South Korea's largest crypto VC says Ethereum is worth $4700, but how did they come up with that figure?

Author: Eric, Foresight News

Reprinted: White55, Mars Finance

What should be the reasonable price of ETH?

For this issue, the market has provided a wide variety of valuation models. Unlike Bitcoin, which has already existed as a major asset, Ethereum, as a smart contract platform, should be able to summarize a reasonable and recognized valuation system, but it seems that the Web3 industry has not yet reached a consensus on this matter.

Recently, a website launched by Hashed has provided 10 valuation models that may be more widely recognized by the market. Among the 10 models, 8 of them indicate that Ethereum is undervalued, with a weighted average price exceeding $4700.

So how is this price, which is close to the historical high, calculated?

From TVL to staking to income

The 10 models listed by Hashed are categorized into three types based on reliability: low, medium, and high. We will start with the low-reliability valuation model.

TVL multiplier

The model believes that Ethereum's valuation should be a multiple of its DeFi TVL, linking market capitalization purely to TVL. Hashed adopted the average market cap to TVL ratio from 2020 to 2023 (personally understood as the period from the beginning of DeFi Summer to when the situation with the Ponzi schemes was not too severe), which is 7 times. By multiplying the current DeFi TVL on Ethereum by 7 and then dividing by the supply, that is: TVL × 7 ÷ Supply, the resulting price is $4128.9, which indicates a potential increase of 36.5% from the current price.

This rough calculation method that only considers DeFi TVL and cannot accurately derive the actual TVL due to the complexity of nested dolls indeed deserves low reliability.

Staking-induced scarcity premium

The model takes into account that the Ethereum that cannot circulate in the market due to staking will increase Ethereum's “scarcity”. By multiplying the current price of Ethereum by the square root of the ratio of total supply to circulating supply, i.e., Price × √(Supply ÷ Liquid), the resulting price is 3528.2, indicating a potential increase of 16.6% compared to the current price.

This model is developed by Hashed itself, and the square root calculation is intended to mitigate extreme situations. However, according to this algorithm, ETH will always be undervalued, not to mention the roughness of purely considering the rationality of the “scarcity” brought by staking and the additional liquidity of Ethereum from the release of staked LST.

Mainnet + L2 TVL multiplier

Similar to the first valuation model, this model adds the total TVL of all L2s and gives a 2x weighting due to L2's consumption of Ethereum. The calculation method is (TVL + L2_TVL × 2) × 6 ÷ Supply, resulting in a price of 4732.5, which has an upside potential of 56.6% compared to the current price.

As for the number 6, although it is not explained, it is likely a multiplier derived from historical data. Even with L2 taken into account, this valuation method still purely references TVL data and is not significantly better than the first method.

“Commitment” Premium

This method is also similar to the second model, except that it adds the Ethereum locked in the DeFi protocol. The multiplier in this model represents a premium percentage brought about by a 'long-term holding belief and lower liquidity supply,' calculated by dividing the total amount of staked and locked ETH in the DeFi protocol by the total supply of ETH. After adding 1 to this percentage and multiplying it by the 'commitment' asset's value premium index of 1.5 relative to liquid assets, we arrive at a reasonable ETH price under this model. The formula is: Price × [1+(Staked + DeFi) ÷ Supply]× Multiplier, resulting in a price of $5097.8, which indicates an upside potential of 69.1% compared to the current price.

Hashed indicates that the model is inspired by the concept that L1 tokens should be viewed as currency rather than stocks, but it still falls into the issue of reasonable prices always being higher than the current price.

The biggest problem with the four low-reliability valuation methods mentioned above is the lack of rationality due to their single-dimensional consideration. For example, higher TVL data is not necessarily better; achieving better liquidity with a lower TVL could actually be seen as progress. As for viewing Ethereum that is not in circulation as a form of scarcity or loyalty premium, it seems to fail to explain how to value it once the price actually reaches the expected level.

After discussing 4 low-reliability valuation schemes, let's take a look at 5 moderately reliable schemes.

Market Cap / TVL Fair Value

The model is essentially a mean reversion model, which calculates by assuming that the historical average level of the market cap to TVL ratio is 6 times. If it exceeds this, it is considered overvalued, and if not, it is undervalued. The formula is Price × (6 ÷ Current Ratio), resulting in a price of $3541.1, indicating a potential upside of 17.3% compared to the current price.

This calculation method appears to reference TVL data on the surface, but in reality, it refers to historical patterns and uses a more conservative valuation approach, which indeed seems more reasonable than simply referencing TVL.

Metcalfe's Law

Metcalfe's Law is a law concerning the value of networks and the development of network technologies, proposed by George Gilder in 1993, but named after the surname of Robert Metcalfe, a pioneer of computer networking and founder of 3Com, in recognition of his contributions to Ethernet. The content states that the value of a network is equal to the square of the number of nodes within that network, and that the value of the network is proportional to the square of the number of connected users.

Hashed indicates that the model has been empirically validated by academic researchers (Alabi 2017, Peterson 2018) for Bitcoin and Ethereum. Here, TVL is used as a proxy indicator for network activity. The calculation formula is 2 × (TVL/1B)^1.5 × 1B ÷ Supply, resulting in a price of 9957.6 USD, which has an upside potential of 231.6% compared to the current price.

This is a relatively professional model, also marked by Hashed as an academically validated model with strong historical relevance, but still considering TVL as the sole criterion seems a bit biased.

Discounted Cash Flow Method

This valuation model is currently the most comprehensive way of viewing Ethereum as a company, treating Ethereum's staking rewards as income and calculating its current value through discounted cash flow. Hashed provides the calculation method as Price × (1 + APR) ÷ (0.10 - 0.03), where 10% is the discount rate and 3% is the perpetual growth rate. This formula is obviously problematic; the actual calculation should be the result of Price × APR ×(1/1.07 + 1/1.07^2 + … + 1/1.07^n) as n approaches infinity.

The formula provided by Hashed cannot be used to calculate this result. If calculated with an annual interest rate of 2.6%, the reasonable price that should be obtained is around 37% of the current price.

Valuation by Price-to-Sales Ratio

In Ethereum, the price-to-sales ratio refers to the ratio of market capitalization to annual transaction fee revenue. Because the fees ultimately flow to validators, there is no concept of price-to-earnings ratio in the network. Token Terminal uses this method for valuation, with 25 times being the valuation level for growth tech stocks, and Hashed refers to it as the “industry standard for L1 protocol valuation.” The calculation formula for this model is Annual_Fees × 25 ÷ Supply, resulting in a price of $1285.7, which has a 57.5% downside from the current price.

The above two examples show that using traditional valuation methods, the price of Ethereum is severely overestimated. However, it is clear that Ethereum is not merely an application; using this valuation method is, in the author's view, fundamentally flawed.

On-chain total asset valuation

This valuation model seems nonsensical at first glance, but upon further thought, it appears to have some merit. The core idea is that if Ethereum wants to ensure network security, it should have its market value align with the total value of all assets settled on its platform. Therefore, the model's calculation method is quite simple: it divides the total value of all assets on Ethereum, including stablecoins, ERC-20 tokens, NFTs, etc., by the total supply of Ethereum. The result is $4923.5, indicating a potential upside of 62.9% compared to the current price.

This is the simplest valuation model calculated so far, and its core assumption gives one the feeling that something is off but cannot quite pinpoint what is wrong.

Yield Bond Model

The only valuation model with high reliability among all valuation models is one that Hashed claims is favored by TradFi analysts who assess cryptocurrencies as an alternative asset class, which values Ethereum as a yield-bearing bond. The calculation method is to divide Ethereum's annual revenue by the staking yield to calculate the total market value, with the formula being Annual_Revenue ÷ APR ÷ Supply, resulting in a figure of $1941.5, indicating a 36.7% downside from the current price.

The only one, possibly considered a highly reliable valuation model due to its widespread adoption in the financial sector, has become yet another example of Ethereum's price being “undervalued” through traditional valuation methods. Therefore, this could be strong evidence that Ethereum is not a security.

Valuation of public blockchains may need to consider multiple factors.

The valuation system of public chain tokens may need to consider various factors, and Hashed has weighted the above 10 methods based on reliability, resulting in an approximate figure of around 4766 dollars. However, given that the calculation of the discounted cash flow method may be incorrect, the actual result may be slightly lower than this number.

If I were to value Ethereum, my core algorithm might be based on supply and demand. Since Ethereum is a “currency” with practical uses, whether it is for paying Gas fees, purchasing NFTs, or forming LPs, ETH is needed. Therefore, it may be necessary to calculate a parameter that can measure the supply and demand relationship of ETH over a certain period based on the level of network activity, and then, in conjunction with the actual transaction costs on Ethereum, compare the price under historically similar parameters to arrive at a fair price.

However, according to this method, if the growth in activity on Ethereum does not keep pace with the decrease in costs, there is reason for ETH's price to stagnate. In fact, in the past two years, the activity level on Ethereum has sometimes surpassed that of the bull market in 2021, but due to the decline in costs, the demand for Ethereum has not been high, resulting in an actual oversupply of Ethereum.

However, the only aspect that cannot be taken into account with this valuation method compared to history is the imagination of Ethereum. Perhaps at some point when the glory of DeFi's rise is once again witnessed on Ethereum, we will still need to ride on the “market dream rate.”