Research | Kevin Mills et al. | What is Ethereum Worth?

Introduction

In the midst of the 2017 bull market, John Pfeffer, former KKR partner and McKinsey consultant, penned one of the most fundamental evaluations of native chain assets, “An (Institutional) Investor’s Take on Cryptoassets” In his paper, Pfeffer concisely laid out why he believed Bitcoin was unique among digital assets as a long-term investment opportunity, and that why the very nature of blockchain technology means any other chain (and specifically the native asset thereof) is likely a fundamentally poor investment on a long term, risk-adjusted basis once the technology reaches mature equilibrium. To his deserved credit, many of the forecasts he made back in 2017 have proven out almost exactly as he predicted, an impressive record given how different the industry was at that time. Though the final version was published in December 2017, the first iteration of the paper was written in June 2017, when ETHBTC was 0.09 - 0.15, compared to 0.035 today. From June to December 2017, Bitcoin ran from $2,500 to $17,500 and Ethereum from $370 to $750.

In Pfeffer’s words, a summary of his position:

Blockchain technology has the potential to disrupt a number of industries and to create significant economic surplus. The open-source nature of public blockchain protocols, combined with intrinsic mechanisms to break down monopoly effects, mean that the vast majority of this economic surplus will accrue to users. While tens or perhaps hundreds of billions of dollars of value will also likely accrue to the cryptoassets underlying these protocols and therefore to investors in them, this potential value will be fragmented across many different protocols and is generally insufficient in relation to current valuations to offer a long-term investor attractive returns relative to the inherent risks.

The one key exception is the potential for a cryptoasset to emerge as a dominant, non-sovereign monetary store of value, which could be worth many trillions of dollars. While also risky, this potential value and the probability that it might develop for the current leading candidate for this use case (Bitcoin) would appear to be sufficiently high to make it rational for many investors to allocate a small portion of their assets to Bitcoin with a long-term investment horizon.

In this paper, we revisit evaluating native blockchain assets by using the largest and most widely adopted, Ethereum, as the base example. Despite nearing its 10th anniversary, many investors and developers in the industry are currently mired in deep debate about what ETH is, how it should be valued, and what a fair valuation ultimately should be. The pendulum seems to swing back and forth between ETH as a cash-flowing asset much like equity, ETH as an internet-native commodity, ETH as money, or even a new chimera asset with traits of all three. This paper represents our contribution to the discussion.

We briefly touch on Bitcoin and its increasingly solidifying role as a non-sovereign store of value before turning the majority of our attention towards exploring how we believe ETH is evolving and thus how it should ultimately be valued from a rational, long term investor’s perspective.

It is important to underscore one point about all of this: Ethereum and other blockchains can be immensely successful and capture substantial shares of the market, but that does not necessarily mean value accrual to investors holding the native assets of those chains justifies the asset as an investment based on expected fundamental growth or future cash flows today. Are increases in price of those assets important for each ecosystem? Absolutely, but the value of the network and the value of the asset itself are not necessarily one and the same.

All outlooks are over a long-term horizon where the technology has progressed to the point of mature equilibrium. In the initial paper, this was posited to be a 10 year horizon. While fundamentals are playing an increasingly prominent role in evaluation, there remains a significant degree of speculative forces in the cryptoasset market that still drive pricing.

The Primary Arguments of Pfeffer’s Original Paper

Let us begin by reiterating some of the key takeaways of the 2017 paper. First and foremost, Pfeffer posits that the inherent strengths and open-source nature of blockchain technologies will prove to be a highly disruptive force in industry, ultimately accruing significant value back to users. As such, aside from a cryptoasset emerging as a dominant non-sovereign store of value, the very same properties that will enable blockchains to be disruptive will also ultimately lead to high fragmentation of the value they can ultimately capture. Though he estimates this to be on the orders of 10s or 100s of billions, the ease of replication and open-source nature will lead to hundreds or thousands of assets splitting that value rather than significant accrual to a select few.

At mature equilibrium, native assets are ultimately means of allocating and paying for computing resources on the network. This applies to gas tokens and many Dapp utility tokens and notably excludes the potential for one to emerge as a store of value, a role into which Bitcoin is increasingly growing. For these protocols, the quantity theory of money (MV=PQ) enables us to calculate the required money stock of a network (M) based on the economic demand of that network (PQ) and speed at which the asset is spent within that economy (V). For reasons we explore in depth throughout this paper, PQ is low at equilibrium and V high, thus rendering the requisite value of the network relatively low.

Metcalfe’s Law (network value V∝ΘN2) is frequently cited as a justification of the high values these networks have historically reached. However, it is important to stress that the ultimate value of a network comes from the ability to extract rent from that network, not the network itself, and due to their inherent properties, native cryptoassets have limited ability to capture sustained rent Θ from the network. Why? Primarily because the alternatives to blockchain networks (e.g. traditional non-distributed technologies) are easily accessible and relatively low-cost. As such, Pfeffer takes the position that:

The network value of a tokenised version… will by construction be a small fraction of the enterprise value of its centralised, joint-stock-company equivalent” and because of that, “[t]he disruption of traditional networked businesses by decentralised protocol challengers will represent an enormous transfer of utility to users and an enormous destruction of market value. Great for users, the economy and society; bad for investors.

The nature of the protocol economy and the rapid iteration that it allows means that the number of startup attempts - and failures - will be high, and that the achievable value of each marginal attempt lessens over time. Modularity and abstraction, coupled with these high failure rates, suggests selecting winners a priori will be incredibly difficult, especially because the winners likely have yet to be launched. The lack of formal ties to protocols, incentive-driven coalitions and ease of forking will lead to the continued erosion of sustainable rent captured by any one network.

Looking back seven years later, it is difficult to argue with any of these main points. The continued launches (and failures) of competing layer 1 networks, and now layer 2 and layer 3s, where the key value propositions largely fall along the lines of “more transactions for less cost” all point to a highly competitive and highly fragmented market where rent capture is continuously compressing towards zero.

There are however a few predictions first posited that have played out slightly differently than Pfeffer expected back in 2017 when Ethereum was still years away from becoming a proof of stake network, had no fee burns or layer 2 networks, and before DeFi and most applications as we know them existed.

Dilution of Value Through Forks

An interesting business idea that someone could logically pursue at some point would be to raise capital to fund a crack team of mercenary blockchain developers and systematically target technically-mature or maturing protocols where there is still a significant economic rent premium and arbitrage that value via hostile forks of those protocols in a way that reduces cost and/or improves functionality to users and reassigns network tokens held by the incumbent developer team and backers to the insurgent team and backers.

While largely correct that at equilibrium multiple forks will exist that erode economic surplus, this position may have underestimated the lock-in and network effects that Ethereum has been able to generate, ascribing slightly too much ease to forks diverting development activity and users. Rather than simply a proliferation of forked Ethereums diluting value, this has largely played out in scaling space on top of Ethereum. Modular rollup kits such as Conduit, Caldera, and Altlayer make it trivially easy to deploy new customizable blockchains (almost entirely EVM L2s) through what are effectively SaaS platforms . For example, Conduit offers a mainnet L2 or L3 chain deployment for $3,000 / month + 5% of sequencer profits. The chain can be deployed in 15 minutes. https://www.conduit.xyz/pricing/rollups The ease and low-cost nature of deployment on top of Ethereum, coupled with the heightened customizability and near-zero cost to users to transact mean that every marginal rollup launched through these providers arbitrages yet another slice of value away from the ever-decreasing rent that the chain before it was able to capture. At competitive equilibrium, surplus available to these scaling chains is 0, and Ethereum’s lower than it otherwise may have been.

There are assuredly rival L1s such as Solana, Aptos or Sui, but the long list of near-defunct ghost chains suggests the forking of users and developers in a sustainable way is incredibly difficult, and the viability of the top new contenders today is still very much in question. Major ecosystem players have shown their commitment to the canonical forks (e.g. Circle and Tether do not support native issuance on Ethereum POW). Though chains are duplicative, developers are not and there appears to be a stronger tie-in effect than he originally gave credit for, despite the open-source nature and lack of contractual restrictions. Undoubtedly there is a subset of mercenary developers that chase incentive bonuses sprayed by new chains, but the majority remain with the ecosystem of choice, such as Ethereum/EVM or Solana.

With that said, we should note that the rise of Solana is an example of his initial prediction: enough incentives would drive the creation of alternative networks that would compete away surplus. Will rent capture go to 0 on Ethereum? Likely not, but it is realistic to expect that it will settle at a level low enough that an investment in the native asset ETH is difficult to justify. We are seeing this play out today - and importantly, it is also necessary to highlight that while everyone recognizes Solana as a competitor to Ethereum, nobody talks about BCH, BSV or LTC eroding BTC’s value.

The proliferation of L2s and long tail of alternative L1s - Solana a prime example- are indeed all examples of his core position, but aspects of Ethereum’s moat may have proven more defensible than perhaps initially expected in 2017. In other cases however – specifically for many Dapps - this was bang on. How many times does one hear, “Uniswap or Aave but on [insert new chain]”? For reference, Uniswap has been forked 791 times, Compound 142 times and Aave 63 times . https://defillama.com/forks

The 2020 Sushiswap vampire attack on Uniswap is a canonical example of this happening at the application level . https://www.coinbase.com/learn/market-updates/around-the-block-issue-9 A single developer forked (e.g. copied) Uniswap’s code and added a few additional community-focused features, such as a governance token and staking, as a way to improve on Uniswap and cut into its market. It was wildly successful, allowing Sushi to siphon hundreds of millions in liquidity from Uniswap in just a few months. Unexpectedly, the high-profile nature of the attack and Uniswap’s response (airdropped own governance token) actually served to increase Uniswap’s liquidity and size in the following months. The rush of deposits into Uniswap to be deployed into Sushi liquidity, the discourse this attack created, and the $1400 airdrop to Uniswap users all effectively contributed to making this the start of DeFi’s “coming out” party . https://www.coinbase.com/it/learn/crypto-basics/what-is-uniswap Uniswap remains a top decentralized exchange today, but its dominant position is being continuously eroded by new, more innovative competitors.

Forking with marginal improvements remains common practice today. Take the transformation of the top decentralized exchange on Base, Aerodrome . https://medium.com/@aerodromefi/introducing-aerodrome-9af62848b876 The team started out by duplicating aspects of existing mature open-source protocols (Uniswap, Convex, Curve) on a Fantom-based DEX, Solidly, iterated on the build on OP Mainnet as Velodrome, before ultimately copy and pasting the Velodrome code to deploy on Base, a somewhat-commoditized OP Stack L2, as Aerodrome. Through all of this, the team created a full token allotment of VELO plus an additional full AERO token allotment for relatively little marginal effort. Although not “hostile”, the team followed the exact path forecast in 2017, forking open-source code to create new token floats, arbitraging value and benefitting considerably. But as more DEXs are spun up on the next marginal chain to launch, the capturable value will continue to decrease over time. Ironically, portions of Aerodrome’s source code is now registered under a Business Source License (rather than open-source) in order to prevent others from leveraging their code as they did with other protocols, primarily to strengthen the sustainable rent capture Θ.

A Chain’s “Economy” Expanding to Include Other Chains

In the 2017 paper, Ethereum’s ‘economy’ was posited to be simply the cost of computational resources required to run the chain. Again, while not incorrect, the ultimate addressable market of this formulation was somewhat underestimated. Whereas Pfeffer deemed that to be the full cost of computational resources for the L1, he (quite fairly) failed to account for the fact that L2s and L3s would also a) exist and be at the center of Ethereum’s roadmap and b) denominate and provide services in ETH, rather than alternative native gas tokens. L2s using ETH are the core moneyness extension and while his predictions were not exactly wrong, he did not explicitly predict forks (e.g. L2s) would also adopt ETH as the base asset rather than using their own to pay for compute resources. This fact is one of the core tenets that many in the industry use today to justify ETH’s lofty valuation.

Bitcoin: Solidifying its Position as the Non-Sovereign Store of Value

It is increasingly clear that Bitcoin has differentiated itself from other cryptoassets as the leading candidate to be a non-sovereign store of value, playing much the same role that gold traditionally has in traditional markets. Pfeffer was confident in BTC’s path dependency back in 2017 and argued that this directionality would continue, as it has. We see no evidence that this forecast has been disproven - only solidified - and as such, will just briefly recap his initial estimation here and provide a revised estimate based on up to date data.

At the time of his writing, the estimated value of above-ground gold was $7.8T. Today, that same stock is worth roughly $16.8T and of that, nearly 40% can be attributed to the financial markets - bars, coins, ETFs and central bank reserves https://www.gold.org/goldhub/research/market-primer.

In addition to gold reserves, Pfeffer argues that central banks would also look to diversify reserves into BTC to reduce reliance on the US dollar and US-controlled payment rails such as SWIFT. Though perhaps somewhat far-fetched at the time, there is increasing evidence that this could occur. Bhutan holds the equivalent of 28% of its GDP in Bitcoin reserves through its active involvement in mining (~$1B), El Salvador already purchases BTC as a state asset, the Chairman of the US Federal Bank has called BTC a rival to gold, and the US president-elect has indicated intent to create a national strategic BTC reserve https://www.centralbanking.com/fintech/crypto-assets/7963449/bitcoin-is-a-rival-to-gold-not-the-dollar-powell https://www.coindesk.com/markets/2024/11/12/el-salvadors-bitcoin-stash-rises-above-500m-but-bhutan-story-might-be-even-bigger/ . Non-gold sovereign reserves are now ~$12.9 trillion (up from ~$11.1 trillion) representing a slightly lower 85% of total reserves (down from 89%).

Together, Pfeffer calculated that BTC could have an ultimate potential value of ~$5-15T, or $260-800K per BTC at maturity. In 2017, that represented a 20-60x potential return. Rationally, allocating a small portion of a portfolio to an opportunity with a -1x:60x return profile and positive EV makes sense, even if the probability is low (5%).

With Bitcoin above $90,000 today, does the math still hold? As a simple exercise, if we use the same approach, updated with the most recent numbers, and assign a slightly higher chance of success (e.g. 20%) of this occurring given its trajectory, we arrive at a similar positive-EV outcome but with lower potential return multiple Note our calculation for the original estimate is directionally the same but mildly lower due to small differences in assumptions.. Though the upside potential is still significant, it has no doubt waned somewhat given Bitcoin is already worth 7x what it was in 2017.

Ethereum is Valuable – But the Risk Adjusted Upside is Hard to Rationalize

It is likely that the combined network values of all utility protocol cryptoassets together will total between tens of billions and hundreds of billions of dollars. That is significant value, but not when compared to the current ~$250 billion combined network value of protocols other than Bitcoin. Investing in utility protocol cryptoassets could make sense if their current network values were one or two orders of magnitude lower than they currently are, but at current valuations, the risk/return to investors is not attractive.

The current combined market cap of all cryptoassets is roughly $3.4T. Bitcoin alone is $1.9T of that, meaning the aggregate value of all other tokens (L1s, L2s, Dapps, etc.) is $1.5T. Despite these lofty numbers, it is widely known that many cryptoassets are priced substantially beyond their fundamental value and there remain many defunct or zombie projects with non-zero floating token supplies that contribute to buoying this aggregate market cap number. There are assuredly projects of significant quality with fundamentally sound models that are worthy of significant valuations (we explore this in depth later), but the multi-billion dollar values currently assigned to many memecoins and abandoned forks are an example of this phenomenon.

Specifically looking at Ethereum, its market cap is ~$400B today, roughly two-thirds of its 2022 peak of nearly $600B, and still well below its $500B height in early 2024. Why do we see such massive swings in value of Ethereum (and many other cryptoassets, such as XRP’s recent 450% move up) when compared to equities? First, many are largely speculative and highly exposed to shifting geopolitical and macro landscapes as well as industry-specific developments such as new infrastructure developments that fundamentally shift the trajectory of the technology. But also, and likely more importantly, many of these assets are so severely departed from fundamental value that when markets shift to risk-on or risk-off stances, they react especially violently to any marginal new information irrespective of actual likely impact.

Why? The industry is young and there are limited true cash flows, moats or other requisite sustainable value that set an actual price floor, and many of those that do exist are incredibly circular and reflexive. The aggregate P/S for the QQQ ETF, for reference, is 5.5x. Nvidia, the speculative AI darling of 2024 with a near monopoly on high-moat AI hardware, has traded at a P/S of 30-45x, against $30B of quarterly revenue. In 2024 alone, Ethereum’s P/S ratio has fluctuated between 65x and 1241x, currently sitting at 250x. That is pricing in a lot of growth for an asset that is already $400B.

But is this even the right way to look at Ethereum? Many traditional equity investors take this tack and value ETH off its cash flows, ascribing expected growth in transactions and revenues to back into discounted cash flows. But many increasingly argue no, fees will trend to $0 and thus viewing ETH as a cash flowing asset makes little sense. While it is understandable that there is disagreement about how to view a new-to-the-world asset class, Ethereum is nearly 10 years old, and though naturally being in its infancy relative to joint stock corporations or commodities, it is perhaps a sign of a more fundamental issue that the industry continues to shift the narrative in order to justify its lofty valuation and even loftier expected future valuation. The technology is still effectively a beta release given the frequent significant changes to its stack, but until the point that it is “finalized”, this shifting foundation only serves to increase the risk associated with any investment, and thus necessitates an even more optimistic outcome to justify its current valuation.

In the following sections, we separately evaluate the three main lenses through which Ethereum is often valued: as a cash flowing asset akin to equity, as an internet-native commodity, and increasingly, as a money for an emerging internet-native network state. One could justifiably value ETH through any of these methodologies, or perhaps even as a sum-of-the-parts combination of all three. However, we argue ETH on its current trajectory - and many native gas and payment tokens in general - are far more akin to internet-native commodities or working capital at mature equilibrium.

ETH as a Cash Flowing Asset

One can look at modeling Ethereum off of its forecast revenue generation. Many industry analysts have gone deep into trying to forecast various revenue vectors for Ethereum 5 years out, such as possible MEV capture by non-existent app-specific L3s or restaking flows. By and large, while commendable, this is incredibly difficult to do accurately and introduces massive assumptions that drive the majority of model value. Crypto is hard enough to forecast 3 months out, let alone 5 years. The problems are further compounded by the fact that Ethereum’s own economic structure is continually being changed (such as EIP-1559, EIP-4844 and EIP-????) which means any such forecast is built on top of a highly unstable foundation EIP-1559 introduced the base fee burn mechanism; EIP-4844 introduced blobs for rollup data..

Further, the introduction of the burn mechanism through EIP-1559 seems to have centered much attention on whether or not ETH is a deflationary asset, with many defining the burn as the network’s true revenue. We view this as largely a red herring given that Ethereum’s monetary policy has effectively codified inflation to remain below 1.5% and typically 1%, lower than most developed market currencies. From this standpoint, its monetary policy is quite sound for the time being.

As such, we will take a simpler approach, which is arguably even more optimistic in its outlook than a DCF normally would be. Quite basically, we model a growing perpetuity against the fee burn required to offset inflation currently (~$2.25B per year). No long-term assumptions about yet-to-be built products or adjusting growth rates across periods. Simply, what cash flow is needed to first make ETH non-dilutive for the marginal holder, and then add a generous long-term growth rate on top. Given that the first number is ~180% above current levels at the time of writing, it is hard to argue this is an unfair place to start, especially with the continued migration of execution to layer 2 networks and network fee generation near all time lows:

Ethereum transaction fees via TokenTerminal.

What is a fair discount rate on ETH? Endowments and pensions roughly target inflation plus 5%; equity investors historically discount closer to ~10%; PE investors come in around 20-25% and VC starts creeping up to 30-40%. The risk of digital assets clearly suggests the upper end of this spectrum is appropriate, but we’ll look across all stakeholders in our model as ETH.

Assuming ETH offsets its current issuance into perpetuity ($2.25B annual inflation), we will also assign an above average growth rate of 5% into perpetuity. Note, there is little reason to expect a consistent, or even growing, revenue level going forward given Ethereum’s historical track record and for all of the reasons we explain, but we will make this concession. This simplistic model also internalizes the network issuance into a simple bar to clear, above which Ethereum becomes ‘profitable’. It also provides a long-term target that needs to be hit if transaction fees are to be adequately high to fund node participation in the network. Issuance today is the main mechanism through which they are paid, but the ability to expand the validator set is entirely reliant on the price of ETH in fiat denominations increasing.

With those assumptions in place, based on a $2.25B run rate, growing at a generous 5% into perpetuity, ETH appears highly overvalued today as a cash flowing asset at $400B.

PV=C/(R−G)

This is a fairly simple back-of-the-napkin approach to valuing ETH, but is consistent with how many analysts seem to ascribe value to the fees and token burn of ETH while treating issuance as a network cost. A more accurate approach is to break down the value flow by stakers versus holders, which fundamentally changes the economic breakdown and turns network issuance into a value-positive dynamic for a subset of network participants.

Specifically, because new network issuance is paid 100% to stakers and node operators, it should be seen as a direct transfer from token holders to token stakers as an internalized tax for securing and facilitating the network. Through this lens, holders are operating at loss, but stakers are in aggregate operating at a sizable profit, as we demonstrate below.

For this analysis, we can use some rough estimates to get a sense of how much value ends up in the hands of holders and stakers, looking at September 2024 as an exemplary month. Roughly 28% of all Ether is currently staked, either directly or through delegation https://dune.com/hildobby/eth2-staking. That leaves 72% of ETH freely circulating to be held or used in other ways. For the purposes of this exercise, we treat all 72% of this as simply ETH held (much is likely used in DeFi, etc.).

Author’s estimates of fee flows, TokenTerminal, Blockworks, Dune (@hildobby).

Holders are simple. They earn their share of the network’s net burn of base and blob fees. In September, that was roughly $68M. As such, holders received $49M of ‘buybacks’ from the network in terms of net token burns. They receive no other inflows of value. So, the 72% of ETH circulating (~$231B worth at the time) accrued $49M of value for the month.

The economics for stakers are far more interesting. Similar to holders, they receive a prorated share of the network’s overall burn, amounting to $19M over this period. However, they also earn additional tips from priority fees and MEV activity. These totaled roughly $35.4M and $11.5M respectively. However, MEV activity remains extractive and one can estimate that ~$3-5M is captured each month by bot activity, largely in the form of fees paid. That means that stakers receive ~$30M from priority fees and $11.5M from MEV activity, giving them pre-issuance revenue of $61M, almost 25% more than what accrued to holders despite representing just 1/3 of the respective share of the network.

Network issuance entirely flows to stakers and validators. That amounted to $193.2M in new issuance. This brings the total value flow to stakers to $254M for the month versus just $49M for holders.

We can break down the value within staking as well. Of all ETH staked, roughly 81% is staked through centralized exchanges, pools or liquid (re)staking protocols, and the remainder is staked directly. For simplicity, we estimate that delegated stakers pay 10% to the node operators and protocols for staking on their behalf and are including solo stakers in this direct staking group. The actual weighted effective amount likely falls somewhere between 5-10%.

Thus, the 81% represented by delegated stakers earn their share of ETH fee burn ($15.4M) and 90% of priority fees ($30.5M) and issuance ($140.7M). In total, delegated stakers earned $186.6M over the month. Direct stakers (19%) captured the remaining $67.6M of value, with $15.1M coming from fees and $52.5M from network issuance.

How does this all shake out? The ~23% of delegated stakers earn a disproportionately high 61% of all value flowing through the network. Direct stakers/node operators, accounting for 5% of ETH stake, earn 22% of all value. MEV bots extract just under 2%. That means holders, accounting for 72% of all ETH in circulation, receive just 16% of all value of the network.

Summary of economic flows on Ethereum

One way of interpreting this by way of loose analogy is as follows:

• Delegated Stakers are most akin to S-Corp shareholders of Ethereum the network. 23% of all ETH held falls into this bucket. Node Operators and Direct Stakers are in essence service providers for the network, working to ensure the chain operates and provides settlement and security. These could fairly be thought of as either COGS or operating expenses. Roughly 5% of ETH held falls into this category.
• Holders are more akin to customers of the network, acquiring the tokens for use across DeFi or other activities or for speculation. Importantly, they primarily pay fees for using the chain (transactions) and to receive the security of the network (issuance). Roughly 72% of all ETH can be seen as being in the hands of ‘customers’.
• MEV actors are 3rd parties acting against perceived inefficiencies in the network. They impact Ethereum in both positive and negative ways, but ultimately end up earning a small profit for their actions. As a very loose parallel, think of drop shippers and dupe peddlers on Amazon’s marketplace, arbitraging apparent pricing discrepancies or simply acting in predatory ways by selling knockoff goods. These MEV actors represent a negligible amount of ETH held in total but do account for a significant amount of activity.

In this model, the delegated stakers (shareholders) have ~60% margins on the network’s earnings. They lose just under 2% to MEV (“allowances”), pay out 22% to node operators (“service providers”) for running and securing the network, and then spend 16% on user acquisition and marketing to attract and retain holders (“customers”) via burn share.

On the flip side, a holder’s outlook is far less rosy. Revenues (e.g. network fee burns in this model) reflect the entirety of their value capture, but they bear the entire cost of the network’s issuance given they receive none of that economic flow in return, unlike stakers. Collectively, that inflation tax falls squarely on holders as a subtle toll for security and settlement services and as a result, holders require drastically higher mainnet fee activity to “break even” from the burn mechanism.

It appears unlikely that Ethereum returns to a deflationary state in the long run (barring any major changes to its monetary policy), and especially unlikely that it returns to a state where it is deflationary enough to bring holders back into significant profitability. As such, we can model the value of Ethereum another way, looking at how much the aggregate cash flows to stakers is ultimately worth. To simplify, we will assume the stake rate remains constant and hold the price of ETH in USD constant (a problematic necessity we touch on shortly).

In May, network issuance was ~$265M (the 4th highest month since the Merge), and is down slightly since then, touching $197M in September. The highest month for issuance was March, where $286M was issued. All that is to say, network issuance is flat-to-down over the year. Using $193M as our base month is reasonable (net of MEV extraction), if not skewed slightly high. Network fees of $115M reflect one of the lowest months on record since the Merge, and only one month since then has eclipsed that, resulting in the lowest quarter of fee generation over that same time period. In short, revenues and fees are flat-to-down as well. Despite this, we’ll still ascribe a long-term perpetual growth rate of 5%. Modeling this as a perpetuity, it is again difficult to rationalize ETH as a strong investment given its current ~$400B level. Keep in mind, to many investors Ethereum and blockchain assets more broadly are still venture investments. As such, target returns are measured in multiples, likely necessitating a few-trillion dollar outcome for ETH. Per staked ETH, given these cash flows, there is little upside on a risk adjusted basis. Note that this converges down to the non-staked value we calculated earlier as stake rate approaches 100%.

PV=C/(R−G)