Ethereum 是金库，ETH 是锁：ETH 当下及2030年的公允价值框架

If there are, say, 1 trillion dollars sitting on Ethereum, would it make any sense that Ethereum in aggregate is worth 10 billion? No, because you would then try to acquire 3 billion, 6 billion, whatever Ethereum to actually attack that 1 trillion-dollar network value. Now, a natural number of questions come up here. Could you actually acquire that number? Maybe, maybe not. We talked about the number that's staked today, the number that's off exchanges. Probably very hard, and you'd have to have a price.

1. If Ethereum is the vault, ETH is the lock

But that also means that this asset would then become much more valuable and would actually reinforce the argument that, guess what, this asset plays a critical part in the security of the network. So, let's try to acquire it to attack the network. I think it's part and parcel of the same argument. Would you be able to actually do it? Maybe, maybe not. Now, is the valuation theoretical? Absolutely, like all valuations are. It's very hard to say, once Ethereum hits 500 billion in network assets, that it has to re-rate to this much. No, it doesn't have to re-rate today or tomorrow or next week. But eventually, like all fundamental models, it should move toward fair value.

And in the piece, I think I did the math, and it was somewhere around 6,000 or so, what it should be today, just based on the network activity we have today, which we know is growing rapidly, right? Stablecoins are only going one way, RWAs are only going one way, and DeFi has its challenges but continues to go up. I don't think, fundamentally, you can have all of these assets continue to appreciate without it having a tie back to Ethereum, the asset, because it helps protect all of these assets on top of it.

Tom, great to see you. Thank you for joining us. How are you doing?

Doing well. Thanks for having me, gents.

You recently wrote a post, an essay about why Ethereum is materially mispriced, my fair value, and the framework people keep missing. This runs counter to, I think, a pretty negative sentiment that was out there. This is a bear-market year in the 4-year halving cycle. We've all lived through this before, and I know Nomatic and I have been very focused on trying to filter out the noise and better understand what's fundamentally going on with Ethereum, what's being built, and how materially mispriced Ether is as an asset.

2. Tom’s role investing at Varys Capital

Before we do that, though, why don't we talk just a bit about your background and what you do at Varys Capital? I would love to hear more about the work you do.

Yeah, sure. Appreciate that. Varys Capital is a crypto-focused fund. We have a venture arm as well as a liquid trading arm. I head venture for Varys. Our focus on the venture side is early-stage investing, so that's pre-seed and seed. On average, we write 1 to 2 checks a month in that area.

I've tweeted a lot about how I think the market has evolved in the time frame that I've been in crypto, which has been the last 5 or 6 years. There's been a lot of consolidation in the venture space, particularly in the area we're investing in. So, there are a lot of exciting opportunities despite the consolidation in the market.

3. How Tom became convinced DCF was the wrong way to value ETH

Tom, maybe before we get into your piece, you clearly have a lot of passion about Ethereum and the ETH asset. So, maybe just give us a little bit of where that came from, because you're clearly defending your thesis of ETH.

I think the really cool part about crypto, one of the reasons that attracted me to move to the asset class, is of course the upside, but also that we're defining new asset classes, right? This is a completely new, different primitive, and I think copying and pasting models that have worked for companies or bonds or commodities isn't the right way to think about these things.

We've been doing DCFs on equities for only 60 or 70 years, which seems like a while, but guess what? Capital markets have been around for hundreds and hundreds of years. So, we found this one primitive that works, and, great, everyone thinks we should just copy and paste it everywhere, which I think doesn't make much sense. We can go into the nuances of that, but the reason I actually came into crypto was for Ethereum. A lot of the cash-flowing properties I thought at the time made these things like companies, right?

I spent 10 years in traditional finance. I was helping allocate assets for pensions, endowments, and foundations, building these huge portfolios in 2020. Back at the time, interest rates were zero, so you were trying to get to a 7% expected return. To do that, you had bonds in your portfolio that were yielding zero because they were defensive; you had equities, great. People thought they were overvalued then. People thought private equity and VC were overvalued then, but you needed to look even further.

The opportunities were interesting real estate investments, direct investments alongside maybe some of your VC or PE investments, the funds you're invested in, or this new, interesting crypto thing. So, I became the crypto guy for the consultancy that I worked at, and it was way, way too early for a lot of these guys, and still is, because it's a new asset class. But the things that attracted me were this new technology that I thought would underpin all businesses going forward.

I did exactly what I tell people not to do now. I was like, “Oh, man, let's look at the cash flows here.” I started running a DCF on ETH, trying to back into what this thing could be valued at. If you look back at the charts then, it was making—I don't know, I think it was like 10 billion ARR a year or something—on Ethereum, and you could get to a pretty coherent revenue multiple then. I think it was like 20 or 30 times revenue at this crazy-growing tech stock. Wow, wow, it all makes sense.

It's only when you start to look at the nuances that you realize, okay, that is exactly the wrong way to value these things. So, Ethereum was my starting point. It was my first love in the crypto space, and I still think it's the most important asset in crypto. But it's funny that my entrance to the space was around valuing this asset the completely wrong way, in my view, today.

4. Is Ethereum winning?

Yeah, I want to get into a bit more of that valuation methodology in a little bit, and I want to go back to the DCF as well. But just the big picture: I think there's confusion in the market as to whether or not Ethereum is winning. When I look at it, I see 52% of all TVL across all blockchains living on Ethereum. That's not even counting L2s, whether you want to bring that into the mix. And then 150 billion in stablecoins lives on Ethereum.

Are we winning? Are we losing to these other players?

So, in my view, and I think the expressed view of a lot of really smart allocators in crypto, the end game for a lot of this is the backbone of the next generation of finance. You could extend that to maybe stablecoins, maybe DeFi, maybe real-world assets, and maybe new and interesting primitives on the consumer side, and we can extend it to there. But it really all starts from that financial lens, right? DeFi Dad, DeFi Summer, like that. This is where it all started.

Just solving that one problem, the finance problem, is a multi-trillion-dollar opportunity. So, full stop there. If we don't get to the other stuff, maybe the VCs lose, maybe I lose, but guess what? Crypto will have won. So, that's the core component here.

Has Ethereum moved toward that goal? I would say absolutely. Have other blockchains stagnated toward that goal? I would also say absolutely, right? We had Solana, which had this fantastic revenue accrual and, you know, revenues shot up through the roof because of memecoins. Fantastic. You've had fits and starts with all these other blockchains, whether it be brief moments for Sui or Aptos or even Cosmos back in the day. None of them have been tangible and sticky long-term.

So, you pointed out some fantastic stats on Matic, but a few others: 2/3 of DeFi still operates on Ethereum today. If we think finance is the use case of crypto that we're all circling around, great. Real-world assets are at $10 billion-plus, with 55% of total RWA activity still on Ethereum today. Stablecoin activity, which is obviously the most salient use case in crypto today, is nearing $200 billion just on ETH alone.

In terms of the nuances of ETH as an asset, you also have some interesting stats, like ETH on exchanges—which is, “Hey, I can buy and sell my Ethereum pretty easily because it's sitting on an exchange”—being at an all-time low of 14 million dollars. That will only continue to tick lower, in my view, as Tom Lee and others continue to buy, as more folks stake, et cetera. That consolidates the asset base and consolidates the sellers.

Right now, we're obviously experiencing this deep shakeout. Despite that, staking rates continue to go up, the queue for staking Ethereum continues to go up, and ETH on exchanges continues to go down, all of which is positive for future price action for this asset.

Yeah, I know that if you go back to the DeFi summer of 2020–2021, there's now this weird revisionist history where those who were most critical of the high fees on Ethereum are now saying that was the best thing, and that's what made ETH valuable. Now that the L1 has scaled, with the help of activity on L2s, they're saying this is a bad thing because we've lowered the ETH burn and we just don't have these egregious fees.

5. Fees are friction, and hence not how we should value ETH

One of the things I really love in your piece is that you call out the idea that the most important thing is growing that activity over time. It's not about being able to charge $50 for a simple DeFi transaction. There's been a longer-term view that I think Ethereum as a community has taken there.

There's more in your post about this misvaluing of Ethereum, I guess based on fees. I think someone who's played an important role in dispelling that and translating the value of ETH has been Tom Lee. He did an interview not too long ago with Cathie Wood, and I think it was Cathie Wood and someone on her team asking, “We hear that Ethereum the network can win, but ETH the asset doesn't necessarily have to win.”

I thought he dismantled the whole argument perfectly in 60 seconds. All he said was, “Think about the stock markets—the exchanges in the United States. If you tried to explain to someone that NVIDIA, Google, Meta, and all these multitrillion-dollar, multibillion-dollar companies trade, and they trade denominated in the U.S. dollar, if you tried to explain to someone that this has no benefit to the U.S. dollar, that it just happens and that there's ultimately no value to the U.S. economy there, they would laugh you out of the room.”

Similarly, we look at Ethereum the network as this global, 24/7, permissionless marketplace or settlement layer. I don't know—any thoughts there on trying to translate that story of the fixation on fees, but trying to understand this grander picture of being a world ledger for all on-chain finance?

Yeah, there are a few things here. People want things to be easy—we all do, right? They like mental models, and they like the ability to say X should equal Y and Z for these reasons. So, it's very easy to say, “Okay, here are the fees, here's a multiple, and here's how we can get to a valuation on this thing.”

That's very easy with traditional companies, as you can compound cash flows over time and use those fees to grow your business. That's not what's happening on this fundamental underpinning layer of consumer and financial activity, right? Fees are not revenue; they're friction. They're attacks on the exact activity that you're trying to create. Raising fees reduces activity and reduces the value of the asset.

If I told you today that every Ethereum transaction was $100,000 and we made 50 transactions in the year, you might say, “Oh, great, look at all this fantastic revenue—whatever it is, $1 million.” That obviously would be terrible, right? The economic activity through the network writ large would reduce dramatically, which would make the asset itself look great on paper in a DCF model, but look terrible if you were actually trying to use it or hold it.

That's what happened in 2021, right? Remember gas wars and $200 fees? Obviously, that's very, very unsustainable. Over time, I think the mental model should shift so that you value the total activity on the network itself. If we can't value that activity, and if we don't think that's valuable, then of course the asset isn't valuable.

Valuing it strictly on transaction fees between parties who are trying to use the network and use the product is ludicrous. I just don't understand how we haven't evolved our thinking over this time period to say, “Yes, of course more transactions are better. Yes, of course more activity is better. Yes, of course more users are better.” That's going to have to come at the sacrifice of fees, but that doesn't mean ETH the asset isn't valuable, right?

Everything is still denominated in ETH, you're still paying gas in ETH, and, to my security point, which we'll get to later, ETH is intrinsically valuable and important in the network in a way that these other assets are not.

The common argument is, “Tom, there are a lot of things that are valuable in this world that don't have value writ large, but don't have a fundamental valuation that would be commensurate to that.” The DTCC is a great example of that, right? Linux is a great example of that.

What I think folks are fundamentally missing about that is those protocols or companies do not have an intrinsic tie directly to the asset itself, the base asset. They have no tie to the dollar. Guess what? If you're using the Ethereum network, because of the security properties of proof-of-stake networks, you are intrinsically tied to Ethereum. That's the key point.

6. Can Ethereum have its cake and eat it too, when it comes to fees?

Okay, so Tom, something else I grapple with personally in this whole debate is that if you were to tell me Ethereum started clipping more fees or bringing in more revenue tomorrow, I feel like everybody would rally around that again. Maybe I'm wrong, but I saw a tweet recently that I think is interesting. It's from Konstantin Lomashuk. We can maybe put this up on the screen so people can see it.

“When Ethereum solves cross-rollup fragmentation through EEZ, which is Ethereum Economic Zone, and native rollups, value capture snaps back to the L1, and ETH reprices and decouples from the rest of the market.”

Clearly, that's his opinion, but he's hinting that we've given up a lot of economic activity by decoupling everything into the L2s. There's a future where we bring some of that economic activity and coordination back through these native rollups that have better value capture.

I often wonder: Can we have our cake and eat it, too, to some degree? Is there still a way to have value captured by the L1 but still not infringe upon your model of, “Hey, fees are friction”? Does that make sense?

It does. I think the answer is that there's never going to be a number high enough to meet the network's ability to function at a level that we think will help usurp some of traditional finance, right? The value at the peak of 2021 was $10 billion, and those were ridiculous gas fees.

If we got anywhere close to that today, it would take a huge number of transactions. I looked at this because this was the pushback I got when I made this argument almost a year ago, when Solana was at its peak. Folks would say, “Hey, every transaction in the world is going to be on-chain. We're going to get to Visa-level transactions. It doesn't really matter if it's a penny, a tenth of a penny, or whatever. We're eventually going to get to a level where those numbers become meaningful enough.”

I think folks are forgetting that these assets are worth hundreds of billions of dollars already. At a certain point, you can't underwrite an asset that isn't growing at 50% to 100% if it's already trading at 20 to 30 times revenue. That math just doesn't work.

Even if you were to put every Visa transaction on-chain today at 0.1¢, 0.01¢, or whatever it is, you still do not get to a meaningful enough number to make those revenue or DCF-type models work. What you really have to do is say everyone is okay with $1 per transaction, $10 per transaction, or $100 per transaction, because that's the only way, even at high enough volumes, that you actually get some level of reasonable multiple for these financially minded folks.

I don't think folks are actually going to want to transact on these networks if the fees are that high. My contention is always that fees are trending toward zero. That is a good thing for the network. In actuality, we should disregard that line of thinking completely, and we should worry about the security of the network and, overall, the assets that are built on top of it. That is why folks will hold these assets.

A part of the essay you wrote gets to the core of the argument here, where you say, “Ethereum is the vault, ETH is the lock.”

I want to talk about this first before we go back to some of these different criticisms of ETH’s value and why you think other folks are wrong. Can you just try to explain to us what the argument was that you made about Ethereum, the vault, versus ETH, the lock, and ultimately trying to value that lock?

Yeah, for sure. The vault here holds everything. That’s $160 billion in stablecoins, $10 billion-plus in RWAs, and all of the DeFi activity around the world. It’s $200 billion or so, give or take.

The vault is only as good as its lock, right? If you hold 1/3 of ETH, then you have the ability to disrupt consensus. With 51%, you have the ability to actually rewrite a lot of these primitives on-chain. So, the only way to ensure that the vault is protected is to make sure the assets have a value commensurate with the ability to actually acquire the amount of ETH necessary to disrupt the assets that are on-chain, whether that be DeFi activity, stablecoin activity, or whatever—anything that sits on Ethereum itself.

Now, this is completely different from proof of work, right? That’s, I think, where a lot of folks get confused about these things. With proof of stake, you actually need to acquire, hold, and stake the assets, and then you have a say in consensus—or a mathematical chance to have a say in consensus—at that point.

So, if there are, say, $1 trillion sitting on Ethereum, would it make any sense that Ethereum in aggregate is worth $10 billion? No, because you would then try to acquire $3 billion, $6 billion, or whatever of Ethereum to actually attack that $1 trillion network value.

Now, a number of natural questions come up here. Could you actually acquire that number? Maybe, maybe not, right? We talked about the number that’s staked today and the number that’s off exchanges. It would be very hard, and you’d drive up the price. But that also means that this asset would then become much more valuable and would actually reinforce the argument that, guess what? This asset plays a critical part in the security of the network because people would try to acquire it to attack the network.

So, I think it’s part and parcel of the same argument. Would you be able to actually do it? Maybe, maybe not. Now, is the valuation theoretical? Absolutely, like all valuations are. It’s very hard to say, once Ethereum hits $500 billion in net assets, that it has to re-rate to this much. No, it doesn’t have to re-rate today or tomorrow or next week. But eventually, like all fundamental models, it should move toward fair value.

In the piece, I think I did the math, and it was somewhere around $6,000 or so—what it should be today, just based on the network activity we have today, which we know is growing rapidly, right? Stablecoins are only going one way, RWAs are only going one way, and DeFi has had its challenges but continues to go up.

The most coherent pushback I hear is, okay, maybe someone takes all the stablecoin activity. Maybe someone takes all the DeFi activity. I’m totally open to these arguments, but I don’t think fundamentally you can have all of these assets continue to appreciate without it having a tie-back to Ethereum, the asset, because it helps protect all of these assets on top of it.

Yeah, rereading through this piece, if somebody is embedded in Ethereum and DeFi, as I am, even with the tokenomics of other tokens, I sometimes find myself forgetting that ETH, the asset, is a security asset. It was refreshing for you to break that down again—what it’s actually doing.

7. Why stablecoin numbers looks bullish this bear market

I think if people do start to look at it the way you’ve been spelling it out—“Hey, is it undervalued based on what it’s securing? Is it overvalued based on what it’s securing?”—that’s a really interesting way to start to look at it. It’s funny because it’s right there, and I just ignored this for such a long time as well.

What I really loved about your post, Tom, is that the first-principles argument there is that, today, Ethereum—the network—is the ultimate hub for stablecoins and RWA activity. Those numbers just continue to grow.

This is the worst time in terms of looking at on-chain metrics. This time of year is historically always just the most dismal time to be looking at those fundamental growth numbers. But if you look at those numbers this year, in our worst moments, they’re flat.

You clearly have a pullback of total TVL when you look at the volatile assets out there—the TVL that is dependent on the price of something like ETH or some sort of tokenized Bitcoin. But stablecoins exited from being on-chain; money moved off-chain in the 2022 bear cycle.

This year, for me, has just been remarkable to see that money, at its worst, is staying on-chain. And this is against a pretty awful backdrop of a number of DeFi exploits that have ultimately affected our most respected platforms, like Aave, which spreads a lot of fear and doubt in the space.

My argument is basically that it could be so much worse this year. I think the fact that it isn’t as bad as what we’ve seen in the past has me very excited for just how much more liquidity will come on-chain.

Another piece of that is that RWA activity is only going to grow because we’re still in this sort of experimental, tinkering, early-adopter stage with RWA asset issuers. Those folks are looking to issue their first RWA on-chain, so they’re looking at some sort of flagship offering, maybe even something that was intentionally designed to be on-chain.

Similar to what newspapers looked like, I think, in the early dot-com era, they published maybe a few posts—their best articles of the day—on this super-primitive version of their newspaper online. Eventually, they published everything online, and then eventually they said, “What the hell are we publishing a paper for when we can just do it all digitally native?”

I kind of see those milestones ahead for us with RWAs, but they will happen so much more rapidly because there’s so much money at stake. Once you realize the capital efficiencies and the 24/7 access—and again, this is all assuming that compliance and regulation get in line, which they seem to be—we’re just so, so, so confident that RWA activity, which is ultimately a bigger umbrella wrapped around stablecoin activity, is just going to grow like bonkers here.

8. Ethereum must succeed, or crypto as an asset class fails

Yeah, I think it’s only going in one direction. The biggest pushback that I think is reasonable—and I was lucky enough to spend some time in Washington last year—is that you don’t have, or didn’t have, a coherent advocate for Ethereum to actually continue to drive a lot of this change.

That’s a business development and investor relations function. Folks are like, “I don’t know who to talk to at Ethereum.” I know who to talk to for Solana or Ripple or whoever to try to advocate for them legally when I’m crafting these bills and laws and whatever. Or if I want to put assets on-chain, I know where to go.

That’s where you’ve seen a lot of these chains win, right? I mean, big announcement for Stellar the other day. Who’s thought about Stellar in years, right? I’m sure they have a fantastic BD team.

You didn’t have it for Ethereum. Then you had these other organizations—Etherealize, some arms of the EF. I’m sure there are a bunch of others I’m forgetting who have started to fill that gap and role.

It was ConsenSys for a while, but those guys have been around for a long time. They made a lot of money. I’m sure they’re not as interested as they used to be. Plus, they have a lot of diverse interests, right?

So, you really need a new party to step up and say, “I want to advocate for what is the biggest chain in crypto, excluding Bitcoin, which I think almost everyone agrees is sort of separate and different and its own special unicorn.” Who is advocating for this?

And this is what I can kind of get at: at the current juncture right now, if Ethereum were to fail, or if consensus were to break, or there were a major attack, I think crypto is almost toast if it’s on Ethereum because it holds 50% to 75% of all activity, writ large.

9. Why comparing Ethereum to Linux + DTCC is both useful and wrong

So, if you were to have this one experiment fail that we’ve been working on for almost a decade now, I think Curve DAO is actually almost going to go underwater. I think it’s part and parcel to the entire asset class: the success of Ethereum itself.

There was a point you made earlier, and this was, for me, maybe my favorite part of your whole essay. You talk about the pushback of Ethereum being infrastructure, and there is this comparison that gets made with Linux and with the DTCC. I want you just to try to dumb that down for folks. Why do you think those are ultimately decent comparisons but also terrible comparisons from a valuation standpoint?

Yeah. Both the arguments for Linux and the DTCC fail for the same reason: they borrow their security from outside themselves. Linux is trusted because it's an open-source community with lots of eyeballs and a long history of code. The DTCC is trusted by U.S. regulators, member banks, law enforcement, and so on.

The DTCC settled almost $4 quadrillion—with a Q; I don't even know if that's a word—worth of value in 2024 alone. And it only made $2 million in revenue. If you port that argument over to Ethereum, I totally understand the bear case. But Linux and the DTCC do not have a token or a piece of their actual business that is intrinsic to their overall operations.

It's like if DTCC or Linux equity were needed to actually transact in the network itself, you would say, “Wow, I need to buy some equity in these companies,” which would then move the value up. That is not how the system works. That is exactly how the system works for Ethereum: you need to hold ETH, the asset, to transact on the network. You also need to have ETH, the asset, to secure the network and to give the assets built on top of the network some level of value.

If there's no security, there is no value. So, this is exogenous to the DTCC and Linux, but it is intrinsic and built into Ethereum. That is the key difference between these 2 systems. You need to hold ETH, and you need it for security itself; it's built into the system. That's how it works.

10. Importance of Ethereum as trustware, producing blocks

I love that. Just reiterating: Linux and the DTCC import trust externally, and Ethereum buys its security internally through ETH. This all goes back to—I love the framing of Ethereum as “trustware.” There was a great article that ConsenSys put together, with a bunch of research they had done, referring to Ethereum as this trustware network.

It takes many years, I think, of being into digital assets to really understand that not all blockchains are equal. The fact that Ethereum has been producing blocks for 10 years without ever going down is really where its greatest value comes from. Just as there is a very clear understanding about Bitcoin—the network existing for so long without going down. It has a simpler value proposition because you really can't do anything there except hold or transfer value, but the complex, nuanced machinery on-chain that is enabled by Ethereum is ultimately powered by producing those blocks.

And so, it's very, very, very important that Ethereum just continues to produce blocks without ever going down.

Yeah, my argument is that the network is extremely valuable because I believe stablecoins are going to continue to grow and aggregate on Ethereum, along with a lot of the things we talked about. Why do folks choose Ethereum versus, let's call it, these new L1s that are focused on stablecoins or maybe privacy, like Canton or something like that? The core reason is censorship resistance.

That seems like pie-in-the-sky, cypherpunk stuff, but what if my transactions can be frozen or disintermediated? They have some level of haircut that you can't apply to a decentralized network like Ethereum, where you can't actually stop any of the activity on it. You've seen this a number of times on other blockchains: either they go down, or they've been able to freeze some level of transactions, or whatever the case may be. That is certainly not present in Ethereum. Maybe it's present at the USDC level or the company level, but that's a different argument.

It's not present at the blockchain level itself, and that is immensely valuable. I think it is probably the most valuable thing. It also reduces your counterparty risk if you are an entity, where that is an extreme concern, particularly if you're acting in this new Wild West environment.

Think back to 2008. Folks didn't know who their counterparties were. They didn't understand the products they were in, and they had no transparency. That's exactly what this is solving, right? You have the ability to trustlessly transact at a certain price based on your understanding of the technology and have full transparency into what exactly you were doing with the assets that you own.

11. Underestimating the impact of Ethereum scaling L1

The other thing is, I feel like people start to look at Ethereum—maybe outsiders that aren't following it as closely—and look at it as totally static, like it's not changing. For example, we're 3 months-ish away; I think this Glamsterdam update's probably going to happen in Q3. So, that's close, and that's another probably 70-some-percent—some people say 80%—transaction-cost reduction.

Not only are you getting this censorship resistance and all these amazing properties of Ethereum, but look, it's scaling right now as well. I feel like there are a lot of people who are going to be in disbelief as we move further into this roadmap that's supposed to be by 2029. But this thing isn't just staying still anymore. I think there were a few years there, maybe with some inactivity—I don't even want to call it inactivity—but there was a bit less growth as this L2 experiment was still playing out.

I think that's going to catch a lot of people off guard, too: transactions are going to go down to pennies for most things, and then they're going to go even lower in the near term as well. I just think that's another thing that people are underestimating.

No, no, you're fine. This is part and parcel of my core argument. These systems are going to continue to get better, and the transaction costs and frictions will naturally reduce, which should create broader economic activity—increased economic activity—but will likely either stagnate or continue to reduce the fees.

If your argument is that fees will eventually increase, I encourage you to do the math. If every single transaction that is currently happening globally today were to happen on a blockchain consistently, 24/7, 365 days a year, and you were to assign a penny or less in transaction costs, the aggregate revenue number you're going to get to is going to be shockingly low. So, the conclusion you're going to come to is, “Okay, either you think these things are not valuable, or I need to think of a new way to value them.” That's sort of the line of thinking that eventually got me here.

I agree they're going to continue to come down in terms of cost, and they're going to continue to improve in terms of technology and efficiency.

All of this hinges on Ethereum continuing to produce blocks and exist. I think there's been a lot of fear this year around the threat of quantum computing. There have also been a lot of fears around AI-driven exploits.

Having just gone to ETHConf, an Ethereum conference that was hosted in New York, one of my takeaways from the many conversations I had there is that there are really brilliant developers who are seeing AI tools as a way to ultimately shore up security for both DeFi and the greater Ethereum network. So, while there have clearly been a number of exploits driven by AI tools, I think the timeline to us getting to the more positive ending here, where ultimately those AI tools are what prevent security exploits, is not far off.

I spoke for just a few minutes with the co-founder of Fluid, and they are continually using new AI models to basically use agents to search for potential ways to exploit their own protocol. They're continually looking to stress-test their own code with it. I think we're getting closer to a lot more code being created with AI.

12. If issuers freeze stablecoins, it doesn’t break reliance on Ethereum

The roadmap that we've referred to—we've heard lots of reinforcement behind the scenes that that roadmap is being accelerated and will be accelerated more by AI development and AI-driven development. So, I'm really excited for that as well. Bringing it back just really quickly, though, to another great point you make in the article around the valuing of ether: one of the pushbacks that we've heard often is that a lot of the value in stablecoins is reliant on an entity like Circle.

USDC is one of the top 2 stablecoins on Ethereum. The pushback is that Circle can freeze USDC. Can you explain why that doesn't break your framework for all of the value that ETH ultimately derives from hosting all that stablecoin activity driven by USDC?

Yeah, I think it's a fair question, but the contention was never that you could steal the USDC, because that's extremely unlikely. What you can do is destroy trust and consensus and make the asset less valuable than $1, which is all you need to do.

That's because when it's on this network, you're trusting it. Why did Circle choose Ethereum to put USDC on? It goes back to the points we made earlier: censorship resistance, trustlessness, the longest history without going down—all of those things.

The moment that changes—the moment we have 1 attack vector or attack actor that is able to disrupt consensus—all of the assets on the chain come into question. Because if I'm able to disrupt consensus or even rewrite consensus, I then have the ability to disrupt $150 billion-plus in USDC that's actually on the chain. Maybe that's just freezing it. Maybe it's just making it so I control this amount of Ethereum. I disrupt consensus on the Ethereum network, and no one can move anything on the Ethereum network anymore.

13. Tom’s valuation framework is for ETH, not for DeFi tokens

And guess what? Then USDC has to go back and say behind the scenes, “Okay, I'm crediting you, you, and you. Okay, maybe I don't owe you. Great. I have no idea what to do here.” Now my whole company—USDC itself—is not a dollar anymore. The whole business is basically wiped if everyone questions stablecoins. It's part and parcel of the network itself that you have continuous and seamless transaction activity and a coherent, censorship-resistant level of assurance of what your assets are worth. As soon as consensus breaks, that is no longer the case.

Tom, I want to go back to this ETH model here a little bit. You spoke earlier about people having used the DCF model for 60 to 70 years, I think you said. I feel like you're asking people to recognize—and it makes sense—that this is a totally new asset class. It's different from anything that came before it, but how do you get people to start adopting this model and, maybe better yet, how do you get the market to start pricing ETH this way? More podcasts, more education? I'm curious how you see this playing out.

I think it's a recognition by the most important voices in the room that cash flows are not the way to value these assets. That's first and foremost. I know this argument and this article came out recently, but I've actually been talking about this for 3 years. This just tells you how long and how convoluted this journey has become, trying to get people to think about these assets very differently.

The only thing that seems to make people want to reassess that is when fees continue to go down and price continues to go down, and they're trying to reconcile what these assets are worth because they're still worth hundreds of billions of dollars. So, it's an education process. It's an understanding across the ecosystem that here is a potentially new framework that we have to think about these things through.

Or, conversely, we have to say these things are not valuable, and we're going to use private blockchains behind the scenes. The value will accrue to individual companies rather than open-source technology. But I think the history of capitalism will tell us that open-source technology wins, creative destruction wins, and that's exactly where crypto and blockchains thrive. So, I'm hopeful that folks will continue to think about these things a bit differently.

I might as well own that: maybe this isn't the perfect model. There are others that probably could add to it, and I encourage folks to do so. But I can tell you I know the DCF model is not the right model for layer-1 blockchains. Is it the right model for applications on top of blockchains? Absolutely. These are businesses. You should value HYPE on cash flows. You should value Aave on cash flows, margins, revenue, growth, and all those fantastic things you look at in a traditional business and its metrics and framework.

But I don't think the primitives that those applications sit on should be valued on those standard metrics. It doesn't apply to everything, right? It only applies to—I mean, we're shrinking the universe of L1s every day. It's Ethereum, Solana, and now Cardano is at the door; Cosmos is at the door. You have a handful of new L1s that are coming, but you really need to value 3 to 5 things based on this new framework. That's it. Everything else, I think, is very traditional.

So, it is a bit of a tough argument, but I think the smart folks and the advocates who have the right ears have to start thinking about these things in a different light and make it happen that way.

14. 20k to $50k ETH price if onchain liquidity hits $750B–$1T

Tom, let's do a little forward-looking exercise here. Say we stay on this current trajectory, where Ethereum looks to be winning the early battle of tokenization and RWAs. I don't think it's crazy that there will be trillions of dollars of value on Ethereum L1 in 5 years; it could even be sooner. I'm curious if you've taken your model and your thesis and applied it out: say we're sitting at $2 trillion or $5 trillion, what do you think ETH's price looks like in some of those scenarios?

These numbers sound crazy when you throw them out there, right? VanEck, Standard Chartered, and Tom Lee have all these price forecasts that are $20,000, $30,000, or $50,000. You're like, how do they get to these numbers? If you use the model I described, you take the aggregate amount of assets on the chain today and apply a framework—whether it be 1/3 or 1/2 of the amount of ETH you need to hold to actually disrupt the native chain itself—then you can apply some level of, let's call it, a premium.

Folks have called it a monetary premium in the past. I think using this stuff as money to validate it in your head as money is sort of silly. I've always thought that, but there has been a bit of a premium above the base level—the so-called book value—of what these assets are. That's been between 1× at the low end and 5× at the high end of the actual book value of what the chain itself is holding.

You get to some pretty crazy numbers. So, $750 billion to $1 trillion of net assets on Ethereum itself gets you to a price target per ETH of $20,000 to $50,000. That seems outlandish, but if you think of this blockchain holding $1 trillion of network activity on top of it, and the asset itself being integral to consensus and security, it becomes, “Okay, that sort of makes sense. I kind of get that now.” The numbers don't have to be ready tomorrow, but if ETH continues to appreciate based on this level of assets and the framework that I've outlined here, that's what it means to secure the network.

15. How Tom gets to a fair market value today of $6,900 per ETH

You make the argument, too, that the total aggregate value on Ethereum today—just on Ethereum mainnet; this excludes L2s—means that, if you consider what the price of ETH should ultimately be based on this model, I think it's currently around $6,900. So, if you follow all of what we're discussing here, the price of Ether—this was based on a spot price of around $2,000 when you published it—should be more than 3 times that.

To me, the non-obvious TL;DR from all of this is that, fundamentally, everything that's been built on and is reliant on Ethereum means those numbers are going up, and they're going up—

Even in a bear-market year.

But when you think about all that's being built and all that's coming in now that I think we've crossed the chasm by convincing some of the most influential minds on Wall Street and across the globe—really serious capital—that there is an opportunity in tokenizing those assets, that money's coming regardless of the 4-year cycle.

It was like we were discussing this at length at the ETH conference: so many people are starting to realize that the conversations, some of the narratives, and clearly the sentiment are so out of line with what's happening across the rest of the world. I really do look forward to the day when we can break free from this Groundhog Day thing that happens every 4 years with the halving cycle. But for right now, it's all sort of played out the same. It clearly does have some influence, I think, on the greater crypto markets, ETH included, but there's just so much to look forward to here.

Agreed. It's going to be an exciting future, Ed. The thesis around this asset and L1s holds as long as stablecoin activity continues to go up, DeFi activity continues to go up, and RWAs and dApps continue to go up. It moves around when they don't, right? We've had the sell-off, we've had some assets come off Ethereum, and the model was adjusted.

16. Was ETH overvalued in 2021 based on this same model?

The model at $1,700 ETH, given where we're at with all those figures today, says the fair value should actually be $4,500 per ETH. If it goes lower, the model will go lower. If it goes higher, the model should go higher. So, for listeners out there, if you want to track where fundamental value can and should be, look at stablecoin activity on Ethereum, Solana, or the blockchain you're trying to value. Look at all those other individual pieces that should accrue value to the native asset itself.

Hey, Tom, before we wrap up, I was just thinking: if you were to go back to 2021, did you ever take the valuation framework here and apply it to 2021, basically thinking about where it would have landed the price of ETH? My gut, not having done the math, is that ETH—the value of ETH, or the asset—had probably way overshot where you would have landed.

This has been part of the story of Ethereum and ETH for me over the past 5 or 6 years: we overshot the value of what ETH probably should have been. But none of us are going to cheer for the price to go down when it's going up, of course.

And what I am really grateful for is that, over the years, we've continued to see all of this building happening. Believe me, I would have abandoned all of this if I wasn't seeing all that's being built and all that value that's ultimately reliant on Ethereum and ETH, the asset. But again, I think it's the total opposite story. It's been a matter of those fundamentals playing catch-up with where the price once was, and now they've sort of flipped.

Now we're saying, “Hey, the price of ETH should be 3 times what it is just based on the work that you've done here.” Back then, again, we were kind of living in the heyday of things being overvalued.

Yeah.

It was a symptom of the broader economy: easy money. Everything went through the roof during that time period. If you look at what the model would have said, it would have said Ethereum was drastically overvalued, as were all other blockchains, right? Because there was no stablecoin activity and no RWA activity. DeFi was there, and it certainly wasn't as big as it used to be, so it was overvalued at the time.

But if you're pricing in a huge level of future growth, then maybe you said back then, “I could see it growing even more than it did today,” and you price that in your model, and that's how you got to the valuation. More likely, folks were just really excited for a new technology. That's how hype cycles work, right? You get really excited for a new technology, you overfund it, you overinvest in it, you build out the groundwork, and everything comes back to earth as you actually have to implement this stuff and build companies on top of it.

And then all of a sudden, you get to a steady state where you're like, “Okay, this technology has actually realized the vision, and it needs to re-rate back to some percentage of the initial crazy growth rate I assigned it 5–10 years ago.”

17. The 2030 base case ($55k) vs bull case ($138K)

Yeah, and we'll be sure to link your article in the show notes. No doubt there's a table that I think listeners will love. There's a table that lays out the 2030 base case versus the 2030 bull case. The base case has $2 trillion in value secured on Ethereum, which would imply a $55,000 price for ETH. The bull case has $5 trillion secured on Ethereum in terms of all total assets on Ethereum, which would imply a price of $138,000.

18. Closing

So, anyway, these, I think, fall in line with some of the other folks you've referenced, like Tom Lee and Standard Chartered. They've been very vocal about this and putting out their price predictions.

Tom, thank you so much for your time. It's so great to have you on the show. I think this is a good place for us to start to wrap up.

Tom, it's just great to meet you. We would love to have you back in the future. Keep up all the great work here. I want to give you the final word before we go.

Thanks for having me, guys. Thanks for tagging along, audience. Hopefully, next time we chat, Ethereum will be closer to what we assign as fair value rather than the depressing levels we're sitting at today.