Author: Diario
Translator: MetaCat
Layout: MetaCat
The traditional blockchain network valuation method often has biases, viewing the blockchain network as a company and using formulas designed to calculate the fair stock prices, which are based on very narrow considerations. This method has fundamental flaws.
Blockchains, especially smart contract platforms like Ethereum, are not companies. As I explained in my previous article, they are emerging, sovereign digital economies with their own reserve currencies. These currencies not only serve their native networks, but can also function as stores of value (SoV), units of account (UoA), and mediums of exchange outside their "borders" - for example, $ETH is not only used in the original mainnet, but has also permeated and become the reserve currency in multiple extended networks (L2s), which fall under its monetary jurisdiction, and even thrives beyond these boundaries (similar to how the US dollar operates today).
Furthermore, Proof-of-Stake (PoS) blockchains introduce mechanisms similar to bonds, where participants stake assets to protect the network in exchange for future rewards. These dynamics reflect the structure of national economies, where financial instruments support their defense and the stability of current and future operations.
In other words, blockchain networks based on smart contracts, like Ethereum, are becoming emerging network states - digital nations that manifest not only through their technology stacks, but also through their monetary jurisdictions and reserve currencies, shared values and beliefs, common history and culture, and sometimes even foundational mythologies.
Gross Decentralized Product
To meet the demand of these emerging digital economies for a more suitable valuation framework, we propose the Gross Decentralized Product (GDP), which can capture not only the monetary base, but also the economic activity within the blockchain ecosystem. Unlike the traditional economic Gross Domestic Product (GDP), the Gross Decentralized Product covers a broader scope: it considers the economic activity generated within the ecosystem and the monetary base, as well as the market capitalization of the protocols, decentralized applications, and cultural assets built on a specific blockchain.
The theoretical foundation behind this expanded framework lies in the paradigm shift represented by the blockchain economy. While these ecosystems share similarities with traditional national economies, their fundamental difference is that every aspect of the economy becomes fluid and to some degree monetized. In this paradigm, output and factors of production are not only components of the economy, but also take the form of "money" that can be traded and monetized on-chain.
Therefore, the most effective way to invest in these blockchain economies is through their native currencies. These currencies, with their programmatically set supply caps, underpin all economic activity on the blockchain. Their value is closely tied to the growth of the system, reflected in their continuously rising market capitalization. Over time, the native assets of the most successful blockchain economies will generate a monetary premium, becoming the most primitive form of collateral within their ecosystems, and gaining the status of a store of value (SoV) reserve asset in the broader crypto space and even the real world.
Below, we outline the key metrics that make up this framework, using Ethereum and other leading blockchain networks as examples.
ℹ️ All data used in this article is from Token Terminal, defillama, and NFT Price Floor, as of November 26, 2024.
1️⃣ Market Capitalization: Measuring Monetary Sovereignty
The market capitalization of a blockchain's native currency can serve as a representation of its monetary base and economic scale, similar to the role of M2, M3, and M4 money supply for the US dollar. As mentioned earlier, the monetary base is not always limited to the blockchain's mainnet, as its native currency becomes a reserve for a series of network extensions (e.g., ETH's L2s/L3s), and can even be bridged to and used in other blockchains outside the same monetary jurisdiction. It's important to note that since the monetary base (supply) of blockchains cannot be arbitrarily increased, the observed phenomenon is an increase in their fiat value, whether it's when their native economy expands or when their native currency colonizes foreign economic domains, in order to maintain and support economic growth. This is why we refer to market capitalization when talking about the monetary base.
If we use the simplest metric of total monetary supply (M1/M2), the top blockchain economies are:
- BTC: $1.82 trillion
- ETH: $400 billion
- SOL: $108 billion
- BNB: $90 billion
- TRON: $16 billion
Here, we include LST and LRT tokens, just as we would measure the M3 or M4 money supply of a smart contract-based blockchain economy. For example, ETH's M1/M2 is $420 billion, M3 is $467 billion (LST), and M4 is $481 billion (LST + LRT).
2️⃣ Total Value Locked (TVL): Capital Utilization in DeFi
TVL measures the value of assets locked in decentralized finance (DeFi) protocols. While critics question its utility, it remains a strong indicator of the active economic activity on the blockchain. For decentralized economies, this metric is similar to tracking the scale of financial intermediation activities in the national economy. Moreover, it signifies the reliability and security of the monetary jurisdiction, as well as its ability to attract not only short-term traders, but also investors who wish to park their wealth for longer periods.
Top blockchain economies by TVL:
- ETH: $66.6 billion
- SOL: $9.25 billion
- TRON: $8 billion
- BNB: $5.5 billion
- BTC: $4.4 billion
3️⃣ L1 Transaction Fees: Income from Economic Activity
The fees generated by a blockchain reflect the users' appreciation for accessing its services. These fees represent the "tax revenue" of the blockchain and are directly accounted for in its GDP. Having a strong and sustainable fee market is fundamental, as it must strike the perfect balance to provide global accessibility for users and protocol/application deployers, maintain operational stability and network security, and ideally offset currency issuance. Otherwise, you may end up in a dysfunctional system, like we see in debt-ridden economies today.
Top blockchain economies by annual fee revenue:
- ETH: $2.6 billion
- TRON: $1.87 billion
- BTC: $1.23 billion
- SOL: $590 million
- BNB: $191 million
For this calculation, we have ignored REV, as a) it is not enforced at the mainnet level, and b) while not all forms of MEV are extremely harmful to users, many are, and there are reasons to believe they will trend towards 0 and be largely captured by applications trying to return them to users in the form of more favorable fee rates.
4️⃣ Stablecoins: Foreign Capital and Monetary Integration
Stablecoins represent foreign capital in the blockchain economy. Similar to TVL, stablecoins are an important indicator of a blockchain's ability to attract foreign capital, or in other words, how a blockchain brings in real-world assets (RWA). Among the major blockchains, Ethereum dominates, hosting $101 billion on its mainnet and an additional $10 billion on Layer 2.
Stablecoin holdings on blockchains:
- ETH: $101 billion (+ $10 billion on L2)
- TRON: $59 billion
- BNB: $5.8 billion
- SOL: $4.65 billion
- BTC: ~$1 billion (Omni)
While not stablecoins or real-world assets (RWA), wrapped versions of BTC (e.g., WBTC and cbBTC) can also be an interesting indicator of how smart contract-based blockchain economies attract foreign capital. In this case, Ethereum stands out as the most vibrant economy, with $15 billion worth of wrapped bitcoins hosted on its mainnet and Layer 2 ecosystem.
Protocols, Applications, and NFTs: The Infrastructure and Culture of the Economy
In the blockchain economy, protocols, applications, and Non-Fungible Tokens (NFTs) play roles similar to the industrial and cultural sectors in the traditional economy. Protocols and applications are the infrastructure and factories driving value creation, including Decentralized Finance (DeFi), Social Finance (SocialFi), Decentralized Science (DeSci), and more. On the other hand, NFTs represent the cultural, entertainment, and media industries, which are key components of the soft power of blockchain networks, as we discussed in the previous article, as culture is an integral part of their influence and identity.
Ethereum dominates in both of these domains, with the total value of fungible tokens (excluding stablecoins and liquidity-staked tokens) at around $110 billion and the total value of NFTs at $4.1 billion. This highlights Ethereum's leadership in both the economic and cultural realms.
- ETH: Fungible assets around $110 billion, Non-Fungible assets around $4.1 billion
- SOL: Fungible assets around $18 billion, Non-Fungible assets around $1 billion
- BTC: Non-Fungible assets around $0.5 billion
Data based on the top 100 market cap cryptocurrencies on CoinGecko and the top 50 NFT collections on NFT Price Floor.
Protocol and Application Fees: The Economic Activity of Enterprises in the Blockchain Economy
To further deepen our understanding of economic activity in the blockchain ecosystem, we analyzed the fees generated by the top protocols and applications hosted on each blockchain. This metric can serve as a proxy for the economic output of the companies and organizations operating in these ecosystems, similar to how enterprises contribute to a country's GDP.
Ethereum leads by a wide margin, with its top protocols generating $6 billion in fees, reflecting its position as the most mature and diversified blockchain economy. Closely following are Solana and the BNB Chain, which have relatively active but smaller-scale activity.
Estimated fees for the top 50 protocols and applications in the blockchain economy:
- ETH: Around $6 billion
- SOL: Around $1.95 billion
- BNB: Around $0.3 billion
These figures also consider the fee share generated by the top stablecoin issuers operating on each blockchain. Given the large trading volumes involving stablecoins across various protocols, issuers like Tether (USDT) and Circle (USDC) make significant contributions to the overall fee base.
By incorporating this metric into our Decentralized Gross Product framework, we can gain deeper insights into the economic vitality of blockchain ecosystems and the level of enterprise activity they host.
By combining these metrics, the concept of Decentralized Gross Product provides a more comprehensive way to measure the blockchain economy. It highlights the complexity, breadth, and global economic integration potential of the blockchain economy.
Determining how to measure and integrate the different metrics that constitute the blockchain economy's "GDP" is a task for future professional economists. For now, we can simply aggregate these numbers to compare the two largest smart contract-based blockchain economies:
ETH: 1) $400 billion + 2) $66.6 billion + 3) $2.6 billion + 4) $101 billion/$110 billion + 5) $114 million + 6) $6 billion = $700 billion
SOL: 1) $108 billion + 2) $9.25 billion + 3) $590 million + 4) $4.65 billion + 5) $18 billion + 6) $1.95 billion = $142.5 billion
Ethereum, as the largest and most diversified smart contract-based decentralized economy, performs strongly in terms of monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural influence.
The total value of the Ethereum economy (excluding the monetary base) is $300 billion, with a ratio of the monetary base to total value of 1.33. Given $ETH's "triple-asset" characteristics and its ability to permeate "external" blockchain networks, its comparison to the US economy should reference the M3/GDP or M4/GDP ratios, which currently range from 1.2 to 1.5.
As blockchain networks continue to evolve, frameworks akin to GDP will help investors, policymakers, and developers better understand their true value as digital sovereign economies. Metrics such as the Gini coefficient and economic diversity index may also be valuable in assessing the economic health and future potential of these ecosystems. It is important to note that this is not about determining the fair value of company shares, but rather about how to comprehensively participate in the entire blockchain economy.
Let's use the example of the US economy in the 1940s, during a period of economic prosperity. How could investors at the time have broadly accessed the "US market"?
- The US dollar: To gain exposure to liquidity and the reserve currency.
- US Treasuries: Prior to the petrodollar in 1971, Treasuries were merely debt instruments, not yet a global store of value.
- Equities: To capture growth-oriented returns.
- Art: New York was gradually becoming the center of the art world.
As we can see, accessing the traditional economy involved investing in a variety of assets, which would ultimately perform differently based on macroeconomic conditions: the dollar might strengthen in times of uncertainty, bonds provide a safe haven during economic downturns, and equities thrive in expansionary periods.
Gaining Exposure to the Blockchain Economy
In a smart contract-based economy (using Ethereum as an example), the native currency as a triple-asset provides unique advantages: it serves as a reserve currency, a store of value, and a bond (when staked). Unlike the need to hold a carefully curated portfolio of assets with different characteristics, a single asset (such as $ETH) can provide an integrated exposure to the entire blockchain economy.
This streamlined approach simplifies investment decisions while aligning incentives with the growth and security of the network. You can also add a basket of native DeFi protocols and blue-chip NFTs of the blockchain economy, and you're all set!
Applying a GDP Model to Estimate the Future Value of the Blockchain Economy
As emphasized throughout this article, the frameworks designed for publicly traded companies should not be used to value blockchain native currencies. Blockchain economies are more akin to being understood and evaluated as the digital counterparts of traditional nation-states, which emerged after the Treaty of Westphalia - the same period when joint-stock companies began to appear. Like traditional nation-states, blockchain economies are in a constant state of competition for capital, security, and human resources (i.e., developers, users, and general settlers). This is precisely what the crypto Twitter mindset instinctively identifies - the emergence of tribalism and maximalism. This is human nature: when a community feels threatened, its immune system activates to protect an idea, a technology, or a set of values perceived to be valuable.
It is important to note that while blockchain economies share some similarities with traditional nation-states, they represent a new paradigm. In these ecosystems, the boundaries between finance and other economic sectors become blurred, to the extent that everything - even art, entertainment, and attention - reaches some level of monetization. This fluidity makes it difficult to distinguish the monetary base from the GDP it represents. However, the traditional economy still serves as our closest reference point and provides a benchmark for projecting the growth of blockchain economies.
Now, as a thought experiment, let's imagine what it would mean for the ETH price if the Ethereum growth story could match the most extraordinary rise of a nation-state in the past century. Ethereum's current economic size (excluding the monetary base) is $300 billion, which is comparable to the scale of the Chinese economy in 1986. It took China around 30 years to grow its GDP to $18 trillion, which is equivalent to the current value of gold. China's economic growth has been extraordinary, a rare feat for an economy of its scale. But interestingly, we can imagine a world where network-states like Ethereum could replicate this unprecedented economic growth rate.
Although this comparison may already surprise you, in my view, leading blockchain economies do have reason to match the performance of modern nation-states:
- Digitalization and openness
- Global accessibility
- No capital controls
- Suitable as financial infrastructure for an AI-driven economy
Assuming the network state thrives, with Ethereum consolidating its dominance in the rapidly expanding DeFi and AI domains, the ultimate bull case scenario emerges, where by 2054 the total economic value of the Ethereum network reaches $18 trillion, matching China's development trajectory over the past 30 years! Under this assumption, how would we apply the GDP model to calculate the price of ETH?
If we adopt a conservative monetary base-to-economic total ratio of 1.2 (similar to the current US M3/GDP ratio), Ethereum's market capitalization would reach $21.6 trillion, leading to an ETH price of $180,000 (without considering potential monetary base deflation due to fee burning). However, if we consider Ethereum's potential to transcend its native ecosystem, similar to how the US dollar became ubiquitous through the Eurodollar system, it could achieve a 1.5 monetary base-to-total value ratio (comparable to the US M4/GDP ratio). In this case, Ethereum's market capitalization would reach $27 trillion, corresponding to an ETH price of $225,000.
Now, this is not any form of ETH price prediction or financial advice, but it is indeed interesting to consider how the GDP framework can provide a powerful perspective to understand blockchain economies, revealing their true nature as emerging digital nations or economies. This framework also highlights that, just like traditional national economies, multiple dimensions must be assessed before making investment decisions.
Within this framework, the rationale for investing in Ethereum lies in its position as the most vibrant and diversified blockchain economy, with an ecosystem spanning a wide range of domains from financial services to cultural products, which not only gives it strong hard power but also establishes significant soft power. Ethereum's ability to attract and retain "sticky capital" further demonstrates this, signaling that despite short-term price volatility, investors still view it as the safest and most promising smart contract-based economy for long-term wealth preservation.
