Written by: Diario
Compiled by: MetaCat
Traditional methods of valuing blockchain networks often fall into misconceptions, treating blockchain networks as enterprises and using formulas designed for calculating fair stock prices based on a very narrow set of considerations. This approach has fundamental flaws.
Blockchains, especially smart contract platforms like Ethereum, are not enterprises. As I explained in previous articles, 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 'overseas'—with $ETH, for example, its role extends beyond the original mainnet to penetrate and serve as a reserve currency in multiple expansion networks (L2) that belong to its monetary jurisdiction, and even thrive beyond these borders (similar to how the US dollar operates today).
Furthermore, proof-of-stake blockchains (POS) introduce mechanisms similar to bonds, where participants stake assets to secure the network in exchange for future returns. These dynamics reflect the structure of national economies, where financial instruments support their defense and current and future operational stability.
In other words, smart contract-based blockchain networks like Ethereum are emerging as new network nations—digital nations, not only manifesting through their tech stacks but also through their monetary jurisdictions, reserve currencies, shared values and beliefs, common histories and cultures, and sometimes even foundational myths.
Gross Decentralized Product
To meet the demand for more suitable valuation frameworks for these emerging digital economies, we propose the concept of Gross Decentralized Product (GDP), which captures not only the money supply but also the economic activity of blockchain ecosystems. Unlike traditional GDP, which measures the domestic output of national economies, decentralized GDP encompasses a broader scope: it accounts for economic activity generated within ecosystems and money supplies, as well as the market cap of protocols, decentralized applications, and cultural assets built on specific blockchains.
The theoretical foundation behind this expanded framework lies in the paradigm shift that blockchain economies represent. Although these ecosystems share similarities with traditional national economies, their fundamental difference lies in that every aspect of the economy becomes fluid and possesses some degree of monetization. In this paradigm, outputs and factors of production are not merely components of the economy; they also become forms of 'currency' that can be traded and monetized on-chain.
Therefore, the most effective way to invest in such blockchain economies is through their native currencies. These currencies support all economic activities on the blockchain through programmed supply caps. Their value is closely tied to the growth of the system, reflected in the continuously rising market cap. Over time, the native assets of the most successful blockchain economies will generate currency premiums, becoming the most primitive form of collateral within their ecosystems, gaining the status of a store of value (SoV) reserve asset in the broader crypto space and even in the real world.
Below, we outline key metrics that constitute this framework, using Ethereum and other leading blockchain networks as examples.
ℹ️ All data used in this article is sourced from Token Terminal, DeFiLlama, and NFT Price Floor, as of November 26, 2024.
1️⃣ Market Cap: Measure of Monetary Sovereignty
The market cap of blockchain-native currencies can serve as a representation of their money supply and economic scale, similar to how the M2, M3, and M4 supplies function for the US dollar. As previously mentioned, sometimes the money supply is not limited to the mainnet of the blockchain, as its native currency becomes a reserve for a series of network expansions (like ETH's L2s/L3s), and even on other blockchains outside the same currency jurisdiction, where these assets can also be transferred through bridging. It is noteworthy that since the money supply (supply) of a blockchain cannot be arbitrarily increased, what we observe is an increase in its nominal value, whether when its native economy expands or when its native currency transcends its own network boundaries and colonizes foreign economies. This is why whenever we mention the money supply, we refer to market cap.
If we take the simplest measure of 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
This includes LST and LRT tokens, similar to measuring the M3 or M4 money supply of blockchain economies based on smart contracts. For example, for ETH, M1/M2 is $420 billion, M3 is $467 billion (LST), and M4 is $481 billion (LST + LRT).
2️⃣ Total Value Locked (TVL): Capital Utilization in DeFi
TVL measures the value of assets locked in decentralized finance (DeFi) protocols. Critics question its utility, but it remains a strong indicator of active economic activity on the blockchain. For decentralized economies, this metric is akin to tracking the scale of financial intermediation in national economies. Moreover, it also illustrates the reliability and security of the monetary jurisdiction, as well as its ability to attract investors who not only wish to trade short-term but also want to store wealth for longer durations.
Top blockchain economies ranked by TVL:
ETH: $66.6 billion
SOL: $9.25 billion
TRON: $8 billion
BNB: $5.5 billion
BTC: $4.4 billion
3️⃣ L1 Transaction Fees: Revenue from Economic Activity
The fees generated by the blockchain reflect the importance users place on accessing its services. These fees represent the 'tax revenue' of the blockchain and are directly included in its GDP. Having a robust and sustainable fee market is fundamental; it must achieve a perfect balance to provide global accessibility for users and protocol/application deployers while maintaining operational stability and network security, ideally offsetting currency inflation. Otherwise, you may end up in a dysfunctional system, similar to what we see in today's heavily indebted economies.
Top blockchain economies ranked by annual fee revenue:
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 because a) it is not a protocol enforced at the mainnet level, and b) while not all forms of MEV are extremely harmful to users, many forms are, and there is reason to believe they will gradually trend towards zero, with most being captured by applications that attempt to return them to users providing better rates.
4️⃣ Stablecoins: Foreign Capital and Currency Integration
Stablecoins represent foreign capital in blockchain economies. Similar to TVL (Total Value Locked), stablecoins are an important metric for measuring the ability of blockchains to attract foreign investment, in other words, how blockchains bring in Real World Assets (RWA). Among major blockchains, Ethereum dominates, with $101 billion hosted on its mainnet and another $10 billion on Layer 2.
Stablecoin Holdings on Blockchain:
ETH: $101 billion (+ L2 $10 billion)
TRON: $59 billion
BNB: $5.8 billion
SOL: $4.65 billion
BTC: Approximately $1 billion (Omni)
Although not stablecoins or Real World Assets (RWA), wrapped versions of BTC (e.g., WBTC and cbBTC) can also serve as interesting indicators of how smart contract-based blockchain economies attract foreign capital. In this case, Ethereum stands out as the most dynamic economy, hosting wrapped Bitcoin valued at $15 billion in its mainnet and Layer 2 ecosystems.
5️⃣ Protocols, Applications, and NFTs: Infrastructure and Culture of the Economy
In blockchain economies, protocols, applications, and NFTs play roles similar to those of industrial and cultural sectors in traditional economies. Protocols and applications are the infrastructure and factories that drive 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 sectors, crucial components of the blockchain network's soft power, as we mentioned in the previous article, where culture is an inseparable part of its influence and identity.
Ethereum dominates in both of these areas, with the total value of fungible tokens (excluding stablecoins and liquid staking tokens) at approximately $110 billion, and the total value of NFTs at $4.1 billion. This highlights Ethereum's leadership in both economic and cultural aspects.
ETH: Approximately $110 billion in fungible assets and $4.1 billion in non-fungible assets
SOL: Approximately $18 billion in fungible assets and $10 million in non-fungible assets
BTC: Approximately $500 million in non-fungible assets
Data is based on the top 100 cryptocurrencies by market cap from CoinGecko and the top 50 NFTs from NFT Price Floor.
6️⃣ Protocol and Application Fees: Economic Activity of Enterprises in Blockchain Economies
To further deepen our understanding of blockchain economic activity, we analyzed the fees generated by top protocols and applications hosted on each blockchain. This metric can serve as a representation of the economic output of companies and organizations operating in these ecosystems, similar to how enterprises contribute to a country's GDP.
Ethereum is far ahead, with fees generated by its top protocols reaching $6 billion, reflecting its status as the most mature and diverse blockchain economy. Following closely are Solana and BNB Chain, which are quite active but on a smaller scale.
Estimated fees for the top 50 protocols and applications in blockchain economies:
ETH: Approximately $6 billion
SOL: Approximately $1.95 billion
BNB: Approximately $300 million
These figures also take into account the share of fees generated by top stablecoin issuers operating on each blockchain. Given the high transaction volume involving stablecoins across various protocols, issuers like Tether (USDT) and Circle (USDC) have made significant contributions to the overall fee base.
By incorporating this metric into our Gross Decentralized 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 Gross Decentralized Product provides a more comprehensive measure of the blockchain economy. It highlights the complexity, breadth, and potential for global economic integration within the blockchain economy.
Determining how to measure and integrate the different metrics that constitute the GDP of the blockchain economy is the task of future professional economists. For now, we can simply summarize these numbers to compare the two largest smart contract-based blockchain economies:
ETH: 1) $400 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) $590 million + 4) $4.65 billion + 5) $18 billion + 6) $1.95 billion = $142.5 billion
Ethereum, as the largest and most diverse decentralized economy based on smart contracts, performs strongly in terms of monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural influence.
The total value of the Ethereum economy (excluding the money supply) is $300 billion, with a money supply to total value ratio of 1.33. Given that $ETH possesses the characteristics of a 'triple attribute asset' and can penetrate 'external' blockchain networks, comparisons to the US economy need to reference the M3/GDP or M4/GDP ratios, which currently range between 1.2 and 1.5.
As blockchain networks continue to evolve, a GDP-like framework will assist investors, policymakers, and developers in better understanding their true value as digital sovereign economies. At the same time, metrics such as the Gini coefficient and economic diversity index may also hold significant value 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 corporate shares, but rather about how to engage fully in the entire blockchain economy.
Let's take the US economy of the 1940s as an example, during a period of economic prosperity. How could investors at that time gain broad exposure to the 'American market'?
These options may include:
US Dollar: To gain exposure to liquidity and reserve currency.
Government Bonds: Before the emergence of petrodollars in 1971, government bonds served merely as debt instruments and had not yet become a global store of value.
Stocks: To achieve growth returns.
Art: New York is gradually becoming the center of the world art.
As we have seen, gaining exposure to traditional economies involves investing in various assets, which will ultimately perform differently based on macroeconomic conditions: the dollar may strengthen during uncertain times, bonds provide security during economic slowdowns, and stocks thrive during expansions.
Gaining exposure to the blockchain economy
In a smart contract-based economy (taking Ethereum as an example), native currencies provide unique advantages as triple attribute assets: they serve as reserve currency, store of value, and bonds (when staked). Unlike the need to have a carefully curated portfolio of different asset characteristics, a single asset (like $ETH) can provide integrated exposure to the entire blockchain economy.
This streamlined approach simplifies investment decisions while aligning incentives with network growth and security. You could also add a basket of native DeFi protocols and blue-chip NFTs from the blockchain economy, and you're all set!
Applying GDP models to estimate the future value of blockchain economies
As emphasized throughout this article, a framework designed for corporations should not be used to value blockchain-native currencies. Blockchain economies are more easily understood and evaluated as digital counterparts to traditional nation-states, which emerged after the Treaty of Westphalia—around the time joint-stock companies began to appear. Similar to traditional nation-states, blockchain economies are also in a continuous competition for capital, security, and human resources (i.e., developers, users, and settlers in the broader sense). This is exactly why the crypto Twitter mentality instinctively recognizes it—hence the emergence of tribalism and maximalism. It is human nature: when a community feels threatened, its immune system kicks in to protect a certain idea, technology, or a set of values deemed valuable.
It is important to note that while blockchain economies share some similarities with traditional nation-states, they represent a completely new paradigm. In these ecosystems, the boundaries between finance and other economic sectors become blurred to the extent that everything—even art, entertainment, and attention—reaches some level of monetization. This liquidity makes it difficult to distinguish between the money supply and the GDP it represents. However, the traditional economy remains our closest reference point and provides a benchmark for predicting the growth of blockchain economies.
Now, as a thought experiment, let's imagine if Ethereum's growth story could rival the most extraordinary rises of nation-states in the past century, what would this mean for the price of ETH? Currently, Ethereum's economic output (excluding the money supply) is $300 billion, comparable to the scale of China's economy in 1986. China took about 30 years to grow its GDP to $18 trillion, a figure that corresponds to the current market cap of gold. China's economic growth has been remarkable, a rare achievement for an economy of its size. Interestingly, we can envision a world in which network nations like Ethereum could replicate this unprecedented rate of economic growth.
While this comparison may have surprised you, in my view, leading blockchain economies indeed have reasons to rival the performances of modern nation-states:
Digitalization and Openness
Global Accessibility
No Capital Controls
Suitable as Financial Infrastructure for an AI-Dominated Economy
Assuming that network nations thrive, with Ethereum solidifying its dominance in the rapidly expanding DeFi and AI fields, leading to a final bull market scenario, by 2054, the total economic value of the Ethereum network would reach $18 trillion, matching China's development trajectory over the past 30 years! In this hypothesis, how would we apply the GDP model to calculate the price of ETH?
If we adopt a conservative money supply/economic output ratio of 1.2 (similar to the current US M3/GDP ratio), Ethereum's market cap would reach $21.6 trillion, leading to an ETH price of $180,000 (not considering potential currency base deflation due to fee burns). However, if we consider Ethereum's possibility of transcending its native ecosystem, similar to how the US dollar became ubiquitous through the Eurodollar system, it could achieve a 1.5 money supply/total value ratio (comparable to the US M4/GDP ratio). In this case, Ethereum's market cap would reach $27 trillion, equivalent to an ETH price of $225,000.
Now, this is not any form of ETH price prediction or financial advice, but it is indeed intriguing to think about how the GDP framework provides a powerful perspective for understanding blockchain economies, revealing their true nature as emerging digital nations 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 diverse blockchain economy, with its ecosystem spanning a wide range of areas from financial services to cultural products, which not only endows it with strong hard power but also establishes significant soft power. Ethereum's ability to attract and retain 'sticky capital' further underscores 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.
