How much is ETH worth based on 10 valuation methods?

Written by: Eric, Foresight News

What should be the reasonable price of ETH?

For this issue, the market has provided a lot of valuation models. Unlike Bitcoin, which exists 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 provided 10 possible valuation models that may be highly recognized in the market. Among the 10 models, the calculations of 8 models indicated 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 adopted the average value of the market cap to TVL ratio from 2020 to 2023 (which I personally interpret as the period from the start of DeFi Summer until the situation with Ponzi schemes was not too serious) of 7 times. By multiplying the current DeFi TVL on Ethereum by 7 and then dividing by the supply, i.e., TVL × 7 ÷ Supply, the calculated price is $4128.9, which has a 36.5% upside potential compared to the current price.

This rough calculation method, which only considers DeFi TVL and cannot accurately derive the actual TVL due to the complexity of nested structures, truly 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 the “scarcity” of Ethereum. By multiplying the current price of Ethereum by the square root of the ratio of total supply to circulation, 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 open calculation is intended to weaken extreme situations. However, according to this algorithm, ETH is always undervalued, not to mention the roughness of purely 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 all L2's TVL with a doubled weighting due to the consumption of Ethereum by L2. 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 included, this valuation method still merely 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 the Ethereum locked in DeFi protocols. The multiplier in this model represents a premium percentage brought about by a “long-term holding belief and lower liquidity supply,” derived from the total amount of staked ETH and ETH locked in DeFi protocols divided by the total ETH supply. By adding 1 to this percentage and then multiplying it by the “commitment” asset's value premium index of 1.5 relative to liquid assets, we ultimately derive a reasonable ETH price under this model. The formula is: Price × [1+(Staked + DeFi) ÷ Supply]× Multiplier, resulting in a price of $5097.8, which has 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 stock, but it still falls into the problem where the reasonable price is always higher than the current price.

The biggest problem with the above four low-reliability valuation methods is that the consideration of a single dimension lacks rationality. For example, higher TVL data is not necessarily better; it can actually be an improvement if better liquidity can be provided with a lower TVL. As for viewing Ethereum that is not in circulation as a kind of scarcity or loyalty that generates a premium, it seems unable to explain how to value it once the price actually reaches the expected level.

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

Market Cap / TVL Fair Value

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

This calculation method seemingly refers to TVL data, but in reality, it is based on historical patterns and employs a more conservative valuation approach, which appears to be more reasonable than simply referencing TVL.

Metcalfe's Law

Metcalfe's Law is a principle regarding 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 networks and founder of 3Com, to honor his contributions to the 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 it still seems biased to consider TVL as the sole criterion.

Discounted Cash Flow Method

This valuation model is currently the most comprehensive way to view Ethereum as a company, treating Ethereum's staking rewards as income and calculating its present value using the discounted cash flow method. Hashed's calculation method 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 flawed; it should actually be calculated as Price × APR × (1/1.07 + 1/1.07^2 + … + 1/1.07^n) when n approaches infinity.

The formula provided by Hashed cannot be used to calculate this result instantly. 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 value to annual transaction fee income. Since the fees ultimately flow to the 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, which Hashed refers to as the “industry standard for L1 protocol valuation.” The formula for this model is Annual_Fees × 25 ÷ Supply, resulting in a price of $1285.7, indicating a potential decline of 57.5% 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 just an application, and adopting this valuation method seems to me to be a mistake even at a fundamental logical level.

On-chain total asset valuation

This valuation model appears nonsensical at first glance but seems to make some sense upon reflection. Its core idea is that if Ethereum wants to ensure network security, it should have a market value that matches the total asset value settled on its platform. Therefore, the calculation method of this model is quite simple: it takes the total value of all assets on Ethereum, including stablecoins, ERC-20 tokens, NFTs, etc., and divides it by the total supply of Ethereum. The result is $4923.5, which indicates a 62.9% upside potential from the current price.

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

Income Bond Model

The only highly reliable valuation model among all valuation models, Hashed claims that this model is favored by TradFi analysts who assess cryptocurrencies as an alternative asset class, is the valuation of 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 cap, with the formula being Annual_Revenue ÷ APR ÷ Supply, resulting in a value of $1941.5, indicating a potential downside of 36.7% from the current price.

The only one that is possibly regarded as a highly reliable valuation model due to its widespread adoption in the financial sector has become yet another example of how Ethereum's price is “undervalued” through traditional valuation methods. Therefore, this might serve as good 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 estimate of around 4766 dollars. However, given that the calculation using the discounted cash flow method may be inaccurate, the actual result could be slightly lower than this figure.

If the author were to value Ethereum, the core of my algorithm might be based on supply and demand. Since 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 period of time based on the level of network activity. This would then be combined with the actual costs of executing transactions on Ethereum, comparing prices under similar historical parameters to derive a fair price.

However, according to this method, if the growth of activity on Ethereum does not keep up with the rate of cost reduction, there is reason for ETH's price not to rise. In the past two years, the level of activity on Ethereum has, at certain times, actually exceeded 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, compared to history, cannot take into account is the imagination of Ethereum. Perhaps at some point, when Ethereum sees a resurgence similar to the rise of DeFi, we will need to factor in the “market dream rate.”