L1 Valuation Puzzle: Will ETH rise 30 times?

Author: Jeff Dorman, Chief Investment Officer of Arca; Translated by: Golden Finance xiaozou

The growth of cryptocurrencies is still not understood by most people.

Last week, digital assets generally declined, but there was a lack of compelling reasons. On a positive note, the White House released a report from the President's Working Group on Financial Markets (PWG) regarding digital assets, and SEC Chairman Atkins announced the launch of the project crypto initiative, which will facilitate the on-chain liquidity of all assets and ultimately allow brokers to trade all assets on a single platform. On the negative side, the Federal Reserve kept interest rates unchanged the day before an extremely weak employment report was released, leading to an 80% expectation of a rate cut in September. Copper prices plummeted due to a reversal of tariff policies, and mixed earnings reports from tech companies triggered downward volatility in the US stock market.

The price trends of cryptocurrencies over the past 9 months have indeed attracted people's attention, but is this attention warranted? I often receive calls from financial journalists asking me to comment on certain topics. Although it can be said that this year is the most groundbreaking year in the history of digital assets, the interest of Wall Street and ordinary investors in blockchain and cryptocurrencies has also reached unprecedented heights, the topics that the media asks me to comment on have hardly changed in the past 7 years. They usually focus on the following basic themes:

"Why does Bitcoin rise (or fall)?" and "What is your target price?"

"Does this belong to the altcoin rebound?"

"Which L1 protocol (ETH, SOL, or another new favorite) will prevail?"

"Meme coin..." (I can't even be bothered to hear what the question is, because I've already heard enough)

There are also new questions like "What do Trump's policies mean? What impact does this have on TRUMP coin?"

I have never received questions about BNB - despite it being arguably one of the best tokens in history from the perspective of tokenomics and investment returns, and its issuer, Binance, being one of the most profitable and innovative companies in history. However, I have been asked multiple times about Zhao Changpeng (CZ, CEO and founder of Binance).

I have never received any questions about Hyperliquid (HYPE) — even though it may be one of the most profitable companies in history in terms of per capita profitability and one of the fastest-growing enterprises, its token issuance method is unique (through airdrops to users, without accepting any VC investment).

I have also never been asked about the question regarding Pump.fun (PUMP) — this rapidly growing company recently completed one of the largest and highest-valued ICOs in history.

I have never been asked about Aave (AAVE) - this on-chain lending protocol has a net deposit size exceeding $50 billion, making it one of the top 50 banks in the United States by deposit volume. Aave accounts for nearly 18% of the total value locked (TVL) in DeFi, with a market share close to 80% in the on-chain lending market, and holds over half of the net deposits in the DeFi sector.

Imagine if financial journalists did not report on Amazon, Google, recent IPOs, or JPMorgan, but only raised vague questions about gold, meme stocks, and the S&P 500; such reporting clearly would not capture the interest of the majority. Unfortunately, this is precisely the current state of reporting in the digital asset space. It is difficult to determine whether this stems from journalists' lack of professional competence to cover more interesting topics in the crypto field, or if the financial audience lacks interest in this content.

What makes the L1 protocol valuable?

Readers who often read my articles know that I despise the term "altcoin"—it simplifies all cryptocurrencies outside of Bitcoin into a single category. Although this term is completely outdated, its origin does have a background: "altcoin" originated in the early development of the cryptocurrency industry when there were only two categories of tokens besides Bitcoin: Bitcoin clones (like XRP, BCH, LTC, etc.) and L1 smart contract protocols (such as ETH, ADA, EOS, XLM, etc.). These tokens were indeed substitutes for Bitcoin at that time. Almost all the issues with the terminology and reporting in the current cryptocurrency industry stem from the fact that there were only these two types of tokens (Bitcoin and L1 protocols) in the early days, while the industry terminology failed to evolve to encompass the increasingly rich subdivisions, token types, and issuers we see today. The scope of digital assets has now vastly expanded, and most have nothing to do with Bitcoin, so it is truly ignorant to lump all tokens together as "altcoins."

L1 smart contract protocols are the most important infrastructure in the entire crypto space, yet they have also given rise to the most criticized phenomena in crypto investment.

It all started with the "Fat Protocol Theory"—a theory that was academically enlightening but ultimately proven completely wrong. After the successful launch of the Ethereum ETH token, this theory triggered a wave of investments from VC firms into emerging L1 smart contract protocols. Now, ten years after the first token issuance of ETH, the market is flooded with a large number of useless and overvalued L1 protocols, which have inflated market capitalizations and received massive investments from venture capital. Similar to the recently emerged Digital Asset Treasury companies (DATs), investors rarely lose when investing in new L1 protocols, so the financing frenzy for such startups shows no signs of stopping.

But have you ever asked the most basic and simple question to the investors of L1 smart contract protocol tokens?

"Why does ETH (or L1 protocol tokens) have value?"

I have raised this question multiple times, but have never received a satisfactory answer.

It is important to clarify that for anything to have value, it must possess financial value, practical value, and social value.

Most L1 protocol tokens indeed possess these three types of value simultaneously, which is a good start. Financial value comes from fees generated by network usage (Gas fees or application payments), utility value arises from the demand for asset usage (paying Gas fees, serving as collateral, or participating in staking), and social value derives from on-chain tribal culture (cool factor). Therefore, there is no doubt that L1 smart contract platform tokens do have certain value.

But how can we explain the outrageous valuations of ETH at $460 billion, SOL at $100 billion, and other L1 protocols that have almost no economic activity?

Let's start with a simple concrete analysis:

financial value

By roughly estimating the revenue situation (in US dollars) of several of the highest market cap L1 protocols, we can deduce the price-to-earnings ratio of their tokens. The historical price-to-earnings ratio of the S&P 500 index is 16 times, currently close to 24 times, while the price-to-earnings ratio of L1 protocols is generally close to 100 times their fees.

Therefore, unless you believe that trading volume and frequency will surge, or that fees will rise significantly, it is difficult to justify the rationale of holding these assets at their current valuation from a financial perspective. These tokens do have some financial value, but it is certainly not enough to support such a large market capitalization.

practical value

ETH does have utility, but aluminum is also practical yet has limited value. To create sustained demand from utility factors, the following conditions must be met: everyone must always hold a certain amount of ETH (or SOL) in their wallets for transactions or staking. However, the current reality is not so—supply in the blockchain space far exceeds demand.

Currently, there are over 200 million wallet addresses holding ETH or interacting with the Ethereum chain. It is commonly advised in the industry that users keep about 0.1 ETH in their wallets as a fee buffer (especially for ERC-20 transfers or DeFi interactions). Based on this estimate: 200 million wallets × 0.1 ETH, which means approximately 20 million ETH may be idle as Gas reserves. At the current ETH price (around $3600), this amounts to $72 billion in funds solely for paying Gas fees.

On Solana, the transaction fees are extremely low: a standard transfer costs only about 0.000005 SOL, and 0.02 SOL can support approximately 4000 transactions. Assuming around 100 million active Solana wallets each hold 0.02 SOL as a buffer, it is estimated that 2 million SOL are idle for transaction costs. Based on the current price of SOL at about 170 dollars, approximately 340 million dollars are reserved for Gas fees.

Therefore, these tokens do have a certain practical value, but it is absolutely insufficient to support such a large market value.

social value

Finally, let's look at social value. Is it cool to be part of these networks? Perhaps it was five years ago, but now every crypto project has its own L1 protocol or is building its own L1, and this halo effect has largely disappeared. While social value exists, it is gradually diminishing. However, most of the value of L1 smart contract protocols comes precisely from social value, as both financial value and utility value are relatively low compared to their market capitalizations.

Let's analyze the two largest smart contract protocols using the above segment valuation method:

If a similar analysis is conducted on all L1 protocols, the results will be similar. The financial value + practical value is far lower than the market value, which means that most of the value comes from social value (accounting for 70-80% of the token value).

Perhaps the aforementioned valuation method is too simplistic, and the value of native tokens may have other sources. After all, native tokens can become reserve currencies on the chain. For example, meme coin traders on SOL buy and sell tokens using SOL instead of USDC or other stablecoins; NFT traders use ETH. But should the values of these blockchains really reach $90 billion and $450 billion? Just because they support trends that almost no one believes are the future of blockchain? Perhaps the focus is not on current trends, but on potential future trends and use cases—no one can predict the emergence of DeFi summer, ICOs, NFTs, meme coins, or other blockchain growth engines in advance. However, those holding L1 protocol tokens as reserve currencies do benefit from the rapid rise of these trends.

Nevertheless, the core goal of blockchain is asset transfer, while 99% of global assets are stocks, bonds, and real estate. "Small-time" crypto assets like NFTs, meme coins, and even equity tokens from real crypto businesses (such as DePin and DeFi) are virtually meaningless in the grand scheme of pushing real assets onto the blockchain.

So the question arises: which blockchains will hold the most real assets in the future? Even if the Sum of the Parts (SOTP) valuation analysis shows that its valuation is too high, this chain may still be undervalued because it will achieve the fastest growth. However, the trading pairs on this chain will be stablecoins, rather than native tokens.

Blockchain clearly has value, but any objective value analysis may conclude that the current price of tokens is overvalued by 50-80%. Perhaps the fundamental reason these L1 protocols can trade at a multiplier of 100 to 1000 times the fee is that the market only compares them against BTC, rather than based on fundamental analysis. When you use an asset (BTC) that itself has no valuation model as a reference, the comparison conclusions drawn are bound to be absurd.

I have been constructing a fundamental valuation model for cryptocurrencies for nearly a decade, and no one has ever logically and coherently explained why L1 protocols are worth their current valuation. My former colleague Nick Hotz's attempt comes closest to an answer—he views L1 blockchains as nations, equating native tokens to fiat currencies. However, this approach is still not a true valuation analysis because it falls into circular reasoning (valuing ETH in terms of ETH).

Although there are slight discrepancies in the reported data regarding ETH short positions hitting a historical high (mainly due to basis trading), this phenomenon may have its underlying rationale. If market participants begin to agree with my view, L1 protocols will eventually evolve into infrastructure-based commodities similar to telephone operators.

In my personal opinion, if blockchain can truly become the ultimate transaction technology for all assets, then the total value of all L1 protocols is likely to exceed the current total market valuation. How much is the internet worth? If this analogy holds, then the totality of all blockchains indeed possesses tremendous value—though individual protocols may not. Ultimately, there may only be 1-2 winners left, so I would prefer to choose protocols valued at $1-2 billion rather than those exceeding $50 billion, as they are essentially high-risk bets, and I lean towards lower-priced chips.

But this judgment is based on my core view: 99% of global assets have not yet been on-chain, which means that the current advantages of ETH or SOL are negligible in the long term – because these on-chain assets are merely a testing phase using worthless assets.

A more optimistic answer is closely related to security. For example, Treasury Secretary Scott Bessent predicts that the scale of stablecoins will reach $3.7 trillion. How much market cap does ETH need to support a $4 trillion stablecoin market? Long-term ETH bull Tom Lee (in a private conversation) stated: "This is why I believe Goldman Sachs and JPMorgan will ultimately stake ETH—to ensure network security." Given his prediction of a 15-fold increase in stablecoins, he believes ETH will grow 30 times.

I completely agree with this analytical framework. This logic indeed holds — if you are a traditional financial institution trying to dominate the stablecoin space, you would naturally invest in L1 protocol tokens that provide the underlying security for this business.

Ironically, this is completely contrary to the "Fat Protocol Theory." The real value actually exists in the applications built on the chain, rather than in the underlying protocol itself. However, to support the development of these applications, the value of the underlying protocol will also grow.