Traditional approaches to blockchain network valuation often fall into the trap of treating blockchain networks as businesses and using formulas designed to calculate fair stock prices based on very narrow considerations. This approach is fundamentally flawed.
Blockchains, and especially smart contract platforms like Ethereum, are not businesses. As I explained in a previous article, they are emerging, sovereign digital economies with their own reserve currencies. These currencies not only serve their native networks, but can also play the role of store of value (SoV), unit of account (UoA), and medium of exchange "overseas" - in the case of $ETH, its role is not limited to the original mainnet, but also permeates and becomes the reserve currency in multiple extended networks (L2) that fall within their monetary jurisdiction and even thrive outside of these borders (similar to how the US dollar operates today).
In addition, proof-of-stake blockchains (POS) introduce a mechanism similar to bonds, where participants pledge assets to protect the network in exchange for future returns. These dynamics reflect the structure of the nation-state economy, with financial instruments supporting its national defense and current and future operational stability.
In other words, smart contract-based blockchain networks like Ethereum are becoming emerging network nations - digital nations, which are not only manifested through technology stacks, but also through monetary jurisdictions and reserve currencies, shared values and beliefs, shared history and culture, and sometimes even foundational myths.
Gross Decentralized Product
To address the need for a more appropriate valuation framework for these emerging digital economies, we propose Gross Decentralized Product (GDP), an approach that captures not only the total amount of money, but also the economic activity of blockchain ecosystems. Unlike the gross domestic product (GDP) of traditional economies, GDP covers a wider range: it considers the economic activity generated within the ecosystem and monetary base, as well as the market value of protocols, decentralized applications, and cultural assets built on a specific blockchain.
The theoretical basis behind this expanded framework lies in the paradigm shift that blockchain economies represent. Although these ecosystems have similarities to traditional national economies, they are fundamentally different in that every aspect of the economy becomes liquid and has some degree of monetary nature. In this paradigm, output and factors of production are not just components of the economy, they also become forms of “money” that can be traded and monetized on-chain.
Therefore, the most effective way to invest in such blockchain economies is through their native currencies. These currencies, with a programmatically set supply cap, underpin all economic activity on the blockchain. Their value is closely tied to the growth of the system, as reflected in rising market capitalization. Over time, the native assets of the most successful blockchain economies will accrue a monetary premium and become the most primitive form of collateral in their ecosystems, gaining the status of store of value (SoV) reserve assets in the wider crypto space and even the real world.
Below, we outline the key metrics that make up this framework, using Ethereum and other leading blockchain networks as examples.
ℹ️ All data used in this article is from Token Terminal, DeFiLlama, and NFT Price Floor, as of November 26, 2024.
Market capitalization: measuring monetary sovereignty
The market capitalization of a blockchain’s native currency serves as a proxy for its monetary base and economic size, similar to how the U.S. M2, M3, and M4 supply does for the dollar. As mentioned earlier, sometimes the monetary base is not limited to the blockchain’s mainnet, as its native currency becomes a reserve for a range of network expansions (such as ETH’s L2s/L3s), and even on other blockchains outside the same monetary jurisdiction, these assets can be transferred through bridges. It is important to note again that since the monetary base (supply) of a blockchain cannot be increased at will, the phenomenon we observe is that both when its native economy expands and when its native currency transcends its own network boundaries and colonizes foreign economies, it is the increase in its fiat value that maintains and supports economic growth. This is why every time we mention the monetary base, we are referring to the market capitalization.
If we take the simplest monetary totals (M1/M2) as an indicator, the top blockchain economies are:
BTC: $1820 billion
ETH: $400 billion
SOL: $108 billion
BNB: $90 billion
TRON: $16 billion
Including LST and LRT tokens here, it’s like measuring the M3 of smart contract-based blockchain economies. Or M4 money supply. In the case of ETH, M1/M2 is $420 billion, M3 is $467 billion (LST), and M4 is $481 billion (LST + LRT).
Total Value Locked (TVL): Capital Utilization in DeFi
TVL measures the value of assets locked in decentralized finance (DeFi) protocols. Critics question its utility, but it remains a strong indicator of active economic activity on the blockchain. For decentralized economies, this metric is akin to tracking the size of financial intermediation activity in a national economy. Not only that, it also illustrates the reliability and security of a currency jurisdiction, and its ability to attract investors who want to not only make short-term transactions, but also want to store their wealth for longer periods of time.
Top blockchain economies by TVL:
ETH: $66.6 billion
SOL: $9.25 billion
TRON: $8 billion
BNB: $5.5 billion
BTC: $4.4 billion
L1 Transaction Fees: Revenue from Economic Activity
The fees generated by a blockchain reflect how much users value accessing its services. These fees represent "tax revenue" for the blockchain and are directly factored into its GDP. Having a strong and sustainable fee market is fundamental, and it must strike the perfect balance in order to provide global accessibility to users and protocol/application deployers, maintain operational stability and network security, while ideally offsetting currency issuance. Otherwise, you may end up with a dysfunctional system like we see in debt-ridden economies today.
Top blockchain economies by annual fee revenue:
ETH: $2.6 billion
TRON: $1.87 billion
BTC: $1.23 billion
SOL: $590 million
BNB: $191 million
For the purposes of this calculation, we’ve ignored REV because a) it’s not a protocol enforced at the mainnet level, and b) while not all forms of MEV All are extremely harmful to users, but many forms are, and there is reason to think they will gradually trend towards 0, and most will be captured by applications that try to return it to users who offer more favorable rates.
Stablecoins: Foreign Capital and Currency Integration
Stablecoins represent foreign capital in the blockchain economy. Similar to TVL (total locked value), stablecoins are an important indicator of the ability of blockchains to attract foreign capital, in other words, how blockchains introduce real world assets (RWA). Among the major blockchains, Ethereum dominates, with $101 billion hosted on its mainnet and another $10 billion on Layer 2.
Stablecoin holdings by blockchain:
While not a stablecoin or real-world asset (RWA), a wrapped version of BTC (e.g. WBTC and cbBTC) can also serve as interesting indicators of foreign investment attraction for smart contract-based blockchain economies. In this context, Ethereum stands out as the most dynamic economy, hosting $15 billion worth of wrapped Bitcoin in its mainnet and layer 2 ecosystem.
Protocols, Applications, and NFTs: Infrastructure and Culture of the Economy
In blockchain economies, protocols, applications, and NFTs play a similar role to the industrial and cultural sectors in traditional economies. Protocols and applications are the infrastructure and factories that drive value creation, including decentralized finance (DeFi), social finance (SocialFi), decentralized scientific research (DeSci), etc. On the other hand, NFTs represent the cultural, entertainment, and media industries, a key component of the soft power of blockchain networks, because as we said in the previous article, culture is an integral part of their influence and identity.
Ethereum dominates both areas, with the total value of fungible tokens (excluding stablecoins and liquidity staking tokens) at approximately $110 billion and the total value of NFTs at $4.1 billion. This highlights Ethereum's leadership at both the economic and cultural levels.
ETH: homogeneous assets approximately $110 billion, non-homogeneous assets approximately $4.1 billion
SOL: fungible assets approximately $18 billion, non-fungible assets approximately $100 million
BTC: non-fungible assets approximately $500 million
Data is based on the top 100 cryptocurrencies by market cap ranked by CoinGecko and the top 50 NFTs ranked by NFT Price Floor.
Protocol and Application Fees: Economic Activity of Firms in the Blockchain Economy
To further deepen our understanding of blockchain economic activity, we analyzed the fees generated by the top protocols and applications hosted on each blockchain. This metric serves as a proxy for the economic output of companies and organizations operating in these ecosystems, similar to the contribution of firms to a country’s GDP.
Ethereum leads the pack with $6 billion in fees generated by its top protocols, reflecting its position as the most mature and diverse blockchain economy. It is followed by Solana and BNB Chain, which have fairly active activity but are smaller in size.
Fee estimates for the top 50 protocols and applications in the blockchain economy:
ETH: ~$6 billion
SOL: ~$1.95 billion
BNB: ~$300 million
These figures also take into account the share of fees generated by the top stablecoin issuers operating on each blockchain. Given the large volume of transactions involving stablecoins across various protocols, stablecoin issuers such as Tether (USDT) and Circle (USDC) make a significant contribution to the overall fee base.
By incorporating this metric into our decentralized total product framework, we gain deeper insights into the economic vitality of blockchain ecosystems and the level of corporate activity they host.
By combining these metrics, the concept of decentralized total product provides a more comprehensive way to measure the blockchain economy. It highlights the blockchain economy’s complexity, breadth, and potential for global economic integration.
Determining how to measure and integrate the different metrics that make up the blockchain economy’s GDP is a task for future professional economists. For now, we can simply roll up the numbers to compare the two largest smart contract-based blockchain economies: ETH: 1) $400 billion + 2) $66.6 billion + 3) $2.6 billion + 4) $101 billion / $110 billion + 5) $114 billion + 6) $6 billion = $700 billion SOL: 1) $108 billion + 2) $9.25 billion + 3) $590 million + 4) $4.65 billion + 5) $18 billion + 6) $1.95 billion = $142.5 billion Ethereum, the largest and most diverse smart contract-based decentralized economy, is strong in monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural influence. The total value of the Ethereum economy (excluding monetary base) is $300 billion, and its ratio of monetary base to total value is 1.33. Due to $ETH's "triple attribute asset" characteristics and its ability to penetrate "external" blockchain networks, the comparison with the US economy requires reference to the ratio of M3/GDP or M4/GDP, which is currently between 1.2 and 1.5.
As blockchain networks continue to grow, a GDP-like framework will help investors, policymakers, and developers better understand their true value as digital sovereign economies. At the same time, indicators such as the Gini coefficient and the Economic Diversity Index may also be of great value in assessing the economic health and future potential of these ecosystems. It is important to emphasize that this is not about determining the fair value of a company's shares, but about how to fully participate in the entire blockchain economy.
Let's take the US economy in the 1940s, when the economy was booming. How could investors at that time gain broad exposure to "the US market"?
These options may include:
US dollars: for liquidity and reserve currency exposure.
Treasury bonds: Before the emergence of the petrodollar in 1971, Treasury bonds were only debt instruments and had not yet become a global store of value.
Stocks:For growth-oriented returns.
Art:New York gradually became the center of world art.
As we have seen, exposure to traditional economies involves investing in a variety of assets that ultimately perform differently depending on macroeconomic conditions: the dollar may strengthen in times of uncertainty, bonds provide safety in economic downturns, and stocks thrive in times of expansion.
Getting Exposure to the Blockchain Economy
In an economy built on smart contracts (using Ethereum as an example), the native currency offers a unique advantage as a triple-attribute asset: it simultaneously acts as a reserve currency, a store of value, and a bond (when staked). Rather than having to own a carefully configured portfolio of assets with different characteristics, a single asset (like $ETH) provides integrated exposure to the entire blockchain economy.
This streamlined approach simplifies investment decisions while aligning incentives with the growth and security of the network. You can also add a basket of native DeFi protocols and blue-chip NFTs from the blockchain economy, and you’re all set!
Applying the GDP Model to Estimate the Future Value of the Blockchain Economy
As we’ve emphasized throughout this article, blockchain native currencies should not be valued using frameworks designed for joint-stock companies. Blockchain economies are more easily understood and assessed as the digital counterparts of traditional nation-states, which emerged after the Treaty of Westphalia — around the time when joint stock companies began to emerge. Similar to traditional nation-states, blockchain economies are in a constant state of competition for capital, security, and human resources (i.e., developers, users, and settlers in general). This is exactly what the crypto-Twitter mentality instinctively recognizes — hence the tribalism and maximalism. It’s human nature: when a community feels threatened, its immune system kicks in to protect an idea, a technology, or a set of values that are deemed valuable.
It’s important to note that while blockchain economies have some similarities to traditional nation-states, they represent an entirely new paradigm. In these ecosystems, the boundaries between finance and other economic sectors blur to the point where everything: even art, entertainment, and attention, is monetized to some degree. This fluid nature makes it difficult to distinguish the monetary base from the GDP it represents. However, the traditional economy remains our closest reference point and provides a benchmark for projecting the growth of blockchain economies.
Now, as a thought experiment, let’s imagine what this would mean for the price of ETH if Ethereum’s growth story could rival the most extraordinary rise of nation-states in the past century. Ethereum’s current economy (excluding monetary base) is $300 billion, which is roughly the size of China’s economy in 1986. It took China about 30 years to grow its GDP to $18 trillion, a figure equivalent to the current market value of gold. China’s economic growth has been extraordinary, and a rare feat for an economy of its size. But it’s interesting to imagine a world in which a cyber-state like Ethereum is able to replicate this unprecedented rate of economic growth.
While this comparison may already surprise you, in my opinion, there are real reasons why leading blockchain economies do rival the performance of modern nation-states:
Assuming that cyber-states flourish, Ethereum consolidates its dominance in the hyper-expansive DeFi and AI sectors, and the final bull case scenario plays out, the total economic value of the Ethereum network reaches $18 trillion by 2054, matching China’s trajectory over the past 30 years! Under this assumption, how would we apply the GDP model to calculate the price of ETH?
If we take a conservative Monetary Base/Total Value ratio of 1.2 (similar to the current US M3/GDP ratio), Ethereum’s market cap would be $21.6 trillion, resulting in an ETH price of $180,000 (not accounting for potential monetary base deflation due to fee burning). However, if we consider the possibility of Ethereum transcending its native ecosystem, similar to the dollar becoming ubiquitous through the Eurodollar system, it could achieve a Monetary Base/Total Value ratio of 1.5 (comparable to the US M4/GDP ratio). In this case, Ethereum’s market cap would be $27 trillion, equivalent to an ETH price of $225,000.
Now, this is not an ETH price prediction or financial advice of any kind, but it is certainly interesting to think about how the GDP framework can provide a powerful lens through which to understand blockchain economies, revealing what they really look like as emerging digital nations or economies. This framework also highlights that, just like traditional national economies, multiple dimensions must be evaluated before making investment decisions.
In this framework, the case for investing in Ethereum lies in its position as the most dynamic and diversified blockchain economy, with an ecosystem covering a wide range of areas from financial services to cultural products, which not only gives it strong hard power but also establishes significant soft power. This is further demonstrated by Ethereum's ability to attract and retain "sticky capital", a signal that despite short-term price fluctuations, investors still regard it as the safest and most promising smart contract-based economy for long-term wealth preservation.
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