Full text of VanEck's Ethereum valuation report: ETH will approach $12,000 in 2030

VanEck, a traditional institution that once managed 69 billion US dollars of ETFs, predicts that in 2030, the value of one Ethereum will be 11,800 US dollars.

Written by: Matthew Sigel, Patrick Bush

Compile: BlockTempo in the moving zone

VanEck, an asset management company located in New York City, USA, was established in 1955. It is one of the world's leading investment management companies. It is basically involved in various asset classes, including stocks, bonds, commodities, gold, emerging markets, etc. In 2020, it manages about $69 billion in ETFs.

Recently, it produced a valuation report on Ethereum, predicting the price of Ethereum in 2030. They believe that under normal circumstances, the price of ETH will reach $11,800. The following report content:

ETH will be a competitor to US Treasuries

In light of Ethereum's recent hard fork, which allows users to withdraw locked Ether (ETH), which we believe will be a serious competitor to U.S. Treasuries, we reassessed using a more rigorous valuation model Ethereum.

According to our estimates, Ethereum network revenue will grow from $2.6 billion per year to $51 billion in 2030.

Assuming Ethereum has a 70% market share in smart contract protocols, this would imply a price of $11,800 in the 2030s, which we discount to $5,300 today with a 12% cost of capital derived from Ethereum’s recent volatility .

Discounted capital is a financial concept used to assess the value of future cash flows. In valuation models, future cash flows are often considered to be less worthwhile than cash flows of the same amount because future cash flows may be subject to risk and uncertainty. Capital discounting discounts future cash flows to today's value to reflect time value and risk.

This analysis provides an explicit valuation methodology for Ethereum, taking into account transaction fees, MEV (Maximize Executable Value), and Security-as-a-Service. We assess Ethereum's market share in key industries and its potential as a store of value asset in the evolving cryptocurrency landscape.

Ethereum Valuation Method: Cash Flow Forecast and FDV Calculation

We value Ethereum by estimating cash flows for the year ending April 30, 2030. We forecast Ethereum's revenue, netting out global tax rates and validators' revenue share, to arrive at a cash flow figure.

We then subtracted the long-term cryptocurrency growth rate (4%) from the long-term projected cash flow yield (7%) using multiple estimates. We then arrive at a Fully Diluted Valuation (FDV) for 2030 by dividing the total by the expected number of tokens in circulation and discounting the result to April 20, 2023 at a discount rate of 12%.

Macroscopically look at the business model of Ethereum: digital shopping malls, verifiers and business on the chain

In order to properly understand our approach to valuing Ethereum, it is first necessary to understand what Ethereum is, how it works and what it is worth.

Think of Ethereum as a digital marketplace

At the most basic level, Ethereum can be imagined as a shopping mall that exists on the Internet, providing a safe place for online commerce. Users interact in the Ethereum market through wallets, and the Ethereum market is composed of batches of smart contract codes.

Ethereum software determines the structure and rules of the mall, while validators ensure that these rules are followed, secure the mall, and maintain a ledger of all economic events that occur within the mall. Ethereum allocates limited space in the mall by charging users a fee for commercial activities and value exchange.

Validator role

Computers running ethereum software are called validators, and they are rewarded with inflation and a portion of fees paid by users for their activities on ethereum.

In order to perform value exchange on the chain or interact with businesses on the chain, users need to pay fees to Ethereum. These fees are related to the computational intensity and computational needs on the Ethereum network. Interestingly, unlike most enterprises, enterprises need to pay rent, electricity and other expenses, while users directly pay the expenses of interacting with on-chain business through transactions to Ethereum as the host and primary supplier of on-chain business.

Therefore, the user pays for the hosting cost of the on-chain business and the cost of Ethereum calculation through the transaction, representing the operation cost of the on-chain business.

Business on the chain

To do anything on Ethereum, users using Ethereum must use ETH tokens. Additionally, validators must provide value in the form of ETH as a guarantee of their honesty. If validators cheat, ETH will be forfeited.

Considering that ETH tokens are the currency that pays validators (who sell ETH to cover costs), this ties demand to supply – Ethereum users buy tokens to use Ethereum, Ethereum validators sell tokens to “supply "Ethereum. What does it mean to "supply" Ethereum? Essentially, it means participating in Ethereum's consensus mechanism, validating value transfers, allowing smart contract code to be deployed, or enabling calls to Ethereum software.

All business logic and asset exchanges are recorded in blocks as ledgers. Blocks are simply a "to-do list" that Ethereum's computers complete, executed every twelve seconds. Users get their actions included in blocks by paying a base fee and a priority fee. If there is a significant demand on Ethereum's "to-do list," users can add a priority fee, called a "tip," to ensure their request is met.

Additionally, Ethereum created a market for auctioning the ordering mechanism for transactions in each Ethereum block. This is because there is tremendous value in transaction ordering. These two activities currently represent the core business of Ethereum - the sale of block space and the sale of others' right to order that space. In short, Ethereum sells secure, immutable block space to facilitate online commerce.

Ethereum Revenue: Exploring Transaction Fees, MEV, and Security as a Service

transaction fee

Since Ethereum is not actually a business, we define revenue as the activity of using tokens in Ethereum’s core business, which is to provide immutable, decentralized computing through the sale of block space. Therefore, we consider transaction fees (including base fees and tips) to be an item of income. Other analysts only calculate the base fee as it gets burned, affecting all ether holders, and ignore the tip, as it is paid only to each leading validator.

In their conception, only the Ether staked on the validator can get the tip. However, we calculate both tip and base fees, as they both reflect the economic activity on Ethereum associated with selling block space. Therefore, the economic value of these actions flows to Ethereum as a business.

Additionally, we subtract the burned Ether from the base fee and derive the token value from the reduced total supply. Admittedly, unlike the other components we analyzed, Ether usage has a significant impact on token valuation today through total token supply reduction. Additionally, we do not consider inflationary security issuance to be a revenue item as it is not directly related to the purchase of block space by external entities.

MEV

We not only recognize the transaction fees of the system, but also recognize MEV as an income item of Ethereum. For example, entities like Flashbots auction off block space to builders, and a portion of MEV is accumulated to ether stakers to be passed on by validators. Similar to tips paid to validators, we also believe that block construction fees should be included in Ethereum’s revenue calculations, since they are economic activities associated with selling block space.

Security as a Service

In the model, due to the programmability of smart contracts on Ethereum and the increasingly sophisticated cross-chain messaging technology, we introduce a novel revenue item called "Security as a Service" (SaaS).

Conceptually, the value of ETH can be used to secure applications, protocols, and ecosystems both inside and outside of Ethereum. With projects such as Eigenlayer, ETH can be used to support entities such as Oracles, Sequencers, Validators, Bridges, Contractual Agreements, and possibly new entities that have yet to be discovered.

The result is that ETH approximates layer 0 assets like Bitcoin, Polkadot's DOT, and Cosmos' ATOM. These layer 0 assets can be used to support and launch new blockchains. Since ETH is a holding asset, ETH can be locked behind the guarantee of an enterprise or protocol to guarantee honest behavior. If this honesty is violated, the value can be seized to punish the malicious or irresponsible party and/or compensate the affected party. This can be thought of as a performance bond or collateral, ensuring that damaged parties recover their losses, while bad actors pay for their malicious actions.

In retrospect, this type of business relies on the value of ether as a token, and the security and durability of the ethereum software. Therefore, since the security of Ethereum can be derived, Ether holders participating in SaaS should be rewarded with some multiple, which is the product of the sum of priority fee, tip, block building fee and ether inflation issuance — Opportunity cost for ether holders multiplied by risk. This multiple reflects the average security risk and investment risk of exiting ether as a safe-haven asset.

Proportion of on-chain business profit among the total fees paid by users (annual)

*Source: VanEck, Token Terminal, as of April 30, 2023. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any of the aforementioned securities. *

As can be deduced from the graph above, the average cost split between the platform and the business of an AAVE user over the past year is 6.98% attributed to the platform (Ethereum) and 93.02% attributed to AAVE (the application and its lenders) . Returning to the question of value accumulation on smart contract platforms such as Ethereum, we believe this relationship will change over time as off-chain businesses are deployed on-chain to reduce costs and seek new revenue. In our model, we assume that the application's fee share will vary between 90% and 97% depending on the end market, while Ethereum's share of the business category will vary between 3% and 10%.

We believe that approximating this fee ratio is necessary because "transaction revenue" is not an ideal mechanism to describe future blockchain value capture. According to our previous discussion, transactions are just a "to-do" list for Ethereum calculations, and many uses of the blockchain cannot be best described as "transactions". For smart contract blockchains (such as Ethereum), block space is a more appropriate unit to measure and describe what is sold.

Smart contract blockchains can package block space into a "service level agreement" for other parties to guarantee a certain amount of existing or future computing or transaction activity. This activity will create a complex, liquid blockchain futures market, similar to the dynamics of commodity futures. However, in keeping with current practice, we will stick to the term "transaction revenue".

To extrapolate future reductions in ETH supply, we start with past ETH burn/fee ratios. We adopted an 80% burning transaction fee ratio. Then, we estimated the average transaction cost of Ethereum and Layer 2 platforms, which has a cost reduction rate of about 60%. We speculate that the cost difference of the L2 platform will be 1/100 of that of Ethereum.

Afterwards, we calculated Ethereum’s future monthly active users based on the monthly active users (MAU) of the terminal market and Ethereum’s share of these users. Ethereum's share of these monthly active users depends on the extraction rate of Ethereum to these underlying business categories of economic activity (between 5% and 20%, depending on the end market).

We don't do projections based on transactions and then extrapolate revenue assumptions from that. We simply assume that transaction costs on Ethereum are gradually decreasing and project the number of burns per year from the base fee burn. Again, this burned amount is deducted from Ethereum's total circulating supply, having a significant impact on token value, as Ethereum's global market capitalization is spread across fewer tokens.

MEV Income: Exploring Transaction Ordering, On-Chain Activity, and Long-Term Forecasts

MEV is considered a "bogie" in the blockchain, and many entities are seeking to stop MEV. In fact, MEVs can be restrained, but not destroyed. We believe that MEV plays an important role in ensuring the security of the blockchain (paying validators and stakers) in the long term because MEV has enormous value.

Its persistence is similar to supermarket shelf space, there will always be more valuable shelf space (i.e. "eye-level" shelves), and someone is willing to pay to occupy that space, at the expense of everyone else. Likewise, ordering transactions is always valuable, and there is enormous value to be gained by monetizing ordering.

Since MEV is highly correlated with on-chain activity, it is difficult to predict. For our estimates, we assume that MEV is directly related to the value of all assets hosted on Ethereum. This gives us an "overhead fee" for keeping value on Ethereum.

Currently, we estimate that the annual value of MEV has been ~2.0% of the total locked value (not the value of all assets) on the Ethereum chain over the past year. In the long run, we assume that MEV will decrease as a percentage of assets as protocols and applications take steps to reduce their impact, the turnover of on-chain assets decreases, and applications return a portion of value to users.

Therefore, we expect MEV's share to shrink to 0.15%. We assume that the total value of on-chain assets is related to the total value of custody assets on the blockchain, and that this value is derived from the FBP share reserved on the blockchain and the market share of Ethereum.

L2 Settlement Dynamics: Scaling Solutions, Revenue Distribution, and Future Profit Forecasts

Since L2 settlement represents a long-term scaling solution for executing transactions on Ethereum, it is considered to be the most important line of business for Ethereum in the future.

L2 settlements represent items in batches of transactions submitted to Ethereum. We predict settlement revenue as a function of the profit relationship between L2 revenue and “profit” and the security cost of sending batches to Ethereum. In our projections, we assume that L2 revenue is simply composed of MEV and transaction revenue, both of which are estimated using the Ethereum framework.

We then assume that L2 pays a portion of these revenues to Ethereum as a security fee. We see L2 "margins" fluctuating between 15% and 40%, depending on Ethereum's gas costs.

In the long run, we assert that the majority of L2 revenue will still belong to Ethereum, including MEV on L2. We assume this because we expect thousands of L2s to compete for block space and profits on Ethereum. We assert L2 long-term margins of 10%, compared to the current range of 15% to 40%. This estimate is obviously arbitrary, but we expect L2 margins to shrink significantly as thousands of competing chains emerge, competing for Ethereum's block space.

In terms of value distribution, we assume that 98% of transactions are executed on L2 and 50% of the total asset value is stored on L2. We assert that Ethereum will still host half of the value of the ecosystem, as certain assets and transactions may require extremely high levels of security, composability, and atomicity.

Emerging security service model of Ethereum

We define a SaaS business on Ethereum as revenue derived from exporting ETH token value to support external ecosystems, applications, and protocols. This is a booming and unpredictable use case for ETH. To speculate how much ETH will be exported for security service fees, we look at current and past examples of cross-chain assets. Currently, the total percentage of ETH bridged from Ethereum to other networks is 0.47%,

The total supply of AToM off-chain is about 0.5%. In the past, Bitcoin was encapsulated and exported to other chains as high as 1.7%, and at the peak of Ethereum's bridging activity, more than 15% of Ethereum's USDC supply was bridged off-chain. As a starting point, let's assume that 10% of ETH will be used to provide off-chain security, and for risk premium it should command a 2x higher premium than on-chain ETH.

Ethereum Price and Revenue Objectives: Benchmarks, Bear and Bull Scenarios

In our baseline scenario, we assume Ethereum achieves $51 billion in annual revenue as of April 30, 2030. We deduct 1% validator fees and a 15% global tax rate from gross revenue, and get Ethereum's cash flow of $42.9 billion. Assuming a free cash flow multiple of 33x and a total supply of 120.7 million tokens, we arrive at a 2030 base case price target of $11,848 per token. To determine today's valuation, we discount Ethereum at a discount rate of 12%, although with the CAPM method we find a discount rate of 8.74%. We use a higher discount rate to reflect increased uncertainty about the future of Ethereum. Therefore, our base case discounted price today is $5359.71.

CAPM stands for Capital Asset Pricing Model, which is a model for estimating the relationship between risk and expected returns in capital markets. CAPM is based on portfolio theory, which assumes that investors consider risk and demand a commensurate expected return for the risk they take on their investment.

We base these estimates on the view that Ethereum will become the dominant open-source global settlement network, hosting the majority of activity in the commercial sector that has the greatest potential to benefit from migrating business functions to public blockchains. In a similar portfolio of smart contract platforms, we assume a range of call options, and the dominant platform may hold the majority of the market share.