The correct public chain valuation model: Is Solana overestimated in one article?

Many people try to value Layer 1 blockchain tokens like stocks, which is ridiculous. Rather than price Ethereum and Solana like *company*, it is better to price them like *country*. Most people use the wrong way to value public chain tokens:

The first method of wrong valuation: return multiple

Some people apply the value investment framework of stocks to the blockchain and get the price/income and price/sales ratios of ETH , SOL , AVAX, etc. Unsurprisingly, the ratio calculated from this model looks surprisingly high. So high that they will cause any value investing enthusiast to have a heart attack.


The problem is here, earnings are the full value of a company, but they do not represent the value of the public blockchain. If Ethereum cuts its average gas by half tomorrow, and other conditions remain the same, the price-to-earnings ratio will double. Does this mean that Ethereum is doubled and overvalued?

No, on the contrary, it will be a boost to the growth of the platform.

Since the token holder, the owner, is also the user of the blockchain, the value of the chain comes from how many economic activities it supports, not how much of these activities are captured as “profits” by the platform. If the public blockchain is regarded as a sovereign economic ecosystem, similar to a country, then the absurdity of the valuation ratio will be immediately apparent.

If the United States doubles all tax rates, the US government’s “price-to-earnings ratio” will fall by half. But is it good for the U.S. economy? almost none. From a structural point of view, the share of government activities in the total economy of some countries is higher than that of other countries. Other things being equal, the price-earnings ratio of China (larger government) will be lower than that of the United States (smaller government). Can this explain the value of these two economies? Obviously not!

The second wrong valuation method: discounted cash flow

DCF is another common framework used for stock valuation, which is actually even more absurd. Using discounted cash flow to evaluate the value of L1 tokens is a waste of time. It tries to use the future income of Ethereum to determine the current ETH/USD exchange rate. But future income needs to be converted through the future exchange rate, which in turn depends on the current exchange rate. This is a complete cycle.

L1 tokens such as ETH and SOL are currency and income assets. If they are regarded as stocks, then their function as the unit of account and the medium of transaction in their respective economies is ignored. The valuation of the latter, the so-called exchange rate, is much more complicated.

The DCF model of the stock:  


Because the company’s future cash flow and its stock price are denominated in the same currency (for example, U.S. dollars). However, the future cash flow of Solana and ETH is based on SOL and ETH instead of U.S. dollars. Therefore, you need to make assumptions about the exchange rate for each period in the future to arrive at the DCF denominated in USD.

Solana’s DCF model:


This is completely useless, because the USD/SOL exchange rate is the first thing you need to calculate. Rather than applying a company valuation model, it is better to use L1 tokens as the currency of cryptocurrency countries for valuation.

L1 tokens are a new type of asset, they are a bit like stocks, a bit like bonds, and a bit like currency. However, the larger the blockchain platform, the more it resembles a sovereign economy, and its native token is a real currency. The most reliable bet in the encryption field is the blockchain country that uses proof of equity as the economic engine.

Currently, there are more than 100 encryption projects that use Proof of Stake (PoS) as a consensus mechanism. Their market capitalization is USD 400 billion (excluding ETH 2.0), which accounts for 15% of the total market capitalization of cryptocurrencies. About 40 of them are public smart contract platforms, also known as layer 1 chains, on which decentralized applications run.

Although the competition is fierce and many L1 blockchains will die out, it is clear that in the future, there will be multiple L1 chains with PoS mechanisms and their extension layers that will coexist and become the infrastructure of the meta universe. However, in addition to the security, technology, and functions of the blockchain, most people do not grasp the huge economic impact of PoS.

If the L1 chain is a new nation-state with its own sovereign economic ecosystem (the first-level chain is a new nation-state. The difference is that you can become a dual, triple, or quadruple citizen without giving up the old passport), then proof of rights It is the basic engine for healthy circulation of energy and value in the entire system.

How does the flow of value happen, and why is PoS so important?

As a smart contract platform for a sovereign economy, a growing L1 platform is a powerful black hole that absorbs financial liquidity. If you want to enter the Ethereum country, you need to buy ETH. If you want to enter the Solana country, buy SOL.

The L1 platform guides its national economy through the flywheel effect, financial operations and the real world.

Increase in the price of native tokens —> Attract liquidity for the platform —> Fund more applications to build more use cases on its land —> Attract more real users and greater network effects —> Increase in demand for native tokens —> Tokens The price of currency has risen.

In a sense, this is not new. When a country’s economy grows rapidly, the exchange rate of its own currency tends to appreciate. This has happened to the U.S. dollar in the past 200 years, and it has also happened to China’s renminbi in the past 20 years.

But this kind of flywheel itself is unstable. The token price, the exchange rate, will not rise forever.

If the flywheel can spin up when the price rises, it can also spin down just as easily when the price goes in the other direction. In the “real world”, it is called the business cycle, where the economy experiences prosperity and depression. Since people don’t like depressions, they have come up with some methods to increase or decrease the money supply according to economic conditions in an attempt to balance economic recession and prosperity. We call this “monetary policy.”

If you want to stimulate the national economy, expand the money supply. As long as you are not too much, you will usually succeed. Just as the Federal Reserve printed US dollars to save the downturn caused by the new crown in the United States, new L1 public chains like Solana and Avalanche issued more SOL and AVAX to make their economy grow. (So ​​many people hate money printing machines and symbolic inflation, but they have overreacted. Although these tools have negative side effects, when you have a tool that has been proven to be effective, you don’t use it. Just an idiot).

In addition to policy programmability, the difference between blockchain countries and the Fed is that the Fed must rely on tradFi (banks and shadow banking) to push its monetary policy to the economy.

But TradFi is a terrible pipe—clogging where it should flow and leaking where it should contain.

Eventually there will be many ugly imbalances in the system, and these imbalances will surprise you in the future. In contrast, proof of rights provides a fairer, more effective and more sustainable monetary policy transmission mechanism for blockchain economies.

As the basic economic engine of blockchain countries, the basic idea of ​​PoS is very simple. The blockchain rewards people for verifying transactions. In order to ensure that verifiers are honest, it requires them to lock resources in the form of the chain’s native tokens, that is, staking.

Although intended as a security mechanism, the economic significance of PoS is far-reaching.

1. It provides citizens with a continuous incentive to hold native tokens.

With proof of work, only miners can be rewarded for processing transactions. The remaining holders mainly hold tokens, and they expect the price to rise. This is why PoW chains like Bitcoin need to always promote rising prices and promote the religious mind control of the HODLing culture to keep people interested. (This is also the reason why the price of BTC always fluctuates and is not suitable as an accounting unit).

In contrast, in addition to price increases, PoS also provides real economic incentives for holdings. Even if you only have 1 SOL, you can obtain consistent income through entrusted mortgage.

Mobile pledge services such as Lido and Marinade Finance make this easier-the tokens you pledge no longer have a lock-up period, and you can enter and exit at will. This increases user stickiness, improves the price stability of everything denominated in L1 tokens, and reduces transaction costs.

2. Efficiently distribute the economic output of the platform.

In the traditional world, the GDP of any market economy is distributed to its participants in two forms: labor income and capital income. In the past few decades, the share of labor income in the economy in all developed countries has been shrinking. This is a comprehensive result of globalization, automation, and tax policies. It causes wealth inequality to become more and more serious, because labor is the main source of income for the masses, and only a few people have capital.


The technological advancement of artificial intelligence and robotics to replace labor. This trend will be intensified in the coming years.

One day, many people will not be able to earn a living on labor income alone. The world is already rich, but it needs new ways to distribute its rich wealth.

One solution is to allow more people to earn more income through capital income. The mortgage mechanism of blockchain countries can help achieve this goal in a programmable way.

Part of the staking revenue of L1 tokens comes from transaction fees charged by the platform. Blockchain countries take a draw from every economic activity that occurs on their land, directly as a staking reward or indirectly by burning txn fees, and handing them over to users to support the token price.

This allows everyone participating in the (reference: equity) platform to share their economic output as non-labor income, which is the public’s capital income. It will take years for governments in traditional countries to implement any type of universal basic income.

But blockchain is already doing this. L1 staking participation rates, such as Solana and Fantom, far exceed 60%-most citizens in these economies receive capital income.

3. Promote the transmission of monetary policy.

Another part of L1 mortgage income comes from new token emissions, that is, the platform “prints” the money and puts it directly into the user’s pocket. This is much stronger than the Fed’s monetary policy, because the Fed’s monetary policy must be defrauded through the high friction banking system, and the banking system benefits some people more than others.

4. Provide basic ingredients for the new financial industry.

The main staking APY of L1 ranges from 4% to 15%, which is more attractive than bank savings rates and more stable than yield agriculture in DeFi. Therefore, PoS has laid the foundation for other financial products.


DeFi products like Anchor have used L1 staking on the back end to provide a stable currency savings rate of close to 20%.


Other products provide “self-repayment” loans, or reduce the liquidation risk of loans by collateralizing borrowers’ collateral in the PoS chain.

This is just the beginning of a new financial system, where the L1 mortgage yield will provide a reference interest rate for all other financial products in its ecosystem.


Smart contract platform is the new sovereign economy

Proof of equity drives the crypto-national economy

PoS supports price stability, provides capital income for the public, creates a strong monetary policy and provides the cornerstone of a new financial system. Therefore, when evaluating L1 tokens, currency exchange rate models are more useful than stock dividend models.

Unfortunately, when you try to evaluate the exchange rate, it’s like opening a jar of worms. There are a million different factors that affect the relative price of currencies, and hundreds of frameworks and assumptions. You can even write a full library. book of. But there is a simple and elegant framework, arguably the closest to “fundamental analysis”, and that is the quantitative model of currency.

It means: Money supply (M) · Money velocity (V) = Price (P) · Real GDP (Y) Rearrange the equation & You can express the price level as:


What does this have to do with the exchange rate?

Assuming that the output of any two economies is fungible, so the price difference can be arbitraged (this is obviously not true in many cases, but as long as the direction is correct, it will not affect our purpose), country A and country B The relationship between the country’s price level is:


Simple example: a hamburger sells for 1 euro in Germany and 1.5 dollars in the United States, so the USD/EUR exchange rate = 1.5.

Substituting this equation back into the previous domestic price level equation, you will get:


If it is not clear enough, let Country A = US Country B = Ethereum, you can get:


This means that ETH appreciates against the U.S. dollar under the following circumstances:

1/ Ethereum GDP (Y_ETH) is growing faster than U.S. GDP (Y_US)

2/ U.S. money supply (M_US) is growing faster than Ethereum money supply (M_ETH)

3/ U.S. dollar currency velocity (V_US) grows faster than ETH currency velocity (V_ETH) If this equation is calculated at face value, there should be 1:1 between the growth rate of ETH price in U.S. dollars and the growth rate of U.S. money supply: 1 relationship.

Since the large-scale expansion of the Fed’s balance sheet last year, the changes in the price of ETH are evidence. But this is not the most interesting part. What is interesting is that there should also be a 1:1 relationship between the growth rate of Ethereum’s price and the growth rate of Ethereum’s GDP (that is, the total output of the Ethereum economy).

Of course, there is no statistical bureau to compile “GDP” for Ethereum countries. However, GDP growth can be inferred indirectly from the growth rates of transactions, wallets, TVL, etc. Almost every transaction involves some additional economic output, and the growth of wallets can be considered an increase in the country’s “working population”.

The growth of TVL reflects the growth of the financial sector in the economy. Of course, these are not perfect measures, but the point is that they are positively correlated with the additional economic output generated on the platform. Actual data confirms the relationship between these variables and the token/dollar exchange rate. The growth of transaction volume has a nearly linear correlation with the price growth of ETH. From historical data, the transaction volume has increased by 10%, and the price has increased by an average of 13%.


Similarly, the total number of wallets increased by 10% and prices increased by an average of 7%.


The following one is even more eye-catching. The acceleration of wallet growth (that is, the growth rate of new wallets) has an almost 1:1 relationship with ETH price growth.


This is not all. Software development in the virtual world is like the construction industry in the real economy and is a leading indicator of GDP growth. It can be said that developer activity on the tier 1 platform is more indicative of the upcoming economic expansion than transactions or wallets.

Back in May, if you search for “ethereum” and “solana” on Github, the repo result returned by the former is 65 times that of the latter. By October, the multiple had shrunk to 17 times, closely following Solana’s rapid growth.


All this is not to say that the platform’s own cash flow is irrelevant. This is important for the stability of L1 tokens.

The government did not accidentally become a monopoly currency issuer. There have been many private currencies in history, but they have never lasted long and have always been eliminated by government funds. Among the many problems of private funds, the lack of “value anchoring” is the most serious problem. The government can protect their currency value through taxation, which is the most stable and almost guaranteed income.

Even if the fiat currency is “unsecured”, the government can raise resources through taxation and use these resources to buy/sell their currency to maintain its value. This is very important and can give currency holders confidence. For non-government currencies, this is difficult! Since transaction fees are programmed into every economic activity on the platform and used for token burning or staking rewards, the currency of blockchain sovereign economies is achieving financial support similar to government currency.

As we have already discussed, although these cash flows do not 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 cryptocurrency countries. Since the meta-universe is only in the primitive stage, we have not even seen the first stage of this growth.

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.

Like (1)
Donate Buy me a coffee Buy me a coffee
Previous 2021-11-08 22:30
Next 2021-11-09 20:59

Related articles