How much is ETH really worth? Hashed provides 10 different valuation methods in one go

After weighting, the fair price of ETH exceeds $4,700.

Written by: Eric, Foresight News

What should the fair price of ETH be?

The market has provided a wide variety of valuation models for this question. Unlike bitcoin, which already exists as a bulk asset, Ethereum, as a smart contract platform, should have a reasonable and widely accepted valuation system. However, it seems that the Web3 industry has yet to reach a consensus on this matter.

Recently, a website launched by Hashed presented 10 valuation models that may be more widely recognized by the market. Among these 10 models, 8 indicate that Ethereum is undervalued, and the weighted average price even exceeds $4,700.

So how is this price, which is close to the historical high, calculated?

From TVL to Staking to Revenue

The 10 models listed by Hashed are divided into three categories based on reliability: low, medium, and high. Let's start with the low-reliability valuation models.

TVL Multiplier

This model believes that Ethereum's valuation should be a multiple of the DeFi TVL on its network, simply linking market cap to TVL. Hashed uses the average market cap to TVL ratio from 2020 to 2023 (personally understood as from the beginning of DeFi Summer to the point before recursive staking became too severe), which is 7 times. By multiplying the current DeFi TVL on Ethereum by 7 and dividing by the supply, i.e., TVL × 7 ÷ Supply, the resulting price is $4,128.9, which is 36.5% higher than the current price.

This rough calculation method, which only considers DeFi TVL and cannot accurately determine the actual TVL due to complex recursive staking, indeed deserves its low reliability rating.

Scarcity Premium Caused by Staking

This model considers that Ethereum locked up due to staking increases its "scarcity" in the market. It multiplies the current price of Ethereum by the square root of the ratio of total supply to liquid supply, i.e., Price × √(Supply ÷ Liquid), resulting in a price of $3,528.2, which is 16.6% higher than the current price.

This model was developed by Hashed itself, and the square root calculation is intended to weaken extreme cases. However, according to this algorithm, ETH is always undervalued, not to mention the rationality of only considering the "scarcity" brought by staking and the additional liquidity of staked ETH released by LSTs, making it equally rough.

Mainnet + L2 TVL Multiplier

Similar to the first valuation model, but this one adds the TVL of all L2s and gives a 2x weighting due to L2's consumption of Ethereum. The calculation is (TVL + L2_TVL×2) × 6 ÷ Supply, resulting in a price of $4,732.5, which is 56.6% higher than the current price.

As for the number 6, although not explained, it is most likely a multiplier derived from historical data. Although it includes L2, this valuation method still only refers to TVL data and is not much better than the first method.

"Commitment" Premium

This method is also similar to the second model, but adds ETH locked in DeFi protocols. The multiplier in this model is the total amount of staked and DeFi-locked ETH divided by the total ETH supply, representing a premium percentage brought by "long-term holding conviction and lower liquid supply." Adding 1 to this percentage and then multiplying by the value premium index of "committed" assets relative to liquid assets (1.5), the final fair ETH price is calculated. The formula is: Price × [1+(Staked + DeFi) ÷ Supply]× Multiplier, resulting in a price of $5,097.8, which is 69.1% higher than the current price.

Hashed states that this model is inspired by the concept that L1 tokens should be viewed as currencies rather than stocks, but it still falls into the problem where the fair price is always higher than the current price.

The biggest problem with the above four low-reliability valuation methods is the lack of rationality due to considering only a single dimension. For example, higher TVL data is not always better; providing better liquidity with lower TVL is actually an improvement. As for treating non-circulating ETH as a form of scarcity or loyalty premium, it seems unable to explain how to value ETH once the price actually reaches the expected level.

After discussing the four low-reliability valuation schemes, let's look at five moderately reliable schemes.

Market Cap / TVL Fair Value

This model is essentially a mean reversion model. The calculation method assumes that the historical average level of the market cap to TVL ratio is 6 times; above this is overvalued, below is undervalued. The formula is Price × (6 ÷ Current Ratio), resulting in a price of $3,541.1, which is 17.3% higher than the current price.

This calculation method appears to reference TVL data, but actually refers to historical patterns, using a relatively conservative valuation approach, which does seem more reasonable than simply referencing TVL.

Metcalfe's Law

Metcalfe's Law is a law about the value of networks and the development of network technology, proposed by George Gilder in 1993, but named after Robert Metcalfe, the founder of 3Com and a pioneer in computer networking, to honor his contributions to Ethernet. The law states: the value of a network is equal to the square of the number of nodes in the network, and the value of the network is proportional to the square of the number of connected users.

Hashed states that this model has been empirically validated for bitcoin and Ethereum by academic researchers (Alabi 2017, Peterson 2018). Here, TVL is used as a proxy for network activity. The calculation formula is 2 × (TVL/1B)^1.5 × 1B ÷ Supply, resulting in a price of $9,957.6, which is 231.6% higher than the current price.

This is a relatively professional model and is marked by Hashed as an academically validated model with strong historical correlation, but it still uses TVL as the sole consideration, which is somewhat biased.

Discounted Cash Flow Method

This valuation model is the most similar to treating Ethereum as a company so far, viewing Ethereum's staking rewards as income and calculating the current value using the discounted cash flow method. Hashed provides the calculation as Price × (1 + APR) ÷ (0.10 - 0.03), where 10% is the discount rate and 3% is the perpetual growth rate. This formula is obviously problematic; the actual calculation should be Price × APR ×(1/1.07+1/1.07^2+…+1/1.07^n) as n approaches infinity.

Even using Hashed's formula, this result cannot be obtained. If calculated at an annualized rate of 2.6%, the actual fair price should be about 37% of the current price.

Valuation by Price-to-Sales Ratio

For Ethereum, the price-to-sales ratio refers to the ratio of market cap to annual transaction fee income. Since fees ultimately go to validators, there is no concept of price-to-earnings ratio for the network. Token Terminal uses this method for valuation, with 25 times being the valuation level for growth tech stocks. Hashed calls this the "industry standard for L1 protocol valuation." The formula is Annual_Fees × 25 ÷ Supply, resulting in a price of $1,285.7, which is 57.5% lower than the current price.

The above two examples show that using traditional valuation methods, Ethereum's price is in a seriously overvalued state. But obviously, Ethereum is not an application, and in the author's view, using this valuation method is fundamentally flawed at the underlying logic level.

Total On-chain Asset Valuation

This valuation model at first glance seems unreasonable, but upon reflection, it makes some sense. Its core idea is that to ensure network security, Ethereum's market cap should match the total value of all assets settled on it. So the calculation is simple: the total value of all assets on Ethereum, including stablecoins, ERC-20 tokens, NFTs, etc., divided by the total supply of Ethereum. The result is $4,923.5, which is 62.9% higher than the current price.

This is the simplest valuation model so far, and its core assumption gives a sense that something is off, but it's hard to pinpoint exactly what.

Yield Bond Model

The only high-reliability valuation model among all, Hashed says this model is favored by TradFi analysts who evaluate cryptocurrencies as an alternative asset class, treating Ethereum as a yield bond. The calculation is Ethereum's annual revenue divided by the staking yield to calculate the total market cap, i.e., Annual_Revenue ÷ APR ÷ Supply, resulting in $1,941.5, which is 36.7% lower than the current price.

The only model considered highly reliable, possibly because it is widely used in the financial sector, becomes yet another example where traditional valuation methods "undervalue" Ethereum. So this may be good evidence that Ethereum is not a security.

Valuing Public Chains May Require Considering Multiple Factors

The valuation system for public chain tokens may need to consider a variety of factors. Hashed weighted the above 10 methods according to reliability, resulting in about $4,766, but given that the discounted cash flow calculation may be incorrect, the actual result may be slightly lower than this figure.

If I were to value Ethereum, my core algorithm might be based on supply and demand. Since Ethereum is a "currency" with real utility—whether paying gas fees, buying NFTs, or forming LPs, ETH is needed—so it may be necessary to calculate a parameter that measures the supply-demand relationship of ETH over a period based on network activity, then combine it with the actual transaction costs on Ethereum, and compare prices under similar historical parameters to arrive at a fair price.

However, according to this method, if the growth in activity on Ethereum does not keep up with the rate of cost reduction, there is reason for ETH's price to stagnate. In the past two years, activity on Ethereum has sometimes even surpassed the 2021 bull market, but due to lower costs, demand for Ethereum has not been high, resulting in actual supply exceeding demand.

However, the only thing this historical comparison valuation method cannot take into account is Ethereum's imagination. Perhaps at some point, when the DeFi boom reappears on Ethereum, we will need to multiply by a "dream ratio."