Original author: sam.frax, founder of Frax Finance. Original translation: zhouzhou, BlockBeats.
Editor's Note: This article explores the distinction between digital commodities (such as L1 tokens) and quasi-equity tokens, proposing a new framework for assessing digital assets, particularly regarding the value of ETH. The author argues that ETH should be viewed as a sovereign commodity rather than a quasi-equity token, as commodities cannot generate cash flow or dividends. It also points out how to eliminate the ambiguous definitions of ETH assets, reaffirms the importance of commodity premium, and highlights potential future valuation errors.
The following is the original content (rearranged for readability):
In the cryptocurrency space, I propose a completely new system for assessing digital commodities, such as the distinction between L1 tokens and sovereign commodities versus governance/utility tokens. This perspective is crucial for ETH and various L2 tokens, potentially eliminating the ambiguity surrounding ETH assets.
In cryptocurrency, there are actually only two types of tokens: digital commodities (usually L1 sovereign assets) and quasi-equity governance tokens. I have elaborated on this in previous discussions.
By definition, commodities cannot pay 'dividends' or have 'cash flow', so if an asset is indeed a digital commodity rather than a governance/quasi-equity token, we must discard this erroneous evaluation standard. Just as a sovereign nation cannot meaningfully default on debts denominated in its own currency (only inflation can occur, not default), digital commodities lack a real issuer; they are a scarce sovereign asset. Therefore, if it is indeed a commodity, it cannot meaningfully provide dividends or cash flow.
The asset itself is the product, like BTC. Labor and other tangible products can only generate economic demand for commodities.
Ethereum (network + chain) is currently the largest digital nation, a sovereign economy filled with global laborers and builders' innovations. This labor is tokenized in the form of governance/quasi-equity tokens, which are distinctly different from quasi-digital commodities like BTC, ETH, and SOL. Wherever any entity pays rewards to digital commodity holders for any operation, whether liquidity provision rewards, DeFi incentives, or LSD and LRT, these can be measured through experience.
This metric should be defined as the asset's commodity premium, rather than monetary premium, sovereign premium, or speculative premium, which is a legitimate and fundamentals-centered term of assessment for a class of assets.
In the global economy, wherever someone pays others in the form of labor or quasi-equity tokens to hold some form of sovereign asset, we can track the value flow of labor to digital commodities. This demand is paid to all forms of ETH holders globally, including those using ETH in liquidity pools, re-staking, L2, and future DeFi innovations yet to emerge.
This is the global economic demand for commodities, namely commodity premium. Clearly, this has a far greater effect on the price and market value accumulation of sovereign assets than any PE DCF framework. This is also why BTC's market capitalization approaches $200 billion without any gas consumption. But in my framework, note that there is no PE DCF premium within a category of tokens, as that is simply impossible.
Only quasi-equity tokens can have cash flow; what we consider 'dividends/repurchases/burning' within a category of assets is actually just commodity premium. Similarly, there is no commodity premium in quasi-equity tokens.
This introduces the 1559 burning mechanism, which is often seen as the core value accumulation mechanism of ETH, as it is considered a way for 'Ethereum as a business' to pay dividends/cash flow to ETH holders.
But this is an absurd concept, as commodities cannot generate cash flow. If a company uses gold in a new industrial application that alters the molecular structure of gold, permanently removing that element from circulation, we would not begin to conduct PE or DCF cash flow analysis on gold; we would simply see it as having a new high-demand industrial use that consumes that commodity. No one would perform PE or DCF analysis on gold.
Similarly, no one does PE or DCF analysis on BTC either. It is like gold but exists in digital form. The PE DCF premium is not within the socially acceptable range for real or digital commodities. Furthermore, the 1559 burning mechanism arises from user demand within Ethereum and its L2 sovereign economies. This is just another form of economic demand for $ETH sovereign assets, representing another industrial use case. This demand is paid through the Ethereum blockchain protocol itself, rather than through labor or manually issued rewards/governance tokens.
Ethereum is the first project facing the 'final boss' challenge in defining its social identity, but SOL is also next, and once it reaches this stage, it may struggle at this step. Other sovereign assets will face similar issues as they mature to these stages.
My view on the lifecycle of digital commodities and their related pitfalls is illustrated through a chart. $SOL has not yet reached the second stage, noting that in my view, $BTC and $ETH took different turns in the second stage.
It is now crucial for $ETH to establish this social contract to demonstrate to the world before it is too late that it is not just $BTC that has this privilege. In fact, this is not a privilege but a social contract of commodity premium—a very specific, quantifiable, rule-based system.
Note that I did not mention the vaguely defined 'speculative premium' in the paper. This is because I focus on a well-defined and measurable framework for fundamental value. Speculative premium is merely an attempt to quantify future trading activity based on a fundamental value system. Speculative premium is not a fundamental framework like commodity premium or PE DCF premium. Speculative premium is simply market activity trying to estimate how that asset will be valued in the distant future.
Until now, PE DCF has been the only fundamental framework for discussing digital assets, aside from $BTC. It has been incorrectly applied to all assets (except BTC) but should only be used to evaluate assets that represent labor, products, and governance rights, rather than sovereign digital commodities.
In the next part of this series, I will explain how and why certain technical steps, such as determined gas tokens, sovereign supply, and consensus, are necessary conditions for establishing the social contract of commodity premium. If $ETH can inadvertently transition slowly into a class two token, it is also possible to transform class two tokens into class one tokens, but this is a very difficult and sensitive process that is prone to error.
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