Ethereum Valuation Using the Edosophia Macro Model

Although there are numerous predictions for the Ethereum all-time high price for this year, I believe there is room for a reasonable price projection with fundamental analysis. I am NOT a Quan or pretend to be one so that’s why I’m not using mathematical models, but qualitative indicators in this model.

I will be using reputable sources to support my arguments and I will also be playing my own devil’s advocate against each one of my conclusions. Please, feel free to reach out to me if you have any questions, disagreements or just want to wish me a good day on Twitter @EdosophiaBTC

Similarly, I will keep this simple and brief so please enjoy it. It might get a bit technical at times so please just click on the links for quick reading on the concepts you might not be familiar with.

Time will tell whether I’m right or wrong, so let it be my judge.

True value derives from the usefulness of an invention to solve a problem. Similarly, Ethereum derives its value not only from scarcity (for more info on scarcity, please read Bitcoin Stock-To-Flow by PlanB) due to the several factors such as the explosive growth of DeFi and the future burning mechanism EIP 1559 reducing supply, but also from its utility use case to solve a crucial problem in the global financial market. This problem can be simplified in just a few words; Eliminating third parties with the invention of Smart Contracts.

The best counter-argument against this premise is that Ethereum is too slow to get rid of third parties and as we are experiencing right now, Gwei prices are skyrocketing due to the congestion of the network. Another rebuttal against Ethereum abilities to solve the third party issue is that it is not necessary to get rid of third parties in the first place. Lastly, there is another counter statement against Ethereum potential which is thriving competitors in the space such as Cardano and Polkadot which claim to be the next wave of blockchains.

I can make the case that the first problem is just temporary, the second one is just not true, and the third is the weakest argument of all these rebuttals.

Firstly, 2B Dollars are currently being staked on Ethereum 2.0 as of Jan 5th of 2021 to solve this scalability problem. We should be seen this issue solved in the last phase “Docking” sometime in 2022.

Secondly, third parties are incredibly bureaucratic and slow with respect to transactions and processes, ask Top US Banking Regulators. As a consequence, third parties add up unnecessary costs to the bottom line and do NOT always pursue the best outcome for everyone, I don’t even need a reference to prove this point.

Lastly, Ethereum is the Tesla of blockchains, although newcomers are trying to come up with better innovative ideas, the truth is that thanks to network effects, Ethereum has a solid ground against these other blockchains.

If the best value proposition of other blockchain competitors (VeChain, Cardano, Stellar, Dot, my dog) is that they are interoperable with Ethereum and scale better, these networks won’t be taking significant market share due to Google’s effect (being first in the market and creating a new sub-industry where other copycats try to catch up).

I could go on but the point is that ETH 2.0 solves the third party problem and each individual counter-argument is not strong enough against this premise. Since we can agree on this now, the next phase is knowing the market value for solving the third party problem.

It is hard to estimate the market value for transactions and fees (third parties) in the financial service industry. It is in the multiple of trillions of dollars globally and Ethereum has barely been above 100 billion dollars as of today. However, thanks to big institutions, we have some metrics that we can discuss to assess this valuation.

For one, Greyscale has over 3.5 billion dollars worth of ETH at the time of this article. Similarly, Santiment has shown that large wallets are accumulating ETH on-chain at an exponential rate. We even have CME ETH future instrument launching Feb 8, something that institutions are patiently waiting for. Lastly, the amount of ETH in exchanges has been heavily decreasing and put in smart contracts for staking and liquidity mining as we saw in the DeFi Summer of 2020. This trend has only grown since then and many consider this new financial system will take over the old one in this decade.

There is a clear sign that scarcity is also playing a factor in the appreciation of ETH as an asset class just like Bitcoin, although in a different way as previously mentioned. ETH, unlike Bitcoin, has more use cases than just being a stored of value. Bitcoin can’t be used as a currency due to scalability issues, but ETH is being used as such by supporting DeFi protocols. Total Value locked in DeFi 40x in less than a year from the first quarter of 2020, check DeFi Pulse for info on this. Bitcoin just teased 4x in 2020.

Similarly, thanks to the beacon chain for ETH 2.0, billions of dollars worth of ETH are currently being locked and staked until the Docking stage in 2022. You guessed it, less circulating supply.

Despite all these metrics shown for how much demand there is for Ethereum, there is one that is by far the most bullish of all, demand for stablecoins.

Ethereum has now become the most common layer for settlements in stablecoins and the OCC has said that banks can now use stablecoins for settlement. The value of interbank transfers alone are in the TRILLIONS.. thank you ETH :)

Okay one last juicy fact before my prediction, let’s talk about EIP 1559. This is an improvement proposal for transactions on the ETH blockchain. It means that the current bit base model for transactions will be replaced for a set base one. Similar to how Synthetix burns its token, ETH will use a similar mechanism reducing supply circulating of ETH that could offset the 18 million coins created per year.

I hope you find this article useful. Time will tell whether this model for Ethereum is right or wrong but in the meantime, follow me on Twitter @EdosophiaBTC for more content about crypto.