including Binance Smart Chain, Avalanche, and Solana, Ethereum has the highest network fees at $4.8 billion.

Research: Why Ethereum is growing from the perspective of network valuation

Figure 1 – Annualized network fee estimates for individual blockchains Source: CoinShares

Issuance costs: The production and protection of block space is not free. The network must pay rewards to key network participants (miners and validators) to keep the network alive, orderly, and secure. This is the distribution cost. Of the six networks, Ethereum has the highest issuance cost at $10.3 billion (see Figure 2).

Research: Why Ethereum is growing from the perspective of network valuation

Figure 2 – Estimated annualized issuance rewards on various blockchains Source: CoinShares

Sustainability: The 6 blockchains we are working on are all operating at different scales. They have different hardware requirements, number of users, transaction speed, number of validators, etc. Therefore, each network’s issuance rewards will vary based on the specific needs of the network. Depending on the burn rate, a blockchain needs a network fee to issuance ratio of at least 1 to be sustainable. Of the 6 blockchains we are studying, only Ethereum has this ratio above 1 (see Figure 3).

Research: Why Ethereum is growing from the perspective of network valuation

Figure 3 – Network Fee to Issuance Ratio Source: CoinShares

Value Accumulation: In a PoS-secured network, stakes must have significant value in order to ensure the correct cryptoeconomic incentives work. Some blockchains, including Ethereum, meet this need for value accumulation by burning a portion of the fees paid to validators. Burned tokens are equivalent to income, and the effect on the value of the tokens is similar to the effect of stock repurchases on shareholders. As shown in Figure 4, Ethereum currently burns $5.7 billion worth of tokens annually.

Research: Why Ethereum is growing from the perspective of network valuation

Figure 4 – Annualized Value Source of Tokens Burned: CoinShares

Net issuance: The net issuance of a blockchain is the number of tokens issued minus the number of tokens destroyed. If more tokens are burned than issued, the remaining tokens will increase in value. Ethereum running PoS is expected to have a deflationary supply, as shown in Figure 5.

Research: Why Ethereum is growing from the perspective of network valuation

Figure 5 – Projected Annualized Supply Expansion Source: CoinShares

The destroyed tokens minus the issued tokens can be regarded as a form of profit for the chain. Keeping all the above factors in mind, we can see that the Ethereum chain running PoS is estimated to have an assumed profit margin of 81% (see Figure 6).

Research: Why Ethereum is growing from the perspective of network valuation

Figure 6 – Estimated Pseudo Profit Margin Source: CoinShares


Ethereum is the foundation of the future Internet (Web3) and the future of finance (DeFi). Currently, more than half of the entire DeFi ecosystem resides on Ethereum. Despite market volatility and macroeconomic uncertainty, Ethereum continues to attract interest from institutional investors.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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