Source: TradingView, CNBC, Bloomberg, Messari
The Growth of Crypto is Still Lost on Most
Digital assets were broadly lower last week, but without a convincing reason for the decline. On the positive side, the White House released the Presidential Working Group (PWG) on Digital Asset Markets, and SEC chair Atkins announced “project crypto,” which will facilitate the flow of every asset on-chain, and will eventually allow broker-dealers to trade ALL assets in one place. On the negative side, the Fed held rates steady a day before a very weak employment report sent expectations of a September rate cut to 80%, copper prices tanked on tariff reversals, and mixed tech earnings created downside volatility in U.S. equities.
The price action in crypto over the past 9 months has certainly gotten people’s attention, but is it the right attention? I get frequent calls from financial reporters asking for comment on story ideas. Despite this being arguably the most progressive year in the history of digital assets, which is generating arguably the most interest in blockchain and crypto from Wall Street and Main Street, the stories the media asks me to opine on have not changed much in 7 years. They typically focus on one of these basic themes:
- “Why is BTC up or down” and/or “what is your price target”?
- “Is this an alt-coin rally”?
- “Which L1 protocol (ETH, SOL, or pick your new favorite) is going to win?”
- “Memecoins” (I can’t even tell you what the question is because I stopped listening)
- [new] “What do Trump’s actions mean, or how does this affect TRUMP coin?”
I’ve never received a question about Binance Coin (BNB) – arguably the best token ever created from both a tokenomics standpoint and a returns standpoint, issued by arguably one of the most profitable and innovative companies in history. I have, however, been asked questions many times about CZ himself (the CEO and founder).
I’ve never received a question about Hyperliquid (HYPE), arguably one of the most profitable companies in history (per employee), and one of the fastest growing companies ever, with a token that was launched in the most unique fashion (airdropped to users, with $0 in venture capital investments).
I’ve never been asked a question about Pump.fun (PUMP), another one of the fastest-growing companies, which recently issued one of the largest ICOs in history at the highest ICO valuation ever.
I’ve never been asked a question about Aave (AAVE), an on-chain lending protocol with more than $50 billion in net deposits, which would rank Aave alongside the top 50 banks in the U.S. by deposit volume. Aave accounts for nearly 18% of all DeFi TVL (total value locked), commanding nearly 80% of the on‑chain lending market share and holding over half of net deposits in the DeFi space.
Imagine financial reporters not reporting on Amazon, or Google, or recent IPOs, or J.P. Morgan, and instead only asking generic questions about gold, memestocks, and the S&P 500. That wouldn’t capture many people’s attention. Unfortunately, that’s where we are in the evolution of digital assets. It’s hard to know if this stems from a lack of education to report on the more interesting areas of crypto, or a lack of interest from the financial audience.
Why are Layer-1 Protocols Valuable?
Frequent readers know that I hate the term “alt-coin” because it reduces the entire crypto token world outside of Bitcoin to a single entity. While it is an entirely outdated term, it does have an etymology. The term “alt-coin” stems from the fact that in the early days of crypto’s growth, the only other tokens that existed were Bitcoin clones (XRP, BCH, LTC) and Layer-1 smart contract protocols (like ETH, ADA, EOS, XLM, and others). At the time, these were alternatives to BTC. Almost every complaint we have about crypto nomenclature and coverage stems from the fact that most of this industry was created based on these two types of tokens only (BTC and Layer 1s), and the industry jargon has not evolved to include the growing facet of new sectors, token types, and issuer types that exist today. Nowadays, the universe of digital assets is much broader and has little to do with Bitcoin at all, so lumping everything into the “altcoin” universe is ignorant.[NOTE: We don’t just complain – we try to educate and fix – like our Digital Asset Taxonomy, and our calls for new definitions like “Adjusted Market cap”.]
Layer-1 smart contract protocols are the most important backbone infrastructure for all of crypto, but have also driven most of what we hate about crypto investing.
It started with the “Fat Protocol Thesis”, which was academically interesting but proved to be completely flawed. This thesis sparked a wave of investments from venture capital investors into new Layer-1 smart contract protocols, following the success of Ethereum’s ETH token. Now, 10 years after the ETH ICO, the market is littered with useless and overvalued Layer-1 smart contract protocols that carry enormous market caps and have received an ungodly amount of investments from VCs. Much like the recent wave of Digital Asset Treasury companies (DATs), investors rarely lose money funding a new Layer-1 smart contract protocol, so they aren’t going to stop funding these startups.
But have you ever asked an investor in a Layer-1 smart contract protocol token the most basic, simple question?
“Why does ETH (or any L1 token) have value?”
I have, many times, and have yet to receive a satisfactory answer.
Many Layer-1 tokens have all 3 of these, which is a good start. Financial value is driven by fees created for using the network (gas or app payments), utility value is driven by the need to spend or use the asset (to pay gas, or as collateral, or for staking), and social value is driven by the tribalism of chains (cool factor). So there is no question that Layer-1 smart contract platform tokens DO HAVE some value.
But how do you then get to a $460 billion valuation for ETH, or a $100 billion value for SOL, or any of the egregiously high valuations for all of the other Layer-1 protocols that barely house any economic activity at all?
Let’s start with a simple sum of the parts analysis:
- Financial value: Using a very rough estimate of fee generation (in dollar terms), and a sample of a few of the largest Layer-1 protocols by market cap, we can estimate a P/E ratio for the tokens of a Layer-1 protocol. The historical P/E ratio of the S&P 500 is 16x, whereas it is currently closer to 24x. Layer 1 protocols trade closer to 100x fees earned.
So, unless you believe that volumes and transactions are going to balloon, and/or that fees are going to increase meaningfully, it’s hard to make a financial argument for owning these assets at current financial valuations. There definitely is some financial value, but certainly not enough to warrant these massive market caps.
Source: ChatGPT
2) Utility value: ETH is definitely useful, but so is aluminum, which is not very valuable. For the usefulness factor to create a demand sink, you’d need a world where everyone has to own some ETH (or SOL) in their wallets at all times in order to transact, or for collateral. But that’s not true right now since there is way more block space available than there is demand for block space.
There are over 200 million wallet addresses that hold ETH or have interacted with the chain. A common industry guideline suggests that users maintain roughly 0.1 ETH in their wallet as a buffer for fees, particularly for ERC-20 transfers or DeFi interactions. Using this rough estimate, and multiplying 200M wallets × 0.1 ETH gives an approximate 20 million ETH potentially held idle across user wallets for gas purposes. At today’s price (~$3,600 per ETH), that represents $72 billion in working capital parked purely for gas usage.
On Solana, minimal fees per transaction are extremely low. A standard transfer costs around 0.000005 SOL, enabling roughly 4,000 transactions from just 0.02 SOL in a wallet. Suppose there are ~100 million active Solana wallets holding small balances. If each keeps a modest 0.02 SOL buffer, that’s an estimated 2 million SOL idle for transaction costs. At ~$170 per SOL, that’s roughly $340 million reserved for gas.
|
Token
|
Estimated Idle Buffer per Wallet
|
Estimated Wallets
|
Total Idle Supply Reserved for Gas
|
Utility Value
at Market Price
|
|
ETH
|
~0.10 ETH
|
~200 M
|
~20 M ETH
|
~$72 B (≈$3,600 per ETH)
|
|
SOL
|
~0.02 SOL
|
~100 M
|
~2 M SOL
|
~$340 M (≈$170 per SOL)
|
So there is undoubtedly some utility value, but certainly not enough to warrant these massive market caps.
3) Social value: That leaves social value. Is it cool to be a part of these networks? Maybe 5 years ago, yes, but now every crypto project has its own L1, or is building its own L1, and that cache is largely gone. Social value exists, but it is declining. Yet the majority of the value of a Layer-1 smart contract protocol is coming from the social value, since the financial and utility value is relatively low relative to the market cap.
Let’s look at the two largest smart contract protocols using the sum-of-the-parts analysis above:
|
Ticker
|
Financial Value (@ 25x P/E)
|
Utility Value
|
Actual Market Cap
|
Estimated Social Value Component (Plug in)
|
|
ETH
|
$60 billion
|
$72 billion
|
$450 billion
|
$318 billion (70%)
|
|
SOL
|
$19 billion
|
$340 million
|
$90 billion
|
$71 billion (77%)
|
If you run this exercise for all Layer-1 protocols, you’d get a similar answer. Financial value + utility value is WAY lower than market cap, which means that the majority of the value comes from social value (70-80% of the token’s value).
Perhaps the above sum-of-the-parts analysis is too crude, and there are other reasons to assign value to the native token of a protocol. The native token, after all, becomes the reserve currency on the chain. So for example, SOL memecoin traders use SOL to buy and sell, they don’t use USDC or other stablecoins. NFT traders use ETH. But are these blockchains worth $90B and $450B simply because they support the trading of fads that almost no one believes are the future of blockchain? Perhaps it’s less about today’s fads, and more about the optionality of future fads and future use cases as well – no one knew that DeFi summer, ICOs, NFTs, memecoins or any other growth engines of blockchain were going to happen ahead of time. Still, those who owned these reserve currency L1 tokens benefited from the rapid rise of all of these.
That said, the point of a blockchain is to move assets, and 99% of the world's assets are stocks, bonds, and real estate. These cute little “crypto assets” like NFTs and memes and even the equity-like tokens of real crypto businesses (like DePin and DeFi) are fairly meaningless in the big picture of moving the real assets on-chain.
So the question is, which blockchain(s) will host the most real assets in the future? That chain is probably cheap even if the SOTP analysis says otherwise, because it will grow the fastest. But the trading pairs on that chain will be stablecoins, not the native currency.
Blockchains clearly have value, it just seems that any objective analysis of that value would place the token 50-80% lower than where they currently trade. Perhaps the reason why most of these L1s trade at 100x to 1000x fee multiples is due to the fact that the market used BTC as a benchmark to compare them instead of actual fundamental analysis. If you use an asset that has no valuation (BTC) as a comp, then you end up with pretty silly comparisons.
I’ve been building fundamental valuation models for crypto tokens for almost a decade, and no one has ever made a logical argument for why an L1 is worth as much as it is. My old colleague, Nick Hotz, probably came the closest when he tried to value Layer-1 blockchains as nations, and thus the native currency became an actual currency. But even this fell short of an actual valuation analysis because it was circular (valuing ETH in ETH terms).
While there is nuance to the reported data that ETH shorts are at record highs (due to basis trading), perhaps there is a good reason for this. If others start to think the way I think, Layer-1 protocols will morph into commodities like phone line operators.
Personally, I think collectively the value of all L1s is probably higher than where they all trade today, IF blockchain really becomes the technology that all assets ultimately transact on. What is the value of the internet? If that’s the right comp, then yes, the sum of ALL blockchains collectively has a ton of value. But probably not most of them individually. There will likely only be 1 or 2 winners, so I’d rather buy ones valued at $1-2B than anything over $50B, simply because they all seem like total longshot bets, and I prefer the cheaper options.
But again, that’s based on my view that 99% of the world's assets aren’t on-chain yet, which means any lead ETH or SOL has today ultimately means very little in the long run because the assets on these blockchains are just test phases with meaningless assets.
The more optimistic answer has more to do with security than anything else. For example, Treasury Secretary Scott Bessent recently estimated that stablecoins will grow to $3.7 trillion. What market cap does ETH have to be in order to support a $4 trillion stablecoin market? Perma ETH-bull Tom Lee (via a private chat) said the following: "This is why I think Goldman and JP Morgan end up staking ETH, to be sure that it is a secure network.” Since he thinks stablecoins grow 15x, he thinks ETH will grow 30x.
I love this framing. It actually does make sense. If you are a TradFi firm attempting to be dominant in stablecoins, you naturally want to be invested in the layer 1 token that provides the security for that business.
Ironically, this is the opposite of the Fat Protocol Thesis. The value is in the applications built upon the chain, not the chain itself, but the chain’s value will grow too in order to support the apps.
