Many people try to value layer 1 blockchain tokens like stocks.

That’s absurd.

Instead of pricing Ethereum, Solana & so on like *companies*, you should price them like *countries*.

Here’s how.

The #1 wrong way to value layer 1 tokens: earnings multiples.

Some people apply value investing framework for stocks to blockchains, and come up with price/earnings, price/sales ratios for ETH, SOL, AVAX, etc.

Unsurprisingly, these ratios look astronomically high. So high that they’d give any value investing devotee a heart attack.

Here’s the problem. Earnings are the end-all-be-all of a company’s value. But they are not of a public blockchain’s value.

If Ethereum cuts average gas fee by half tomorrow, other things equal the P/E ratio would double. Does that mean Ethereum is doubly overvalued? No. To the opposite, it’d be a boon to platform growth.

Since token holders, i.e. owners, are also users of the blockchain, the value of the chain comes from how much economic activity it supports, regardless of what percentage of that activity is captured by the platform as “profits”.

If you think of public blockchains as sovereign economic ecosystems, similar to countries, the absurdity of valuation ratios is immediately clear.

If the US doubles all tax rates, the “P/E” of US government would drop by half. But is that good for US economy? Hardly.

And structurally, in some countries government activities take up a higher share of total economy than in others. Everything else equal, China (bigger gov) would have a lower P/E than US (smaller gov). Does that tell you anything about the value of those two economies? None.

The #2 wrong way to value layer 1 tokens: discounted cash flow.

DCF is another common framework borrowed from stock valuation that is actually even more absurd.

What DCF model looks like for stocks:

This is well & good since the company’s future cashflows are in same currency, e.g. USD, as its stock price.

But the future cashflows of Solana & Ethereum are in SOL & ETH, not in USD. So you need to make up assumptions for what the exchange rate would be for every future period to arrive at a DCF denominated in USD.

What DCF model looks like for Solana:

This is completely useless as the USD/SOL exchange rate is what you were trying to calculate in the first place.

Instead of applying company valuation models, layer 1 tokens should be valued as currencies of crypto nation states.

Layer 1 tokens are a new breed of assets. They’re sorta stocks, sorta bonds, sorta currencies. But the bigger a blockchain platform gets, the more it acts like a sovereign economy & its native token a bonafide currency.

Therefore exchange rate models for currencies are more useful than stock dividend models in valuing L1 tokens.

Unfortunately when you try to evaluate exchange rate, you open a can of worms. There’re a million factors affecting relative prices of different currencies, and hundreds of frameworks & hypotheses you can write a library of books on.

But a simple & elegant framework— and arguably the closest thing to a ‘fundamentals analysis’— is the quantitative model of money.

It says:

money supply (M) · velocity of money (V) = price (P) · real GDP (Y)

Rearrange the equation & you can express the price level as:

How is this relevant for exchange rate?

Assuming outputs of any two economies are substitutable so price differences can be arbitraged away (it’s obviously not true in so many cases, but doesn’t affect our purpose here as long as it’s directionally correct), the relationship btw price levels in country A & country B is:

Example: a burger sells for 1 Euro in Germany & 1.5 dollars in US, so USD/Euro exchange rate = 1.5.

Plug this equation back into the previous equation for within-country price level & you get:

In case not clear, let

country A = US

country B = Ethereum,

you get:

What this says is ETH appreciates against USD when:

1/ ethereum GDP (Y_ETH) grows faster than US GDP (Y_US)

2/ US money supply (M_US) grows faster than ethereum money supply (M_ETH)

3/ USD money velocity (V_US) grows faster than ETH money velocity (V_ETH)

If you take this equation at face value, there should be a 1:1 relationship btw ETH price growth rate in USD terms & growth rate of US money supply. What happened to ETH price since last yr w/ large Fed balance sheet expansion is evidence to that.

But that’s not the most interesting part.

The interesting part is there should also be a 1:1 relationship btw ETH price growth rate & growth rate of Ethereum GDP, i.e. the aggregate output of Ethereum economy.

Obviously there’s no statistics bureau out there compiling “GDP” for the Ethereum nation. But a GDP growth can be indirectly inferred from growth rates of transactions, wallets, TVL, etc.

Almost every transaction involves some additional economic output being produced. Wallet growth can be thought of as an increase in “working population” of the country. And TVL increase reflects growth of financial sector in the economy.

Granted, none of these are perfect measures. But the point is they’re positively correlated w/ additional economic outputs produced on the platform.

Actual data confirms the relationship btw these variables & token/USD exchange rate.

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There’s a near linear correlation btw growth of transaction volumes on ethereum & ETH price growth: 10% growth in txn volumes translates to 13% price increase on average.

Similarly, 10% growth in the number of total wallets implies an average 7% price increase.

This one below is even more striking. The acceleration of wallet growth (i.e. growth rate of new wallets) has an almost 1:1 relationship w/ ETH price growth.

That’s not all.

Software development in virtual world is like the construction sector in real economy— a leading indicator of GDP growth. Developer activities on a layer 1 platform is arguably more telling about the economic expansion to come than transactions or wallets.

Back in May if you searched ‘ethereum’ and ‘solana’ on Github, the former returned 65x more repo results than the latter. By October the multiple had shrunk to 17x— closely tracking the fast growth of Solana nation.

All of this is NOT to say the platform’s own cashflow doesn’t matter.

It matters a lot, for the stability of a L1 token.

Governments didn’t become monopoly money issuers by accident. There have been many private currencies throughout history. But they never lasted long & were always out competed by government money.

Among many problems of private money, lack of a “fiscal anchor” is a most serious one.

Governments can protect the value of their currency through tax, which is the most stable, almost guaranteed income. Even though a fiat is “unbacked”, govs can raise resources by taxation & use those resources to buy/sell their currency to defend its value.

This is a big deal & gives confidence to currency holders.

The same couldn’t be said about non-government money, well…not until now.

W/ transaction fees programmed into every economic activity on the platform & used for token burn or staking reward, currencies of blockchain nations are achieving fiscal backings similar to currencies from governments.

While those cashflows do not pin down the token price, as we already discussed, they help keep exchange rate stable in the long run.

But what matters most for token price is still the GDP growth of a crypto nation. With metaverses only at primitive stage, we’re not even seeing the 1st inning of this growth yet.


  1. Can transactions be executed on a blockchain platform without its native token. For e.g. can a use case transaction be executed on Ethereum without Ether? Can a transaction on the platform be executed on a platform but payment done through a fiat currency?

    • Yes, there are several blockchain infrstructures which are 0 fee by default: there are no transaction fees, hence you can execute a transaction without having to buy and spend the token. Unlike Cardano which only “plans to”, such platforms have been successfully operating for years, some since 2016. Check out (steem blockchain) or (hive blockchain)

  2. Since Hedera surpassed Ethereum in total transactions, this article makes me more bullish on HBAR.

  3. Adam Saltiel Reply

    Thank you. This makes sense. You are filling in missing pieces I already realised.
    IntoTheBlock and other services track some of the data points you have mentioned.
    This isn’t finding hidden signals, it is looking for what obviously must be there e.g. number of wallets and their growth.
    You have put it very usefully in a larger political economic context by mapping to the language of the economics of nation states.

  4. Adam Saltiel Reply

    Conventionally, companies are valued on the discounted value of future earnings.
    In this piece, the measure has been discounted since future earnings are denominated in a “different” currency, which leads to a circular assessment.
    However, should the method proposed be used here to yield a “fundamental” valuation in this way?
    Are we certain this measure can be used?
    Let’s assume for the moment that it can.
    Velocity of money is a concept generally applicable to inflation, money supply and suchlike.
    In a crypto space, the number of transactions with a token are measured.
    We have the questions of how these are measured and relating to what?
    Let me put this another way.
    I just came across a report on the potential market for psychedelics.
    There are 4/5 psychedelics companies currently with much larger balance sheets than the others.
    Does that make them a potentially good investment, given the predicted growth of the market?
    What would be the value add of the market, or investing in it (what is the value add of investment)?
    I think this example is interesting because we can try to think about what would be the specific product being measured.
    Should it be abstract happiness, or “happiness” found through subsequent extensive surveys of changes in behaviour that lead to the desirable outcome of less reliance on health services?
    That would be a measurable result which would contribute to metrics concerning market penetration and competitive advantage.
    What about attention, which is bought and sold by other companies?
    With Facebook and co., it is the monetisation of eyeballs. Early internet marketeers wet dream.
    Facebook has found that since it controls the stream in and out of its garden, it can reliably charge for aggregated bags of attention that are traded on a secondary market between advertisers.
    In both of these examples velocity is measured in terms of transactions of something — with reference to other data points.
    Abstracting the term as Velocity introduces the dimensions of inflation, money supply and so on.
    However, in crypto, there are no particular rules constraining those parameters.
    In traditional finance, so long as a nation can, there would be adjustments of the constraints found in the equation
    P = (M . V)/Y
    Where Y means the ascertained GDP, for instance through the gathering of statistics, depending on the maturity of the nation concerned. Exchange rates, that determine the cost of goods in and out of that nation, form a definitive constraint.
    Therefore, where Y is unknown,
    Y = (M . V)/P and each term should have some means of being determined through measurement.
    Here, then, we must agree that “money supply (M) · velocity of money (V)” are both measurable terms.
    How are we to do this in crypto, though?
    There is a question about “how mature” these nations are, since they have different and changing rules governing this behaviour.
    Moreover, there is no one supervening crypto nation used as a reliable measure and, anyway, people ultimately need to use their crypto in dollar denominated fiat.
    The constraint on the cost of goods in and out does not seem to exist, as nothing comes in or leaves apart from through fiat on and off ramps.
    In other words, in the form of money exchange.
    From the above, we can see that crypto is actually a series of financial instruments, rather than analogous to nations.
    The real question is how such instruments are valued, whether in the crypto world or the wider world or pre-existing finance.

  5. Sinclair Davidson Reply

    Hi – really enjoyed this. Completely agree with the argument.

    I’ve been trying to reproduce your diagrams but can’t quite get there. Is your x-axis the log of the number and your y-axis the log of price? Or is the y-axis the log change in price?

    • These are partial regression charts, i.e. what’s plotted are residuals from regressing both x and y axis variables on other explanatory variables. in this case, it just means the average of both variables are taken out, since the only other explanatory var is the constant.

  6. I’m convinced. Is there a best place to buy the top 5-10 market cap level 1 public chains with US dollars, where I can also stake them? It seems, wherever I look, there are limitations. Thank you

  7. All this is too complicated. Value of a crypto token is the value NET US dollars flowing into the crypto world.( or any other fiat currency) / A particular Token in circulation.


    In other words NET FLOW Is based on Speculation Or value seeking. (investment) . if you cut out the speculation for a minute. it depends on the investment potential = Value created by the ecosystem = which in turn hopefully creates cashflows to you a as token holder.

    So key is how do you measure value created = Activity/Wallets/Services on the platform. => Adoption
    That gives you directional answer. ( up or down)

    Exact value over long therm. =.You must look Cash flows to the token token holder. ( in USD, even if it’s circular. Especially if it’s circular you can put in some equation to account for double compounding – increase in the USD/Token price * Cashflow token as result of increased activity) . That explains 10,100X gains relative to USD that’s happening in the space.

  8. Totally in agreement with your thesis. Please allow me to brag a little with a blockchain-backed statement: I posted to the steem blockchain a similar analysis in February 2019, comparing the economy of the steem eco-system with a “virtual Iceland”
    Check out
    I followed up on this in a subsequent article from March 2019 where I basically talk about NFTs before they were a thing
    Check out