The L1 valuation puzzle: Will ETH increase 30 times?

Author: Jeff Dorman, Chief Investment Officer, Arca; Translation: Jinse Finance xiaozou

Cryptocurrency's growth remains largely unappreciated

Last week, digital assets generally declined, but without compelling reasons. On the positive side, the White House released the report of the Presidential Working Group (PWG) on Digital Asset Markets, and SEC Chairman Atkins announced the launch of Project Crypto, an initiative that 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 held interest rates steady the day before an extremely weak jobs report, causing market expectations of a September rate cut to rise to 80%. Copper prices plummeted due to the reversal of tariffs, and mixed earnings reports from tech companies triggered downward volatility in US stocks.

Cryptocurrency price action over the past nine months has certainly attracted attention, but is this attention warranted? I frequently receive calls from financial journalists asking me to comment on certain topics. Despite arguably the most groundbreaking year in the history of digital assets, with Wall Street and Main Street investors showing unprecedented interest in blockchain and cryptocurrencies, the topics the media asks me to comment on have remained largely unchanged over the past seven years. They typically focus on a few basic themes: "Why is Bitcoin going up (or down)?" and "What's your price target?" "Is this an altcoin rally?" "Which L1 protocol (ETH, SOL, or another new favorite) will win?" "Memecoins..." (I don't even bother to hear the question because I'm tired of it) and the ever-popular "What do Trump's policies mean? How will this affect TRUMP coin?" I've never received a question about BNB—even though it's arguably one of the best tokens ever in terms of tokenomics and ROI, and its issuer, Binance, is one of the most profitable and innovative companies ever. However, I've been asked numerous times about Changpeng Zhao (CZ, Binance CEO and Founder). I've never received a question about Hyperliquid (HYPE)—even though it's arguably one of the most profitable companies per capita ever, one of the fastest-growing, and its token launch was unique (an airdrop to users, no VC investment). I've also never been asked about Pump.fun (PUMP), an equally fast-growing company that recently completed one of the largest and most valuable ICOs in history. I've never been asked a question about Aave (AAVE)—an on-chain lending protocol with over $50 billion in net deposits, placing it among the top 50 US banks in terms of deposit volume. Aave accounts for nearly 18% of DeFi's total value locked (TVL), nearly 80% of the on-chain lending market, and holds over half of DeFi's net deposits. Imagine if financial journalists didn't cover Amazon, Google, recent IPOs, or JPMorgan Chase, and instead only asked general questions about gold, meme stocks, and the S&P 500. Such coverage would clearly be uninteresting to most people. Unfortunately, this is the current state of digital asset reporting. It's hard to tell whether this stems from journalists lacking the expertise to cover the more interesting topics in crypto or a lack of interest among financial audiences. What makes L1 protocols valuable? Regular readers of my articles know that I loathe the term "altcoin"—it simplifies all cryptocurrencies other than Bitcoin into a single category. While the term is completely outdated, it does have a history: "altcoin" dates back to the early days of the crypto industry, when only two types of tokens existed besides Bitcoin: Bitcoin clones (such as XRP, BCH, and LTC) and Layer 1 smart contract protocols (such as ETH, ADA, EOS, and XLM). These tokens were indeed alternatives to Bitcoin at the time. Almost all of the problems with current crypto terminology and reporting stem from this early focus on just these two categories (Bitcoin and Layer 1 protocols), while the terminology has failed to evolve to encompass the increasingly diverse range of sectors, token types, and issuers. The scope of digital assets is now far broader, and most have nothing to do with Bitcoin, so lumping all tokens together as "altcoins" is ignorant. Layer 1 smart contract protocols are the most crucial infrastructure in the entire crypto space, yet they've also spawned one of the most criticized phenomena in crypto investing. It all started with the "fat protocol theory"—an academically insightful theory ultimately proven completely wrong. Following the success of Ethereum's ETH token, this theory sparked a wave of VC investment in emerging Layer 1 smart contract protocols. Now, a decade after ETH's initial coin offering (ICO), the market is flooded with useless and overvalued Layer 1 protocols, boasting inflated market capitalizations and garnering massive amounts of venture capital investment. Similar to the recent surge in digital asset treasuries (DATs), investors rarely lose money when investing in new Layer 1 protocols, prompting a continued fundraising frenzy for these startups. But have you ever asked investors in Layer 1 smart contract tokens the most basic and simple question? "Why does ETH (or L1 protocol tokens, for that matter) have value?" I've asked this question many times, but I've never received a satisfactory answer. To be clear, for anything to have value, it must possess financial value, utility value, and social value. Most L1 protocol tokens do possess all three, which is a good start. Financial value derives from fees generated by network usage (gas fees or application payments), utility value derives from demand for the asset (paying gas fees, serving as collateral, or participating in staking), and social value derives from on-chain tribal culture (the cool factor). So, there's no doubt that L1 smart contract platform tokens do have some value. But what about the ridiculously high valuations of ETH at $460 billion, SOL at $100 billion, and other L1 protocols with virtually no economic activity? Let's start with a simple, concrete analysis: Financial Value By roughly estimating the revenue (in USD) of the largest L1 protocols by market capitalization, we can deduce the P/E ratios of their tokens. The S&P 500 has a historical P/E ratio of 16x and currently trades closer to 24x, while L1 protocols typically trade at multiples closer to 100x fees. Therefore, unless you believe that transaction volume and frequency will surge, or fees will rise significantly, it's difficult to justify holding these assets at current valuations from a financial perspective. These tokens do have some financial value, but it's definitely not enough to justify such large market capitalizations. ETH is indeed practical, but aluminum is also practical but has limited value. For practicality to create sustained demand, the following condition must be met: everyone must always hold a certain amount of ETH (or SOL) in their wallet for transactions or staking. However, this is not the case today—the supply of blockchain space far exceeds demand. Currently, there are over 200 million wallet addresses holding ETH or interacting with the Ethereum chain. The industry generally recommends that users maintain a fee buffer of approximately 0.1 ETH in their wallets (especially for ERC-20 transfers or DeFi interactions). Based on this estimate: 200 million wallets x 0.1 ETH, approximately 20 million ETH may be idle as a gas reserve. At the current ETH price (approximately $3,600), this equates to $72 billion in funds solely used to pay gas fees. On Solana, transaction fees are extremely low: a standard transfer costs only approximately 0.000005 SOL, and 0.02 SOL can support approximately 4,000 transactions. Assuming that approximately 100 million active Solana wallets each maintain a 0.02 SOL buffer, an estimated 2 million SOL are idle and used for transaction costs. At the current price of SOL of approximately $170, approximately $340 million in funds are reserved for gas fees. Therefore, these tokens do have some utility value, but it's definitely not enough to support such a massive market capitalization. Finally, let's consider social value. Is it cool to be a part of these networks? Perhaps five years ago, it was, but now that every crypto project has its own L1 protocol or is building one, that halo effect has largely disappeared. While social value exists, it's gradually waning. However, the majority of the value of L1 smart contract protocols comes precisely from social value, as both financial and utility value are relatively low relative to their market capitalization. Let's use the above valuation by parts approach to analyze two of the largest smart contract protocols: A similar analysis of all L1 protocols yields similar results. The combination of financial value and utility value is significantly lower than market capitalization, implying that the majority of value comes from social value (70-80% of the token value). Perhaps the above valuation by parts approach is too crude, as the value of the protocol's native token may stem from other sources. After all, the native token serves as the on-chain reserve currency. For example, memecoin traders on SOL use SOL to buy and sell tokens, not USDC or other stablecoins; NFT traders use ETH. But should these blockchains really be worth $90 billion and $450 billion respectively, simply because they support transactions that few believe are the future of blockchain? Perhaps the focus isn't on current trends, but on future trends and use cases—no one could have predicted the DeFi summer, ICOs, NFTs, memecoins, or other blockchain growth engines. However, those who hold these L1 protocol tokens as reserve currencies have benefited from the rapid rise of these trends.

Nevertheless, the core purpose of blockchain is asset transfer, and 99% of the world's assets are stocks, bonds, and real estate. "Small-ticket" crypto assets like NFTs, memecoins, and even equity tokens for real-world crypto businesses (like DeFi and DeFi) are virtually insignificant in the grand scheme of things, pushing real assets onto blockchains.

The question, then, is: which blockchains will host the most real-world assets in the future? Even if a parts-of-the-parts valuation (SOTP) analysis shows it's overvalued, this chain may still be undervalued because it will experience the fastest growth. However, trading pairs on this chain will be stablecoins, not native tokens. Blockchains clearly have value, but any objective valuation analysis would likely conclude that the tokens are currently overvalued by 50-80%. Perhaps the fundamental reason these L1 protocols trade with fee multipliers of 100x to 1000x is that the market compares them solely to BTC, rather than based on fundamental analysis. When you use an asset (BTC) without its own valuation model as a reference, the resulting comparison is inevitably absurd. I've been developing fundamental valuation models for crypto tokens for nearly a decade, and no one has yet come up with a coherent explanation for why L1 protocols deserve their current valuations. My former colleague Nick Hotz's attempt came closest—he treated L1 blockchains like countries, equating their native tokens with fiat currencies. However, this approach still falls short of true valuation analysis because it falls into a circular logic (valuing ETH in ETH units). While there are slight discrepancies in the reported data regarding record highs in ETH short positions (primarily due to basis trades), there may be underlying rationale for this phenomenon. If market participants begin to agree with my view, L1 protocols will eventually evolve into infrastructure commodities similar to telephone carriers. In my opinion, if blockchain truly becomes the ultimate transaction technology for all assets, the combined value of all L1 protocols is likely to exceed current market valuations. How valuable is the internet? If this analogy holds true, then the sum of all blockchains is indeed enormously valuable—but most individual protocols may not be. Ultimately, there will likely be only one or two winners, so I'd rather choose protocols valued at $1-2 billion than those over $50 billion. After all, they're inherently high-risk bets, and I prefer lower-priced options. However, this judgment is based on my core view: 99% of the world's assets are off-chain, meaning the current advantages of ETH or SOL are negligible in the long run—because these on-chain assets are just testing phases using worthless assets. A more optimistic answer is closely tied to security. For example, Treasury Secretary Scott Bessent predicts a $3.7 trillion stablecoin market. How large would ETH's market cap need to support a $4 trillion stablecoin market? Perpetual ETH bull Tom Lee stated (in private communication): "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-fold. I completely agree with this analytical framework. The logic is valid—if you're a traditional financial institution aiming to dominate the stablecoin space, you'll naturally invest in the L1 protocol tokens that provide the underlying security for this business. Ironically, this completely contradicts the "fat protocol theory." The real value lies in the applications built on the chain, not the underlying protocol itself. However, to support the development of these applications, the value of the underlying protocol will also increase.