Blockchain Valuation

[[email protected]]

Blockchain like Bitcoin/Ethereum/Solana...is new type of assets.

I want to share some ideas about how to evaluate them.

Blockchains in general (whether L1s or L2s) have a couple sources of revenue from flows.

The first is congestion fees, aka "base fees". The second is contention fees, aka "MEV".

Let's tackle contention fees first. IMO, with modern app and wallet design, we should expect MEV to increasingly flow upstream and be recaptured by apps, wallets, and/or users. Eventually almost all MEV will be recaptured by entities closer to flow originators, and downstream infrastructure like L1s and L2s should expect breadcrumbs from contention fees. In other words, chasing MEV is IMO likely long-term futile for L1s and L2s.

What about congestion fees? For Ethereum L1 historically the bottleneck was EVM execution. Considerations for consensus participant, things like disk I/O and state growth, were key drivers for setting a small execution gas limit. With modern blockchain design that use SNARKs or fraud proof games for scaling, we will increasingly live in a post-scarcity world for execution. The bottleneck then shifts to data availability, which is fundamentally scarce because Ethereum validators run on limited home internet connections, and in practice DAS only provides a linear ~100x scalability boost unlike fraud proofs and SNARKs which provide an essentially unbounded scalability boost.

So let's zoom into DA economics which I claim is the only sustainable source of flows for L1s. EIP-4844, which suddenly increased DA supply in a sizeable way through blobs, went into effect less than a year ago. The chart titled "Average Blob Count per Block" in this dashboard clearly shows demand growth for blobs over time (IMO largely driven by induced demand), with demand progressively growing from 1 blob/block, to 2 blobs/block, to 3 blobs/block. We're now saturating blob supply but are only at the beginning of blob price discovery, where low-value "spam" transactions are slowly being pushed away by economically-denser transactions.

If DA supply was left unchanged for a few months I'd expect hundreds of ETH burn per day from DA. However right now Ethereum L1 is in "growth mode", and the Pectra hard fork (coming within a few months) will double the target number of blobs per block, from 3 to 6. This DA supply flood should crush the blob fee market, and it will take a few months for demand to catch up again. As full danksharding is rolled-out over the next couple years there will be a cat-and-mouse game between DA supply and demand.

What about the long-term equilibrium? My thesis hasn't changed since my 2022 Devcon talk titled "ultra sound money". Long term I expect DA demand to outpace supply. Indeed, supply is fundamentally constrained by consensus participants running on home internet connections, and I don't think the equivalent of ~100 home internet connections of DA throughput is sufficient to satisfy world demand, especially as humans always find creative ways to consume more bandwidth. In ~10 years I expect Ethereum to settle 10M TPS (roughly 100 transactions per day per human) and even at little as $0.001/transaction is $1B/day of revenue. 

Of course, DA income is only part of the story for long-term value accrual of ETH. The two other important considerations are issuance and monetary premium—for those I would refer to my 2022 Devcon talk.

 

Source: 

 

Edited Wednesday at 01:18 AM by [email protected]

[[email protected]]

"All blockchains have a value accrual problem, and none have a perfect answer. If visa charged a fee per transaction independent of transaction amount, their revenue would be much diminished, yet this is currently the exact fee model that blockchains operate under. Execution layers fare a little bit better than data layers, because they can extract priority fees which reflect the urgency of a transaction, whereas data layers only charge a flat fee.

 

My answer to value accrual is first and foremost to grow value. There is now value to accrue where there is none created. While we do it, we should maximize the opportunities where there is a chance evenutally charge some fees. This means maximizing the Ethereum data layer so that there will be more value on Ethereum overall and alt DA is unnecessary, scaling the L1 so that high value applications can be on L1, actually, and encouraging projects like Eigenlayer that will scale the use of Ether as (non-financial) collateral. (Scaling as purely financial collateral is more tricky because it increases the potential for death spirals)"
 

Source: Ethereum Foundation - Dankrad Feist

Same link as above
 

Edited Wednesday at 01:20 AM by [email protected]

[[email protected]]

The point is, Visa charge a fee proportional to the transaction amount, whereas you can currently send $1b on ETH L1 for just 34 cents. And ETH holders + small transaction senders are subsidizing the security on that.

[[email protected]]

"Justin Drake is most likely wrong about DA being a good revenue source for Ethereum specifically, because Ethereum already has something much more valuable (an attractive execution layer with lots of liquidity). DA will be valued at a fraction of this (but is still great for white label Ethereum products and to scale break out applications). DA will have a moat too, but it will be at a much lower price tag than execution (and therefore needs to provide much more scale)"

[alxcii]

Ethereum is a in a weird place - jack of all trades, master of none. Bitcoin is better as money, SVM > EVM for execution and Celestia is better for DA. They've got liquidity, corporate mindshare and devs going for them for now, but I don't know how defensible this is. 

[[email protected]]

18 hours ago, alxcii said:

Ethereum is a in a weird place - jack of all trades, master of none. Bitcoin is better as money, SVM > EVM for execution and Celestia is better for DA. They've got liquidity, corporate mindshare and devs going for them for now, but I don't know how defensible this is. 

Nice. You are the most informed crypto member I know on this value investor forum so far.

1. At the end of this year, Ethereum Layer 2 like Base, Arbitrum, Uniswap...will probably faster and cheaper than Solana. Scaling horizontally as Ethereum is the right architecture, proved by Internet with millions of servers. To serve billions of users, Blockchain will also need a least thousand of Layer 2s.

2. DA from Celestia is almost free but major rollup/layer 2 still choose Ethereum. In fact Mantle, the most valuable Layer 2 that posted DA on Celestia, is moving to Ethereum. So Ethereum DA has moat and pricing power. This pricing power will get even stronger when the interop between Layers become more seamless over time. Then the network effect will be very strong.

3. Bitcoin sure has better meme for money/digital gold narrative. But Bitcoin has long tail risks(quantum, security budget, centralization) that will require hard fork and affect moneyness. 

I have one question for you, do you think Blockchain Layer 1 will be "the winner take all" market or will be multiple winners?

[[email protected]]

As succinctly as possible, what is the value accrual thesis for ETH the asset in 2024?

Ethereum is building a financial platform, and it will be by far the most neutral platform that at the same time
* allows to issue representations of financial assets
* allows trading those assets
* and permissionlessly create new financial products, such as derivative, based on them
in existence.

This is all very valuable activity. Capturing value from it is going to be possible, but it is not a priori obvious what the mechanisms are going to be. I still think it is some sort of fee mechanism -- in the rollup roadmap, I do continue to believe that the Ethereum L1 will be the crossroads between all those subdomains, and a lot of very valuable activity will continue to take place on it and that will generate valuable fees. (A decent amount of L1 scaling will be necessary for this to happen)

If this turns out not to be the best value accrual mechanism, then there are interesting alternatives that I consider with an increasing degree of skepticism, but none of them are impossible: Value accrual through data availability fees, as the main medium of exchange asset in the ecosystem, and finally by being used as collateral (which is the riskiest).

Does the EF consider continuous value accrual to ETH the asset important? Can you briefly explain why

"The EF" does not have an opinion on this, as researchers we all form our own opinions.

Personally I believe it is best if we focus on building a value-generating ecosystem on Ethereum, and I think that value capture will ultimately come naturally. This doesn't mean I don't think about it, but it is a great mistake to focus on it while the value generation part is still coming short.

If executing on the rest of the roadmap results in a diverse ecosystem of rollups settling on Ethereum L1, with a multitude of dapps on L2s and sub-cent fees for users, but little to no value accrual to ETH the asset, would the EF consider this a successful implementation of the Ethereum roadmap?

Again, I don't speak for the EF, but I have an individual opinion as a researcher.

When I build a startup, of course I would like to make money, but I would still consider it as a success if it was useful to my customers and I ultimately went away empty-handed.

Translating this to Ethereum, I do think that if we had a diverse ecosystem of rollups providing the world with interesting applications, I would consider this a success, but an even greater success would be if this ecosystem also made ETH the asset more valuable.

I know that many believe that the rollup-centric roadmap will take away fee revenue and MEV from Ethereum and rollups might ultimately be parasitic. I think that's not true. I think that it will continue to be true that the highest-value transactions will happen on Ethereum L1, while rollups will grow the pie by providing plenty of space for users to transact on Ethereum. The relationship will be symbiotic: Ethereum provides rollups with cheap data availability (I think it should be cheap, Ethereum security should be affordable for everyone) and in return they make Ethereum L1 the natural crossroads for all financial activity for the really valuable transactions.

Source: 

[Milu]

4 hours ago, [email protected] said:

As succinctly as possible, what is the value accrual thesis for ETH the asset in 2024?

Ethereum is building a financial platform, and it will be by far the most neutral platform that at the same time
* allows to issue representations of financial assets
* allows trading those assets
* and permissionlessly create new financial products, such as derivative, based on them
in existence.

This is all very valuable activity. Capturing value from it is going to be possible, but it is not a priori obvious what the mechanisms are going to be. I still think it is some sort of fee mechanism -- in the rollup roadmap, I do continue to believe that the Ethereum L1 will be the crossroads between all those subdomains, and a lot of very valuable activity will continue to take place on it and that will generate valuable fees. (A decent amount of L1 scaling will be necessary for this to happen)

If this turns out not to be the best value accrual mechanism, then there are interesting alternatives that I consider with an increasing degree of skepticism, but none of them are impossible: Value accrual through data availability fees, as the main medium of exchange asset in the ecosystem, and finally by being used as collateral (which is the riskiest).

Does the EF consider continuous value accrual to ETH the asset important? Can you briefly explain why

"The EF" does not have an opinion on this, as researchers we all form our own opinions.

Personally I believe it is best if we focus on building a value-generating ecosystem on Ethereum, and I think that value capture will ultimately come naturally. This doesn't mean I don't think about it, but it is a great mistake to focus on it while the value generation part is still coming short.

If executing on the rest of the roadmap results in a diverse ecosystem of rollups settling on Ethereum L1, with a multitude of dapps on L2s and sub-cent fees for users, but little to no value accrual to ETH the asset, would the EF consider this a successful implementation of the Ethereum roadmap?

Again, I don't speak for the EF, but I have an individual opinion as a researcher.

When I build a startup, of course I would like to make money, but I would still consider it as a success if it was useful to my customers and I ultimately went away empty-handed.

Translating this to Ethereum, I do think that if we had a diverse ecosystem of rollups providing the world with interesting applications, I would consider this a success, but an even greater success would be if this ecosystem also made ETH the asset more valuable.

I know that many believe that the rollup-centric roadmap will take away fee revenue and MEV from Ethereum and rollups might ultimately be parasitic. I think that's not true. I think that it will continue to be true that the highest-value transactions will happen on Ethereum L1, while rollups will grow the pie by providing plenty of space for users to transact on Ethereum. The relationship will be symbiotic: Ethereum provides rollups with cheap data availability (I think it should be cheap, Ethereum security should be affordable for everyone) and in return they make Ethereum L1 the natural crossroads for all financial activity for the really valuable transactions.

Source: 

Not sure if you have discussed on this forum yet but I'm curious what your portfolio looks like. Based on your post history you look to be a big proponent of Ethereum. Does this make up the largest part of your networth, do you hold bitcoin and other cryptoassets, stocks, gold?

 

It's a lot easier to get a sense of a person's posts once I have an idea where they put their money?

[DooDiligence]

45 minutes ago, Milu said:

Not sure if you have discussed on this forum yet but I'm curious what your portfolio looks like. Based on your post history you look to be a big proponent of Ethereum. Does this make up the largest part of your networth, do you hold bitcoin and other cryptoassets, stocks, gold?

 

It's a lot easier to get a sense of a person's posts once I have an idea where they put their money?

 

That's such a nice way of phrasing it. I'm curious about the motivation for this flood of posts too.

[gfp]

One thing we know for sure is their email address 

[DooDiligence]

1 minute ago, gfp said:

One thing we know for sure is their email address 

 

[Longnose]

ETH is cool. 

 

But thats about it. 

[[email protected]]

11 hours ago, Milu said:

Not sure if you have discussed on this forum yet but I'm curious what your portfolio looks like. Based on your post history you look to be a big proponent of Ethereum. Does this make up the largest part of your networth, do you hold bitcoin and other cryptoassets, stocks, gold?

 

It's a lot easier to get a sense of a person's posts once I have an idea where they put their money?

 

Hi, tks for asking.

I hold many assets: equity, real estate, crypto assets...

For crypto, Yes.  I'm a big proponent of Ethereum Ecosystem.

Why do I post all those information about Crypto and Ethereum? To Pump ETH? That's not a realistic goal for me.

I share those info because:

1. That's a good way for me to learn faster, deeper about Crypto and Ethereum which is very new topic.

2. To invalidate my bias about Ethereum. I need counter arguments about why Ethereum is bad.

3. To spread correct information(imo) about Crypto and Ethereum. In my view, Ethereum culture deserve better understanding: inclusive, liberty, economic freedom, real world application, tech innovation... After Bitcoin, all crypto innovations like Stablecoin, DeFi, NFT come from Ethereum. Yet, many people think XRP is best long term Blockchain Tech. I think that is kind of disinformation for many users.

 

I should note that there are many investing opportunities in Ethereum Ecosystem beside ETH coin. For example:

- Get high yield by farming stablecoin USDC, USDT...

- Maker Token: Stablecoin issuer.

- UNI Token: Decentralize Exchange (NASDAQ onchain).

- AAVE/Morpho Token: Lending Platform.

- GMX: Perp Trading Platform.

...

All those tokens have revenue, many have positive cash flow, some have dividend or buy back.

 

You can even apply many other classic strategies from Warren Buffett like Arbitrage, Liquidation... from time to time in Crypto.

But most of the time, the main strategy is very similar to venture investing.

 

 

[DooDiligence]

I'm excited about this new opportunity. How do I buy some?

Edited 10 hours ago by DooDiligence

[[email protected]]

1 hour ago, DooDiligence said:

I'm excited about this new opportunity. How do I buy some?

In the US, Coinbase is the most convenient for new ones. Outside of US, it's Binance.

Both Coinbase/Binance are Centralize Exchange.

Try Uniswap if you want to exp with Decentralize Exchange.

https://apps.apple.com/us/app/uniswap-crypto-nft-wallet/id6443944476