Article Summary
- Analysis of various Ethereum valuation models
- Assessment of the reliability of each model
- Overview of Hashed's approach to Ethereum valuation
- Evaluation of factors influencing Ethereum's price, including supply and demand
Introduction
The perennial question: What is the fair price of Ethereum? Unlike Bitcoin, which is viewed as a commodity asset, Ethereum is a smart contract platform, making its valuation more complex. Despite this, the Web3 community hasn't reached a consensus on a universally accepted valuation model.
Different Valuation Models
Hashed recently presented 10 different valuation models that are potentially widely accepted. The results of 8 of these models suggest that Ethereum is undervalued, with the weighted average price exceeding $4,700. So how is this near-all-time-high price calculated?
TVL Multiples
TVL (Total Value Locked) multiple models argue that Ethereum’s valuation should be a multiple of its DeFi TVL. Hashed uses the average market cap-to-TVL ratio from 2020 to 2023 (7x). This model is considered low reliability as it focuses solely on TVL and doesn't account for other complexities.
Staking Premium
These models consider that Ethereum not circulating due to staking increases its "scarcity". Hashed uses a formula that gives a price 16.6% higher than the current price. However, this model is too simplistic and doesn't fully account for Ethereum market dynamics.
Mainnet + L2 TVL Multiples
These models are similar to TVL multiples but add the TVL of all Layer 2 (L2) solutions and give a double weighting due to L2’s impact on Ethereum. Still, this model relies heavily on TVL data.
"Commitment" Premium
These models add Ethereum locked in DeFi protocols to staked Ethereum. These models use a multiplier based on the ratio of total staked ETH and locked in DeFi to the total ETH supply. However, these models always assume the fair price is higher than the current price.
Market Cap / TVL Fair Value
This model relies on the assumption that the historical average ratio of market cap to TVL is 6x. This model is more conservative than other models.
Metcalfe's Law
Metcalfe's Law states that the value of a network is proportional to the square of the number of users on the network. Hashed uses TVL as a proxy for network activity. However, relying solely on TVL is an oversimplification.
Discounted Cash Flow Model
This model treats Ethereum as a company and uses staking rewards as revenue. However, applying traditional valuation methods to Ethereum may not be appropriate.
Price-to-Sales Valuation
In Ethereum's case, the price-to-sales ratio refers to the ratio of market capitalization to annual transaction fee revenue. However, using traditional valuation methods indicates that Ethereum is overvalued.
On-Chain Total Asset Valuation
This model assumes that Ethereum's market capitalization should match the value of all assets settled on it, including stablecoins, ERC-20 tokens, and NFTs.
Yield-Bearing Bond Model
This model treats Ethereum as a yield-bearing bond. However, using traditional valuation methods indicates that Ethereum is undervalued.
Conclusion
Valuing Ethereum requires considering various factors. Hashed suggests a weighted average of 10 different models, resulting in a price of around $4,766. If I were to value Ethereum, the core of my method would likely be supply and demand. However, this valuation method cannot take into account Ethereum’s potential.
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