Article reprinted from: MetaCat
Author: Diario
Translation: MetaCat
Typesetting: MetaCat
Traditional methods for valuing blockchain networks often fall into the trap of viewing blockchain networks as businesses and using formulas designed for calculating fair stock prices based on very narrow considerations. This approach has fundamental flaws.
Blockchains, especially smart contract platforms like Ethereum, are not businesses. 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 act as stores of value (SoV), units of account (UoA), and mediums of exchange 'overseas'—for instance, $ETH's role is not limited to the original mainnet but extends and becomes a reserve currency in multiple expansion networks (L2) that belong to its monetary jurisdiction and thrive even beyond those borders (similar to how the dollar operates today).
Additionally, 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 network nations—digital nations—manifesting not only through technology stacks but also through monetary jurisdictions and reserve currencies, shared values and beliefs, shared 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 Gross Decentralized Product (GDP) approach, which captures not only monetary volume but also the economic activity within blockchain ecosystems. Unlike the GDP of traditional economies, the scope covered by Gross Decentralized Product is broader: it considers the economic activities generated within the ecosystem and monetary base, as well as the market capitalizations of protocols, decentralized applications, and cultural assets built on specific blockchains.
The theoretical foundation behind this expanded framework lies in the paradigm shift represented by the blockchain economy. Although these ecosystems share similarities with traditional national economies, their fundamental distinction is that every aspect of the economy becomes fluid and possesses some degree of monetization. In this paradigm, output and factors of production are not just 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 activity on the blockchain through programmatically set supply caps. Their value is closely linked to the system's growth, reflected in the ever-increasing market capitalization. Over time, the native assets of the most successful blockchain economies will generate monetary premiums, becoming the most primitive form of collateral within their ecosystems, achieving a status of value storage (SoV) reserve assets in the broader crypto space and even in the real world.
Below, we outline the key metrics constituting 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.
Market capitalization: Measures monetary sovereignty
The market capitalization of blockchain-native currencies can serve as a representation of their monetary base and economic scale, similar to how the M2, M3, and M4 supplies function for the U.S. dollar. As mentioned earlier, the monetary base is not limited to the blockchain's mainnet, as its native currency becomes a reserve for a series of network expansions (like L2s/L3s for ETH), and these assets can be transferred even across other blockchains outside the same monetary jurisdiction through bridging. It is important to note again that since the monetary base (supply) of a blockchain cannot be arbitrarily increased, what we observe is: whether when its native economy expands or when its native currency transcends its own network boundaries and colonizes foreign economies, it is an increase in its nominal value in order to sustain and support economic growth. That is why every time we mention the monetary base, we are referring to market capitalization.
If we measure with the simplest monetary volume (M1 / M2) as an indicator, the top blockchain economies are:
BTC: $1,820 billion
ETH: $400 billion
SOL: $108 billion
BNB: $90 billion
TRON: $16 billion
Here, including LST and LRT tokens is akin to measuring the M3 or M4 money supply of smart contract-based blockchain economies. Taking ETH as an example, M1/M2 is $420 billion, M3 is $467 billion (LST), and M4 is $481 billion (LST + LRT).
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 activities in national economies. Moreover, it illustrates the reliability and security of monetary jurisdictions and their ability to attract investors who not only wish to trade short-term but also want to store wealth for a longer duration.
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
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 blockchain's 'tax revenue' and are directly accounted for in its GDP. Having a strong 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 issuance. Otherwise, you may end up in a dysfunctional system, as we see today in heavily indebted economies.
Top blockchain economies ranked by annual fee income:
ETH: $2.6 billion
TRON: $1.87 billion
BTC: $1.23 billion
SOL: $590 million
BNB: $191 million
For this calculation, we overlook 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 are, and there is reason to believe they will gradually trend toward zero, with most captured by applications trying to return it to users who provide better rates.
Stablecoins: Foreign capital and currency integration
Stablecoins represent foreign capital in the blockchain economy. Similar to TVL (Total Value Locked), stablecoins are an important metric for measuring a blockchain's ability to attract foreign capital, or in other words, how blockchains bring real-world assets (RWAs) into play. Among major blockchains, Ethereum dominates, hosting $101 billion on its mainnet and an additional $10 billion on Layer 2.
Stablecoin holdings in the blockchain:
ETH: $101 billion (+ L2 $10 billion)
TRON: $59 billion
BNB: $5.8 billion
SOL: $4.65 billion
BTC: Approximately $1 billion (Omni)
While not stablecoins or real-world assets (RWAs), wrapped versions of BTC (such as WBTC and cbBTC) can also serve as interesting indicators for attracting foreign capital in smart contract-based blockchain economies. In this case, Ethereum stands out as the most dynamic economy, hosting $15 billion worth of wrapped Bitcoin in its mainnet and second-layer ecosystem.
Protocols, applications, and NFTs: the infrastructure and culture of the economy
In the blockchain economy, 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 driving value creation, including decentralized finance (DeFi), social finance (SocialFi), and decentralized science (DeSci). On the other hand, NFTs represent the cultural, entertainment, and media industries, a key component of blockchain networks' soft power, as we mentioned in the previous article, culture is an integral part of their influence and identity.
Ethereum dominates both realms, with the total value of homogeneous tokens (excluding stablecoins and liquid-staked tokens) approximately $110 billion and the total value of NFTs at $4.1 billion. This highlights Ethereum's leadership position in both economic and cultural aspects.
ETH: Homogeneous assets approximately $110 billion, non-homogeneous assets approximately $4.1 billion
SOL: Fungible assets approximately $18 billion, non-fungible assets approximately $0.1 billion
BTC: Non-homogeneous assets approximately $0.5 billion
The data is based on the top 100 cryptocurrencies by market capitalization on CoinGecko and the top 50 NFTs by Price Floor.
Protocols and application fees: Economic activities of enterprises within the blockchain economy
To deepen our understanding of blockchain economic activity, we analyzed the fees generated by the top protocols and applications hosted on each blockchain. This metric serves as a representation of the economic output of companies and organizations operating within these ecosystems, similar to the contributions enterprises make to a nation'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 of the top 50 protocols and applications in the blockchain economy:
ETH: Approximately $6 billion
SOL: Approximately $1.95 billion
BNB: Approximately $300 million
These numbers also consider the share of fees generated by top stablecoin issuers operating on each blockchain. Given the large trading volume involving stablecoins across various protocols, stablecoin issuers like Tether (USDT) and Circle (USDC) contribute significantly 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 encompass.
By combining these metrics, the concept of Gross Decentralized Product provides a more comprehensive measure of blockchain economies. It highlights the complexity, breadth, and potential for global economic integration within blockchain economies.
Determining how to measure and integrate various indicators that constitute the GDP of blockchain economies is a task for future professional economists. For now, we can simply aggregate 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) $11.4 million + 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 smart contract-based decentralized economy, performs strongly in terms of monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural impact.
The total value of the Ethereum economy (excluding the monetary base) is $300 billion, with a ratio of its monetary base to total value being 1.33. Since $ETH possesses the characteristics of a 'triple attribute asset' and can penetrate 'external' blockchain networks, the comparison with the U.S. economy requires referencing 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 help investors, policymakers, and developers better understand 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 company shares but about how to fully participate in the entire blockchain economy.
Let's take the U.S. economy in the 1940s as an example, during a period of prosperity. How could investors at that time broadly access the 'American market'?
These options might include:
Dollar: For 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 global value storage means.
Stocks: For growth returns.
Art: New York gradually became the center of the world's art.
As we can see, engaging with traditional economies involves investing in various assets that ultimately perform differently based on macroeconomic conditions: the dollar may strengthen during uncertain times, bonds offer safety during economic downturns, and stocks thrive during expansions.
Gaining exposure to blockchain economies
In a smart contract-based economy (taking Ethereum as an example), the native currency serves as a unique asset with triple attributes: it acts simultaneously as a reserve currency, a means of value storage, and a bond (when staked). Unlike needing a carefully curated portfolio with diverse 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 the network's growth and security. You can also add a basket of native DeFi protocols and blue-chip NFTs from the blockchain economy, and everything is set!
Apply GDP models to estimate the future value of the blockchain economy
As we emphasize throughout the article, frameworks designed for valuing publicly traded companies should not be used to assess 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 same 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 a general sense). This is precisely why the crypto Twitter mentality instinctively recognizes this—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 ideology, 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 whole 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 a degree of monetization. This fluidity makes it difficult to separate the monetary base from the GDP it represents. However, traditional economies remain our closest reference point and provide a benchmark for predicting the growth of blockchain economies.
Now, as a thought experiment, let's imagine what it would mean for ETH's price if Ethereum's growth story could rival the most extraordinary rises of nation-states in the past century. Ethereum's current economic volume (excluding the monetary base) 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 equivalent to the current market value of gold. China's economic growth has been extraordinary, a rare feat for an economy of its scale. But interestingly, we can envision a world where networks like Ethereum can replicate this unprecedented economic growth rate.
While this comparison may already be surprising, I believe leading blockchain economies indeed have reason to match the performance of modern nation-states:
Digitalization and openness
Global accessibility
No capital controls
Suitable as the financial infrastructure for an AI-driven economy
Assuming network nations thrive, Ethereum solidifies its dominance in the rapidly expanding DeFi and AI sectors, leading to a bullish scenario where by 2054, the total economic value of the Ethereum network reaches $18 trillion, matching the trajectory of China's development 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 monetary base/economic total ratio of 1.2 (similar to the current U.S. M3/GDP ratio), Ethereum's market cap would reach $21.6 trillion, leading to an ETH price of $180,000 (not accounting for potential monetary base deflation due to fee destruction). However, if we consider the possibility of Ethereum transcending its native ecosystem, akin to how the dollar became ubiquitous through the Eurodollar system, it could achieve a 1.5 monetary base/total value ratio (comparable to the U.S. M4/GDP ratio). In that 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 interesting to contemplate how the GDP framework can provide a powerful perspective for understanding blockchain economies, revealing their true nature as emerging digital nations or economies. This framework also highlights that, 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 status as the most vibrant and diverse blockchain economy, encompassing a wide range of fields 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 fluctuations, investors still see it as the safest and most promising smart contract-based economy for long-term wealth preservation.
