Traditional methods of valuing blockchain networks often have flaws, viewing blockchain networks as enterprises and using formulas designed to calculate fair stock prices, which are based on very narrow considerations. This approach has fundamental defects.
Blockchains, especially smart contract platforms like Ethereum, are not enterprises. 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 serves not only the mainnet, but has also permeated and become the reserve currency of multiple Layer 2 networks within its monetary jurisdiction, and even thrives beyond these boundaries (similar to how the US dollar operates today).
Furthermore, Proof-of-Stake (POS) blockchains have introduced mechanisms akin to bonds, where participants stake assets to protect the network in exchange for future returns. These dynamics reflect the structure of nation-state economies, with financial instruments supporting 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 histories and cultures, and sometimes even foundational mythologies.
Gross Decentralized Product
To meet the need for a more suitable valuation framework for these emerging digital economies, we propose the Gross Decentralized Product (GDP), which not only captures the total monetary supply, but also the economic activity within the blockchain ecosystem.
Unlike the Gross Domestic Product (GDP) of traditional economies, 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 basis behind this framework extension is the normalization transformation represented by the blockchain economy. Although these ecosystems share similarities with traditional national economies, their fundamental difference lies in the fact that every aspect of the economy has become fluid and to some extent monetized. In this normalization, outputs 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 the chain.
Therefore, the most effective way to invest in such blockchain economies is through their native currencies. These currencies, with programmatically set supply caps, underpin all economic activity on the blockchain. Their value is closely tied to the growth of the system, as reflected in their constantly rising market capitalization. Over time, the native assets of the most successful blockchain economies will generate monetary premiums, becoming the most primitive form of collateral in their ecosystems, and gaining the status of value storage (SoV) reserve assets in the broader crypto realm and even the real world.
Below, we outline the key indicators that make up this framework, using Ethereum and other leading blockchain networks as examples.
Note: All data used in this article is from Token Terminal, DeFiLlama, and NFT Price Floor as of November 26, 2024.
Market Capitalization: Measuring Monetary Sovereignty
The market capitalization of blockchain native currencies can serve as a representation of their 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 mainnet of the blockchain, as its native currency becomes a reserve for a series of network extensions (such as ETH's L2s/L3s), and can even be transferred to other blockchains outside the same monetary jurisdiction through bridging. It is worth noting again that since the monetary base (supply) of blockchains cannot be arbitrarily increased, the observed phenomenon is an increase in their fiat value, whether it is when their native economy expands or when their native currency exceeds the boundaries of its own network and colonizes foreign economies, in order to maintain and support economic growth. This is why we always refer to market capitalization when talking about the monetary base.
If we use the simplest metric of total money 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 smart contract-based blockchain economies. For example, ETH's M1/M2 is $420 billion, M3 is $467 billion (LST), and M4 is $481 billion (LST + LRT).
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 powerful indicator of 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 also indicates the reliability and security of the monetary jurisdiction, as well as its ability to attract not only those who wish to engage in short-term trading, but also those who wish to store their wealth for a longer period.
The top blockchain economies by TVL are:
- ETH: $66.6 billion
- SOL: $9.25 billion
- TRON: $8 billion
- BNB: $5.5 billion
- BTC: $4.4 billion
L1 Transaction Fees: Revenue 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 included in its GDP. Having a strong and sustainable fee market is fundamental, and it must strike the perfect balance to provide universal 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 what we see in debt-ridden economies today.
The top blockchain economies by annual fee revenue are:
- 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 gradually trend towards 0, with most being captured by applications that try to return them to users at more favorable rates.
Stablecoins: Foreign Capital and Monetary Integration
Stablecoins represent foreign capital in blockchain economies. Similar to TVL, stablecoins are an important indicator of a blockchain's ability to attract foreign capital, 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 Bitcoin hosted on its mainnet and ecosystem of Layer 2s.
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, a key component of the soft power of blockchain networks, as we discussed in the previous article, 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 NFTs on NFT Price Floor.
Protocol and Application Fees: The Economic Activity of Enterprises in the Blockchain Economy
To further deepen our understanding of blockchain economic activity, 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 is far ahead, 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 BNB Chain, which have relatively active but smaller-scale activity.
Estimated fees of 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 indicators that constitute the blockchain economy's "GDP" is a task for future professional economists. For now, we can simply aggregate these figures to compare the two largest smart contract-based blockchain economies:
ETH: 1) $40 billion + 2) $66.6 billion + 3) $2.6 billion + 4) $101 billion / $110 billion + 5) $1.14 billion + 6) $6 billion = $700 billion
SOL: 1) $108 billion + 2) $9.25 billion + 3) $0.59 billion + 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 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, currently in the range of 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 like 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 emphasize 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, a time of economic prosperity. How could investors at the time have broadly accessed the "American market"?
The options may have included:
- The US dollar: To gain liquidity and a reserve currency position.
- US Treasuries: Prior to the 1971 petrodollar, Treasuries were merely debt instruments, not yet a global store of value.
- Equities: To capture growth-oriented returns.
- Art: As 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 may have strengthened in times of uncertainty, bonds provided safe haven during economic downturns, and equities thrived in expansionary periods.
Gaining Exposure to the Blockchain Economy
In a smart contract-based economy (using Ethereum as an example), the native token 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 position in the entire blockchain economy.
This streamlined approach simplifies investment decisions while aligning incentives with the growth and security of the network. You can even add a basket of native DeFi protocols and blue-chip NFTs of the blockchain economy, and you're all set!
Estimating the Future Value of the Blockchain Economy Using the GDP Model
As we have emphasized throughout this article, the framework designed for joint-stock companies should not be used to value native cryptocurrencies of blockchain economies. Blockchain economies are more easily 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. Similar to traditional nation-states, blockchain economies are also in a constant state of competition for capital, security, and human resources (i.e., developers, users, and settlers in the general sense). This is precisely what the crypto-Twitter mentality instinctively recognizes - hence 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 form of normalization. In these ecosystems, the boundaries between finance and other economic sectors become blurred, to the extent that everything - even art, entertainment, and attention - reaches a certain degree of monetization. This fluidity makes it difficult to separate the monetary base from the gross domestic product it represents. However, the traditional economy still serves as our closest reference point and provides a benchmark for predicting the growth of blockchain economies.
Now, as a thought experiment, let's imagine what it would mean for the price of ETH if the growth story of Ethereum could match the most extraordinary rise of a nation-state over the past century. Ethereum's current economic size (excluding the monetary base) is $300 billion, which is comparable to the scale of China's economy in 1986. It took China about 30 years to grow its GDP to $18 trillion, which is equivalent to the current market 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 pace of economic growth.
While this comparison may already be surprising, in my view, leading blockchain economies indeed have reasons to perform on par with modern nation-states:
- Digitalization and openness
- Global accessibility
- Lack of capital controls
- Suitability 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, and the ultimate bull case materializes, by 2054 the total economic value of the Ethereum network could reach $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 size ratio of 1.2 (similar to the current U.S. M3/GDP ratio), Ethereum's market capitalization would reach $21.6 trillion, resulting in an ETH price of $180,000 (without considering potential monetary base deflation due to fee burn). However, if we consider Ethereum's potential to surpass its native ecosystem, similar to how the U.S. dollar has become ubiquitous through the Eurodollar system, it could achieve a monetary base-to-total value ratio of 1.5 (comparable to the U.S. 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 nation-states 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.
