How much is ETH really worth according to 10 valuation methods?

Written by: Eric, Foresight News

What should be the reasonable price of ETH?

The market has provided many valuation models for this issue. 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. However, it seems that the Web3 industry has not yet reached a consensus on this matter.

Recently, a website launched by Hashed presented 10 valuation models that may have relatively high market recognition. 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 classes based on reliability: low, medium, and high. We will start with the low reliability valuation models.

TVL Multiplier

The model suggests that the valuation of Ethereum should be a multiple of its DeFi TVL, linking market capitalization purely to TVL. Hashed used the average market cap to TVL ratio from 2020 to 2023 (which I personally interpret as the period from the beginning of DeFi Summer until the time when the nested schemes weren't too severe) of 7 times. By multiplying the current DeFi TVL on Ethereum by 7 and then dividing by the supply, namely: TVL × 7 ÷ Supply, the resulting price is $4128.9, indicating a potential upside of 36.5% compared to the current price.

This rough calculation method that only considers DeFi TVL and cannot accurately derive the actual TVL due to complex nesting indeed deserves low reliability.

Scarcity Premium Caused by Staking

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

This model was developed by Hashed itself, and the square root calculation is intended to mitigate extreme cases. However, according to this algorithm, ETH is always undervalued, not to mention the roughness of simply considering the reasonableness of the “scarcity” brought by staking and the additional liquidity of Ethereum from the release of staked LST, among other issues.

Mainnet + L2 TVL Multiplier

Similar to the first valuation model, this model adds up all L2 TVL and gives a 2x weighting due to L2 consumption on Ethereum. The calculation method is (TVL + L2_TVL × 2) × 6 ÷ Supply, resulting in a price of 4732.5, which indicates a 56.6% upside potential 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 though L2 is 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 similar to the second model, except that it includes Ethereum locked in DeFi protocols. The multiplier in this model represents a premium percentage derived from the total amount of staked and locked ETH in DeFi protocols divided by the total supply of ETH, reflecting a “long-term holding belief and lower liquidity supply.” After adding 1 to this percentage and multiplying it by the value premium index of “committed” assets relative to liquid assets, which is 1.5, 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, indicating a potential increase 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 above four low-reliability valuation methods is that the single dimension considered lacks rationality. For example, higher TVL data is not necessarily better; if one can provide better liquidity with a lower TVL, that is actually an improvement. As for treating Ethereum that is not in circulation as a form of scarcity or loyalty premium, it seems that it cannot explain how to value it once the price actually reaches the expected level.

Having discussed 4 types of low-reliability valuation schemes, let's take a look at 5 types of medium-reliability schemes.

Market Cap / TVL Fair Value

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

This calculation method superficially refers to TVL data, but in reality, it is based on historical patterns and adopts a relatively conservative valuation approach, which does seem more reasonable than simply relying on TVL.

Metcalfe's Law

Metcalfe's Law is a law regarding the value of networks and the development of network technologies, proposed by George Gilder in 1993, but named after Robert Metcalfe, the computer networking pioneer and founder of 3Com, in recognition of his contributions to the Ethernet. The content is: the value of a network is equal to the square of the number of nodes within that network, and 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 dollars, which has an upside potential of 231.6% compared to the current price.

This is a relatively professional model, which Hashed has labeled as an academically validated model with strong historical relevance, but still considering TVL as the sole criterion seems somewhat biased.

Discounted Cash Flow Method

The valuation model is currently the most company-like approach to valuing Ethereum, treating Ethereum's staking rewards as income, and calculating the current value through discounted cash flow method. The calculation method provided by Hashed is Price × (1 + APR) ÷ (0.10 - 0.03), where 10% is the discount rate and 3% is the perpetual growth rate. This formula is clearly problematic; it should actually be the result of the calculation when n approaches infinity, which is Price × APR × (1/1.07 + 1/1.07^2 + … + 1/1.07^n).

Using the formula provided by Hashed directly cannot yield this result. If calculated with an annual interest rate of 2.6%, the reasonable price obtained should be 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. Since the fees ultimately flow to the validators, there is no concept of price-to-earnings ratio in the network. Token Terminal adopts this method for valuation, with a 25 times valuation level being typical for growth tech stocks, which Hashed refers to 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, indicating a potential downside of 57.5% from the current price.

The above two examples demonstrate that using traditional valuation methods, the price of Ethereum is seriously overestimated. However, it is clear that Ethereum is not just an application; in the author's view, adopting such a valuation method is fundamentally flawed.

On-chain Total Asset Valuation

This valuation model appears to be nonsensical at first glance, but upon further reflection, it seems to make some sense. The core idea is that in order for Ethereum to ensure network security, its market cap should match the total value of all assets settled on it. Therefore, the calculation method of this model 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% from the current price.

This is the simplest valuation model to date, and its core assumption gives a feeling that something is off, but you can't quite put your finger on what it is.

Yield Bond Model

The only valuation model with high reliability among all valuation models, Hashed claims that this model 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 capitalization, with the formula being Annual_Revenue ÷ APR ÷ Supply, resulting in a figure of $1941.5, indicating a potential downside of 36.7% compared to the current price.

The unique 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.

The valuation of public chains 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 value of around $4,766. However, considering that the calculation of the discounted cash flow method may be flawed, the actual result may be slightly lower than this figure.

If the author were to value Ethereum, my core algorithm might revolve around supply and demand. Because Ethereum is a “currency” with practical uses, whether it's paying gas fees, purchasing NFTs, or forming LPs, ETH is required. 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 combine it with the actual transaction costs executed on Ethereum. By comparing prices under similar historical parameters, a fair price can be derived.

However, according to this method, if the growth of activity on Ethereum does not keep up with the decline in costs, there is reason for ETH's price to remain stagnant. In fact, the level of activity on Ethereum has, at certain times over the past two years, even surpassed that during the bull market of 2021. However, 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 this valuation method, which compares with history, cannot take into account is the imagination of Ethereum. Perhaps at some point, when the prosperity of DeFi reemerges on Ethereum, we will also need to account for the “market dream rate.”