Ethereum Tokenomics: Powerful Flywheel or Cycle of Doom?

It requires taking an arbitrary view on the transaction fee growth of the protocol for the next 10-20 yearsIt requires taking an arbitrary view on the appropriate discount rate to determine present value.

Given anticipated limited new token issuance rate under Proof-of-Stake (and potentially even a deflationary token supply given the fee burn), this creates a competition for ETH tokens between staking and DeFi. Assuming DeFi activity continues to rise as more users are onboarded onto the network, the only way for the market to solve this conflict is... See more

Although most actives ETH addresses contain <$100k worth of ETH, the wealth distribution within the Ethereum ecosystem is highly unequal, with top 100 wallets accounting for ~35% of total ETH supply (for reference, top 100 Bitcoin wallets account for ~13.5% of all BTC supply).

It is possible that in the short term migration of transactions to Layer 2’s will exert downward pressure on transaction fees earned by ETH stakers, which could negatively affect token price. However, as I explained in my valuation framework, I do not believe it is appropriate to value Ethereum based on its revenues using a DCF - given that Ethereu... See more

Network “revenues” do not accrue to all token holders (some are captured only by miners or stakers, while others - like the fee burn - are captured by all token holders)

Put differently, Ethereum’s inability to successfully migrate a meaningful chunk of its users onto the Layer 2 chains will likely result in continued market share loss to alternative Layer 1s as they continue to offer cheap and fast transaction execution and rapidly growing dApp ecosystems. This would directly reduce network activity over time and ... See more

It is inherently circular since network revenues are denominated in ETH, which is what the DCF is looking to value in the first place.

I believe that following the full transition to Proof-of-Stake, most long-term financial investors will become stakers to maximize their total return and capture the yield available to stakers. Not doing so would be akin to owning a stock that pays a dividend and actively opting out from receiving the dividend! 

One valuation approach that has been making its rounds through Crypto Twitter is a Discounted Cash Flow analysis that calculates the present value of future cash flows of the Ethereum network. While this clever approach may be attractive to people with TradFi backgrounds (i.e. recovering investment bankers like me!), I see a few key issues with thi... See more