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Look at the valuation range of Ethereum from 5 narrative perspectives

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The DeFi protocol wants ETH to be used as collateral to create other assets, such as DAI and synthetic assets, to be used as a reserve currency to allow users to trade and raise funds.

From Digital Oil to a DIgital Country-narratives for Ethereum in 2021"

Original article by Electric Capital

Bai Ze Research Institute

5 most popular views in the Ethereum community today:

1.ETH is a digital good

2.ETH is a non-sovereign digital store of value

Ethereum is a payment network

4.ETH is a productive financial asset

5. Ethereum is a digital nation and ETH is a reserve currency

4 ways to value Ethereum:

1. The adoption rate

2. Network costs

3. The multiple of price-to-earnings (or similar) the market will bear

4. Overall crypto market share

Below we provide a quantitative framework for each view. Our goal is not to come up with a price target for ETH, but rather to understand what these narratives mean for Ethereum, and the expectations of market participants and various returns.

Key premise: Assume that the Ethereum London upgrade will be successful

,We expect a successful transition to PoS and EIP 1559 implementation.

,Due to the upcoming monetary policy changes, we assume a fixed SUPPLY of 115,000,000 ETH in our calculations.

,We assume an 80% to 95% decline in average transaction revenue compared to q1 2021 levels due to network upgrades and Layer 2 solutions.

Internet level growth rate

,Technologies invented after the Internet, such as smartphones and social media, tend to develop faster than the Internet. We usually assume that growth is like the Internet, not faster.

,From January 2016 to January 2021, ethereum volume grew at a compound annual growth rate of 161%. From 2020 to 2030, our model uses compound annual growth rates of 44% and 63%.

Lower average transaction costs

,The average transaction cost in the first quarter of 2021 is about $31 (median transaction cost is about $17)

,Efforts are being made to reduce transaction costs. The Layer 2 scaling solution, ETH 2.0 release and transition to proof of interest, and future network upgrades are all aimed at improving the user experience by increasing throughput and reducing costs.

,Our assumption in the model below is that average transaction costs will fall by 80% to 95%, resulting in an estimated average cost of between $2 and $7 (and also assumes a significant increase in network value, thus implying that settlement significantly increases the volume driven by these transaction costs).

Point 1: ETH is a commodity in the digital world

A common argument is that ETH is like oil. Oil got us through the industrial age, but we are now in the software age, and ETH could be the fuel for the digital economy. With upcoming network changes and DeFi's progress over the past year, this comparison sounds increasingly important:

1. Like oil, ETH "burns" when used.

2. Similar to oil, the demand for ETH comes from different, diversified use cases:

,Participate in the DeFi.

,Protect the ETH 2.0 network.

,Issue, buy, sell, or transfer digital assets, such as ERC20 tokens, including stablecoins and NFT.

,EVM was used for the calculation.

,Store value in alternative asset classes.

,Create cross-chain Bridges where ETH will be retained.

3. Similar to oil, ETH is in limited supply and supply growth should slow significantly in the near future.

,EIP 1559 will destroy ETH previously sent to miners.

,Moving to PoS would require locking up large amounts of ETH, resulting in one-off supply shocks and lasting changes in the supply cycle.

,Upcoming network upgrades may consume more ETH than network problems, further reducing supply.

4. Like oil, geopolitics affects demand, and sentiment drives swings.

The above statements also apply to many other commodities, so we consider the total value of global oil reserves, as well as proven reserves of other commodities in limited supply, to give a rough estimate of the probable value of the Ethereum network.

The table below shows the price of ETH if the market value of Ethereum reaches the market value of natural resources (assuming a known reserve unit of these commodities and a fixed supply of ETH).

For example, if ETH became as valuable as copper in the global economy, it would be worth $63,913 per ETH.

Picture: Comparing various assets, the corresponding price of Ethereum

Limitations of comparing ETH to a commodity

,There are limited alternatives to oil (coal, solar, water, nuclear, etc.), but cryptocurrencies can fork, and new cryptocurrencies can be created. In order for this claim to be true, one must believe that ethereum's network effects will make it the preferred, dominant solution, and that encrypted networks will ultimately have power l $AW or winner-take-all market allocation.

,Digital goods are often cheaper to produce than physical goods, so when we compare ETH to oil, even if ETH becomes as important to the global economy as oil, it may be worth less than oil.

,Ethereum's supply and monetary policy are changeable, meaning that while supply will be limited in the near future, it's technically possible that it could one day grow (or shrink).

Point 2: ETH is a non-sovereign digital store of value

The phrase "digital gold" has been accepted by many BTC investors. With the upcoming Ethereum upgrade, there are four reasons to believe this narrative is relevant to Ethereum:

1. Like BTC, ETH has characteristics that make it superior to gold. Cryptocurrencies are easier to obtain, transport and transfer, and can be used to buy and sell goods and services.

2. BTC and ETH supply growth is lower than gold:

Annual supply growth:

Gold: 2.5%

BTC: 1.75%

ETH: May be less than 2% per year after EIP 1559, may be lower or negative.

3. ETH is easier to build than BTC, which can have powerful network effects.

Because of its ease of programming, ETH became the reserve currency for DeFi and today handles more transactions than any other network. BTC already has more programmability requirements: as of May 2021, more than 1% of BTC supply has been "packaged" into Ethereum ² so that it can be programmed and traded on the Ethereum network. More and more BTC is being used for Ethereum:

Pictured: The number of BTC's on the Ethereum network

4. The global digital store of value market is likely to be larger than the gold market.

A) More availability and accessibility could increase the size of the market -- the total global gold above-ground supply today is worth about 11 tons ³. Valuable digital stores reduce friction, offer better access and programmability compared to gold, which may increase the total market size.

Take us taxi and limousine services and Uber, an imperfect but relevant comparison. In 2009 (the year Uber was founded), the US taxi and limousine service market was $9.4b and growing at a compound annual growth rate of 3.2%. By 2021, after companies like Uber improve the user experience, the U.S. ride-hailing and taxi market grows to an estimated $47B and is growing at an estimated 11.7% CAGR.

B) Investors worry about inflation and demand for good value stores increases - with record money printing in 2020, many believe that inflation and/or fear of inflation are likely to drive up prices of fixed-supply assets.

C) Younger generations want to own cryptocurrencies more than gold -- while an estimated 12% of Americans own gold, 25% of millennials with more than $50,000 in savings already own some form of cryptocurrency, and another 42% are interested in buying one.

If ETH becomes the leading digital store of value, it could gain significant value (even as a BTC runner-up).

Our approach to this framework is:

1) The total market size range to provide a digital store of value compared to gold;

2) The proportion of this market that ETH can occupy.

Comparison of ETH and BTC

· BTC 已经主导了市场，网络效应可能会阻止其他加密货币获得市场份额。

· ESG 对能源密集型采矿业务的担忧可能有利于拥有工作量证明替代方案的链。

· 目前尚不清楚是否可能有两个「黄金」，或者数字价值存储是否是赢家通吃的市场。贵金属市场表明，领先的价值存储可以占据多达 70% 的市场份额。

Point 3: Ethereum is a payment network

Like a payment network, Ethereum has millions of users who pay a fee to process their transactions. If Ethereum becomes a separate global payment network, we can estimate its value by estimating its volume and transaction fees (validator revenue) and comparing it to existing payment networks such as Visa and mastercard.

In estimating the possible trading volume and cost range, we consider the following factors:

· 在截至 2020 年 12 月的 12 个月中，Visa⁶ 和 Mastercard⁷ 处理了 $17.7T，平均交易成本为 2.5% 至 3%

· 截至 2020 年 10 月，以太坊交易量（包括 ERC20 代币）为 989B 美元，交易支出为 1.64B 美元（交易量的 0.17%）。

· 2021 年 5 月，以太坊每天处理 $20B 到 $30B 的稳定币交易（$7.3T 到 $11T 年运行率）和每天约 $10B 的 ETH（$3.7T 年运行率），平均矿工收入约为 $60M 天（每年 $21.9B）。仅占稳定币和 ETH 的费用约为交易量的 0.16%。

· 截至 2019 年第四季度，Visa 和万事达卡的 PE 倍数分别为 38 和 37。我们使用疫情之前的倍数作为更「典型」的倍数。

We can estimate the range of possible ethereum network values by assuming 37 times p/E and extrapolating fees from transaction rates and volume.

Again, our goal is not to assert the potential value of ETH. The idea is to build an intuition of what people must believe in order to prove that ETH has some potential value in the future. Does it make more sense that ethereum could be trading at $5T or $30T? Is it more likely that the fee will fall to 0.5% in time or all the way down to 0.01%?

How Ethereum differs from payment networks

· 以太坊有一种本地货币，这使它与今天的支付网络不同。如果用户需要持有 ETH 才能使用网络，以太坊的估值可能与支付网络的估值不同。

· 以太坊可以处理的不仅仅是简单的支付：它是一个可以计算非常复杂的金融合约的平台。

· 以太坊是非管辖和跨管辖的，因此用户可能愿意为非主权解决方案支付溢价。

Point 4: ETH is a productive financial asset

The transition to PoS will allow verifiers to generate cash flow with their capital, which means ETH will have value as a productive financial asset. To create the cash flow model, we considered the following:

1. Transaction fees and block incentives could represent substantial revenue -- fees paid to miners grew from $46 million in 2019 to $630 million in 2020 and over $2.40 in the first quarter of 2021.

2. Average transaction fees are likely to decline in the future compared to q1 2021 -- lower fees mean less revenue for verifiers, and adoption is likely to be faster as higher fees are a deterrent to users.

3. Certificate of Equity margins will be higher than proof of work -- a shift to certificate of equity is coming and, if successful, will remove the need for highly specialised, expensive machines to mine deals, as well as energy-intensive PoW machines. For simplicity, let's assume that the profit rate is 100%.

Here are two frameworks for estimating ETH prices based on future cash flows:

1. Discount the cash flow of all verifier revenues generated from 2021 to 2050 to estimate the NPV of ETH today.

2. Price-to-earnings multiple of the revenue generated by Ethereum in 2030.

Method 1: Validator revenue DCF, and the net present value of the Ethereum network.

(Note: DCF stands for discounted cash flow method, which evaluates the value of an asset by the discounted present value of the cash flow it will generate in the future)

Approach 2: A PE multiple of transaction fee revenue, and the value of the Ethereum network in 2030.

(Note: PE multiple means price/earnings ratio, generally speaking, the smaller the price/earnings ratio is, the better, meaning that investors have a shorter period of time to recover the investment costs)

Challenges in estimating future cash flows

,The effect of Layer 2 changes on average transaction costs and volume is unclear.

· 鉴于加密货币的波动性，市场可能会要求更高的贴现率。

· 如今的加密货币具有高度投机性，其市盈率可能与传统金融资产的市盈率存在显着差异。

· 存在重大的监管不确定性，可能会导致采用率发生巨大变化。

Point 5 (a) : Ethereum is a digital nation

In many ways, Ethereum is like a country. It has citizens (wallets and users), governments (Ethereum Foundation), currencies (ETH), companies (DAOs and Dapps), financial markets (DeFi), and relationships with other digital nations (Bridges between different chains).

In such a comparison between Ethereum and a country, one can compare the velocity of ethereum's money circulation to the velocity of money circulation in other countries, where the velocity of money circulation is composed of the ratio of nominal GDP to money supply (M1, M2). To do this, we need:

1. Define ethereum'S GDP.

2. Define ethereum's money supply.

3. Measure the ratio of money supply to GDP in different countries.

4. Estimate what The GDP of Ethereum might be in 2030 to calculate the potential value of the network.

Define the GDP of Ethereum

Three examples of goods and services produced and sold on Ethereum today are miner revenue, DeFi revenue, and NFT sales. A simple year-to-date annualization of GDP for the three categories is $3.7 billion, $2.7 billion and $8 billion, respectively, indicating a GDP of $14 billion in 2021. There are reasons to believe that these numbers will continue to grow:

· 矿工收入增长

· DeFi 量正在增长

· NFT 销量不断增长

· 未来可能会通过以太坊生产和销售其他产品和服务。例如，几年前在技术上可以创建和销售 NFT，但它们直到最近才真正起飞。同样，在 1990 年代，少数人可以想象互联网有一天会促进数十亿次视频通话、视频流和其他宽带密集型应用。

Define the money supply of Ethereum

If Ethereum were a country, then ETH would be its money supply. The ETH supply is most similar to a country's M1 supply (coins and notes in circulation and other assets that are easily converted into cash). However, unlike traditional banking systems, the supply of ETH is limited and cannot be created by commercial banks using their reserves to create cryptographic equivalents of loans.

Thus, while ETH is most similar in definition to M1, we use M2 in our framework, which is related to GDP.

(Note: M2 (broad money supply) is cash circulating outside the banking system plus corporate deposits, household savings deposits and other deposits. It includes all forms of money that are likely to become purchasing power in reality, and usually reflects changes in aggregate demand and future inflationary pressures.)

In a country, M2 consists of:

· 公众持有的所有货币

· 交易存款

· 储蓄存款

· 小额定期存款（低于 100,000 美元）

· 和零售货币市场证券。

Ethereum already has similarities to the M2 component:

· 用户钱包中的 ETH 和 DAI 是公众持有的货币。

· 交易所钱包中的 ETH 和代币类似于交易存款。

· 像 Yearn 和 Curve 这样的 DeFi 产品是储蓄存款。

· 锁定 DeFi 存款是定期存款。

· Aave 和 Compound 等 DeFi 产品是货币市场。

Measures the ratio of money supply to GDP in different countries.

Countries have different money supply and GDP dynamics. We looked at the ratio of M2 to GDP for several countries to create a range for our assumptions.

The picture shows GDP by country/region

We can use M2 money supply comparability and a series of GDP assumptions to calculate different scenarios for Ethereum and its programmable currency:

The difficulty with this approach is that no one knows how much GDP Ethereum will generate. There are many competing chains, each of which can occupy a large part of its target industry. For example, consider the NFT as an area where Ethereum faces competition. NBA Top Shot, one of the largest NFT markets, is built using the Flow blockchain instead of Ethereum.

In fact, meaningful GDP can be achieved through financial services and DeFi alone.

View 5 (b) : ETH will become a global digital reserve currency

There are two notable recent catalysts that could trigger a change in reserve currencies and support the limited supply of cryptocurrencies:

A) The creation of new fiat currencies has increased inflationary pressure on fiat currencies.

B) There is a growing global distrust of institutions.

The following data from Pew, Gallup, and Edleman show that many people around the world have lost faith in the institutions that form the foundation of modern society-the press, public schools, banks, and so on. This is not a side effect of the Internet social media in the 90s or the 2000s. Trust in all these institutions has declined since the 1960s.

On average, it has remained a reserve currency for 100 years

Historically, reserve currency transitions can occur in as little as 20 years. For example, gold went from being the preferred reserve currency for central banks' foreign exchange reserves of 60% in 1980 to about 15% in 2000, while the dollar grew from about 28% to 60% over the same period. During ¹⁶ (including gold). A similar shift occurred when the pound lost its reserve currency status after the first World War, and before that the French River and the Dutch guilder. All three remained reserve currencies for about 100 years.

Why cryptocurrencies, why ETH?

Cryptocurrencies are important here because they have the inherent attributes of good currencies: they are durable, portable, divisible, unified, and in many cases in limited supply. When considering reserve currencies, we also need to consider three emerging characteristics: global demand, acceptability, and status as a reserve currency compared with other currencies.

Today's ETH is far from successful on these three dimensions: global demand is very small compared to other currencies, even compared to BTC; Outside of cryptocurrencies, ETH is accepted almost nowhere as a form of payment; Prices fluctuate greatly; Other cryptocurrencies are competing with ETH; Central banks around the world are developing their own competing digital currencies.

However, ETH stands out as a ready contender for a currency that many businesses and countries may choose to hold in time.

1. Growing and diversified demand for ETH:

· 投资者希望 ETH 存储价值，在 DeFi 中赚取被动收入，并投资于其他加密机会。

· 消费者希望 ETH 访问以太坊网络上的不同 Dapp，买卖艺术品、游戏资产、保险等数字资产，并以更好的隐私和匿名进行交易

· DeFi 协议希望 ETH 用作抵押品来创建其他资产，例如 DAI 和合成资产，用作储备货币以允许用户进行交易并筹集资金。

· 建设者和创作者希望 ETH 接受来自加密用户的付款，建立只能用可编程货币存在的企业，在不依赖可能审查它们的平台的情况下将创意内容货币化。

· 其他区块链希望 ETH 储备将其链连接到最大的生态系统以太坊。

2. ETH has become the reserve currency of DeFi.

,On Uniswap, today's largest decentralized exchange, there are more than 3.5 times as many ETH as the three most popular USD stablecoins combined (as of May 2021). On Sushiswap, the multiple was more than 4.

,The largest DeFi protocol in terms of total lock-in value is Maker, which locks in over $12B of ETH as collateral for its stablecoin, DAI.

· ETH 也是 Synthetix 等项目的储备货币，其中 ETH 作为抵押品存入以创建合成资产。

· 超过 1%（截至 2021 年 5 月为 10B 美元）的比特币供应已经打包用于以太坊，这表明数字价值存储和储备加密货币需要更多的可编程性。

3. Currencies in high demand have natural network effects, and Ethereum preempts them.

4. Supply growth is about to become limited, which means prices are likely to rise in line with demand. Rising prices contribute to the reserve-currency network effect, because when prices rise, more people tend to buy and hold money.

What would the global digital reserve currency be worth by 2030 if it were to replace any reserve currency today? Based on its comparable reserve currency status, we can add the following amounts to the previous scenario of Ethereum as a digital nation: