October 11, 2024
Jonah Weinstein

We introduce a novel “monetary store of value” (MSOV) framework to value native tokens of Layer 1 blockchains. Our framework implies that at today’s prices, Ethereum (ETH) and Solana (SOL) are expected to grow their MSOV totals by $142 billion and $85 billion respectively, as they currently trade at 2.1x and 6.7x multiples to their MSOV totals. We hope this paper can be a resource to help investors understand long-term value drivers and implied expectations for Layer 1 (L1) tokens.

In 2017, John Pfeffer published a paper titled, “An Investors Take on Cryptoassets,” in which he outlines a framework for understanding long-term investment outcomes in L1 tokens, like Bitcoin (BTC) and Ethereum (ETH). In his paper, John explains that all Cryptoassets - except those which have claims on cash flows paid in a different asset - must become widely used as a monetary store of value (MSOV)[1] to produce positive returns for long-term investors. We consider this paper a seminal piece on L1 token valuation, and so before proceeding, we encourage our readers to familiarize themselves with it: An institutional Investors Take on Cryptoassets | John Pfeffer.

Now in 2024, Onchain adoption continues to march ahead (Onchain refers to the total universe of assets and activity on public blockchains), and institutional investors are showing more interest than ever. We are now also seeing the debate on how to value L1 tokens come roaring back. A leading view that’s emerged is to value L1 tokens like ETH and SOL based on the US dollar value of “revenue” collected by these tokens, because ETH and SOL are proof-of-stake tokens, which means they earn fees from activity on their respective blockchains.[2]

However, this view is based entirely on a false premise. Namely, although ETH and SOL earn fees from activity on their chains, these fees are only paid in the L1 token itself, not US dollars. Therefore, the dollar value of these fees is subject to the same deflationary forces that arise from the underlying blockchain scaling bandwidth and driving increased velocity of the native token.[3] Pfeffer’s framework clearly shows that for any L1 token, higher velocity (i.e. from scaling the chain) deflates price over time, and therefore MSOV demand is necessary for driving long-term returns.

 What does this mean for the value of tokens like ETH and SOL? In principle, John’s argument from 2017 remains true. But since then, one very important thing has changed: Onchain Finance (next version of financial services being built on public blockchains, enabling peer-to-peer transactions that are automated, secure, and transparent).

In this paper, we address the false premise of “revenue” for L1 tokens, and then show how L1 tokens are being used as MSOVs, highlighting the key role played by Onchain Finance. Our argument suggests there can be many credible store-of-value assets native to the Onchain Economy (umbrella term for total consumer activity happening on public blockchains), and that BTC may even be surpassed by one or many of these altogether. The prospect for L1 tokens as long-term investments ultimately depends on this argument, so let’s examine each key point.

Point One: Like sovereign bond yields, L1 staking yields represent a “risk free rate” and are key for attracting long-term capital.

ETH and SOL can be staked on Ethereum and Solana blockchains respectively to earn a pro-rata share of each blockchain’s total fees. Critically, staked ETH and SOL only earn in native tokens. These fees are never paid by users in US dollars, and stakers never earn in US dollars, so expressing this as revenue accrued in US dollars is a fallacy. Because of this, L1 token valuation frameworks that are premised on US dollar “revenue” are all based on a false premise.

Staking income for tokens like ETH and SOL can be accurately expressed as a Nominal Yield and a Real Yield. Nominal Yield is simply the total income per staked token, annualized. Real Yield is the Nominal Yield minus annualized change of the token’s total supply.  Today ETH stakers earn ~3.1% Real Yield (Figure 1) SOL stakers earn 1.9% real yield (Figure 2).

We can also see how the annual rate of inflation or deflation for each tokens’ total supply impacts the Real Yield versus the Nominal Yield. Today the total supply of ETH inflates at ~ 0.7% per year and SOL inflates at ~ 4.9% per year. For both ETH and SOL, all this inflation is paid to stakers, so it contributes to their Nominal Yield.

Nominal Yield is an important metric for stakers to understand the totality of their returns, while a Real Yield is key to support the case that these tokens can attract long-term demand as monetary SOV assets. But what drives the Real Yield for these tokens and how long-term durable is it?

Categorically, these Real Yields are made up of two parts: Base Fees and Priority Value. 

1. Base Fees are fees paid to the blockchain network for simple services like data storage and retrieval. As Pfeffer explains, these are subject to scaling efforts that are highly deflationary [4] Therefore, these services will not experience the durable supply / demand imbalance necessary to maintain pricing power. Long term investors should expect Base Fees as core driver of Real Yield to trend toward zero. 

2. Priority Value refers to any income earned by stakers where time fundamentally constrains the networks capacity to process transactions. This include fees that users pay the network for their transaction to be processed faster, and value earned by stakers related to optimizing the order of transactions as they are finalized (MEV) [5].

Unlike Base Fees, Priority Value is a long-term durable driver of Real Yield. Although blockchains like Ethereum and Solana can scale their capacity to process more overall transactions (therefore deflating cost per transaction), eventually all these transactions must be finalized in some order. When multiple transactions in a single block target the same “state,” for example two transactions to buy the same token, the blockchain determines what transactions are finalized first. In these situations, the chain can extract value for stakers. 

To support the case for there being several tokens beyond BTC that can be viable as MSOVs, we believe earning a durable Real Yield is key. Like any economy, L1 tokens need to offer a robust Real Yield to attract long term capital to invest in their onchain economy. As we explore further in the next section, we can track precisely the market’s ongoing demand for the Real and Nominal Yields of any L1 token. Over time, this demand for L1 token yields reflects the market’s ongoing pricing of each L1 ecosystem’s “risk free rate.”

Now with this in mind, let’s dive into the “monetary store of value” (MSOV) valuation framework.

Point Two: Valuation Framework, How L1 tokens accrue value as Monetary SOVs (MSOVs)

While there’s a commonly held view that demand for L1 tokens as MSOVs is subjective, we show that it can be measured and there’s a fundamental approach to value L1 tokens. Our valuation framework for L1 Tokens is based on two key variables, “Staked Value” and “Deposit Value”, which together sum up to a Total MSOV (Figure 3).

Staked Value

For proof of stake tokens like ETH and SOL, the demand for their respective yields can be quantified by measuring the net dollar value of capital deposited into the staking on a rolling basis. The US dollar (USD) value we net on a rolling basis, using a FILO (first-in-last-out) method, is the “value when staked,” which is the USD value of L1 tokens deposited into staking at the time of deposit, minus the USD value of L1 tokens withdrawn from staking at the time of withdrawal. 

Today the Staked Value for ETH is $118b (Figure 4) and for SOL is $9.8b (Figure 5).

Capital invested into L1 tokens and then staked constitutes a monetary use of these L1 tokens. By staking, the primary risk that invested capital assumes is the price risk of ETH/USD or SOL/USD over time. We know that the price of these tokens would otherwise be driven down by deflationary effects of the networks scaling their throughput, and we also know that “A monetary store of value is characterized by having a value that is decoupled from its utility for other purposes and from the cost of making/extracting and storing it.” [6]  This definition for monetary store of value is key, and we rely on it throughout the memo.

 The Staked Value data indicates that ETH and SOL are being used as monetary stores of value (MSOV) because it measures demand for the L1 token’s staking yield, and this demand is decoupled from demand for paying transaction fees, which is the “utility for other purposes…” of L1 tokens.

 We also measure Staking Value as a factor in our MSOV framework by analyzing the correlation of Staking Value to the market cap of each L1 token. For example, for ETH, the historical average correlation of Staked Value monthly change and Price monthly change is 0.48 (Figure 6).

 Early data for ETH’s Staking Value is impacted by its recent transition to proof-of-stake (2022), rather than launch with staking back in 2015 when the chain first launched. But now two years later, the data has begun to normalize. And as time goes on, we expect this correlation to continue growing stronger. Today this correlation on a 6-month rolling basis shows increased measure of 0.59, indicating this normalization is already underway.

 On longer time horizons such as years, we expect net growth of Staking Value to be an important driver for MSOV of L1 tokens, and the correlation with its token price will continue trending higher as L1 tokens mature and their ecosystems scale.

Deposit Value 

Deposit Value is the second key driver in our valuation framework, which measures the US Dollar value of L1 tokens that are deposited into Onchain Finance. This is a key MSOV driver because, just like US dollar bank deposits in traditional finance, L1 token deposits in Onchain Finance[7] are used to support the growth and liquidity of other onchain assets and overall onchain activity. Like commercial banks in the off-chain world, a larger deposit base in Onchain Finance means a more liquid and capable “banking system” for each L1 ecosystem.  

As we show below, L1 tokens anchor the deposit base for Onchain Finance in their respective L1 ecosystems, accounting for a major share of all deposits. These deposits of L1 tokens in Onchain Finance constitute MSOV usage, because this use is entirely decoupled from L1 token’s “normal utility” (paying transaction fees). Therefore, as this usage grows, it grows total value of L1 tokens as MSOVs.

Today in 2024, Onchain Finance is growing through a combination of a) creating net-new markets and b) key players from traditional finance building onchain. To quantify this secular growth, let’s first examine the overall market for Total Onchain Assets, and then how Onchain Finance supports this growth with a deposit base anchored by L1 tokens (ETH, SOL).

Total Onchain Assets: Excluding the native L1 token of each ecosystem, all onchain assets fall into 3 categories.

1. Stablecoins

2. Native Onchain Assets

3. Tokenized Assets from traditional finance (“real world assets”)

Stablecoins are fiat-backed tokens that represent US dollars. These USD tokens are issued by companies like Tether and Circle, who hold cash backing each stablecoin 1:1. Native Onchain Assets are tokens that originate from the Onchain economy, like tokens that govern onchain software or represent digital collectibles (non-fungible tokens). Tokenized Assets refers to a growing category of assets where traditional finance tokenizes assets they normally custody off-chain, like treasuries or private credit, to make them forward-compatible with Onchain Finance.   

Today there is ~$200b of Total Onchain Assets across the Ethereum Ecosystem (Figure 7) and ~$15b of Total Onchain Assets across Solana ecosystem (Figure 8).

The relationship between the Total Onchain Assets and Onchain Finance is symbiotic. Onchain Finance brings a financial services layer to Onchain Assets, such as secondary market liquidity and collateralized loans. Total deposits in onchain finance need to grow to support this activity.

While the deposits in Onchain Finance supporting this overall growth can include many different assets, L1 tokens like ETH and SOL account for an outsized share, as have several key advantages: L1 tokens are the most highly available liquid assets in their respective L1 ecosystem. They are also supply constrained, infinitely divisible and highly programmable. They offer a real and nominal yields, and of course, have minimal counterparty risk because there is no centralized issuer. As L1 Token deposits in Onchain Finance are increasingly used to meet this demand, they grow into the role of “anchor asset” supporting growth throughout the entire onchain economy.

 In the Ethereum ecosystem today there’s ~$31b of ETH tokens used as deposits in Onchain Finance, alongside ~$21.7b of other assets from Ethereum’s Total Onchain Assets (Figure 9).

In Solana ecosystem today there’s ~$3b of SOL tokens being used as deposits in Onchain Finance, alongside ~$1.7b of other assets from Solana’s Total Onchain Assets (Figure 10).

We can see how prominently ETH and SOL are used as deposits[8] in their respective Onchain Finance ecosystems. This persistent demand is largely influenced by several unique attributes of L1 tokens that make them valuable as deposits in their respective Onchain Finance ecosystems. As they native ecosystem asset, they are the most highly available (liquid) asset for applications in their ecosystem. They are also non-sovereign, supply constrained, infinitely divisible and highly programmable. They offer a real and nominal yield, and of course, have minimal counterparty risk because there is no centralized issuer.

 When we measure Deposit Value as a factor in our MSOV framework, we find that it has a high correlation to the L1 token’s market cap. For example, for ETH, we find the historical correlation between Deposit Value changes and token price changes is 0.93 (Figure 11).

In the long run, we believe that Deposit Value will become the biggest driver of Total MSOV for L1 tokens.  

Taken together as metrics that quantify the two largest monetary use cases for L1 tokens, we believe summing Staking Value and Deposit Value into a Total MSOV output provides a straightforward and reliable framework for valuing L1 tokens.

Staking Value measures demand for an L1 token that is clearly monetary in nature, as buying and staking an L1 token to collect its native yield is clearly not for purpose of its “normal utility” (paying transaction fees). With this driver, we quantify the demand for an L1 token’s Real and Nominal Yields, and how the market is pricing the “risk-free rate” of return it demands for investing in each L1 ecosystem.

Deposits Value Like Staking Value, this measures demand that is clearly monetary in nature, as this demand for using the L1 token as deposits in Onchain Finance is not for purpose of its “normal utility” (paying transaction fees). Deposit Value measures the value of L1 tokens being used to support growth and liquidity for each L1 ecosystem’s broader onchain economy.

Total MSOV

When we examine our Total MSOV output as a whole, we find that it has a high correlation with the L1 token price changes.  For example, for ETH, the historical average correlation between MSOV Total and price is 0.81 (Figure 12).

This high correlation between MSOV Total and token price suggests the MSOV framework is an effective method to measure the long-term value drivers for L1 tokens.

Point Three: Applying the MSOV Framework, what is priced in?

 Using the monetary store of value (MSOV) framework, we can track how the price of L1 Tokens like ETH and SOL have trended alongside their MSOV Totals. Today ETH’s MSOV is $1,238 per token, compared to its price of $2,650 per token (Figure 13).

 Today SOL’s MSOV is ~$21.7 per token, compared to its price of $146 per token (Figure 14).

In both examples, ETH and SOL, trade at premium multiples to their MSOV. We believe a conservative approach would be to treat the MSOV figure as the “floor price,” which accounts for the total value they have currently accrued as MOSVs but does not account for growth in the future. The multiple above MSOV then represents the future growth of each token’s MSOV Total that the market is currently pricing-in.

Today, ETH trades at 2.1x multiple, which implies the market is pricing 2.1x growth of its MSOV or +$142 billion. SOL trades at ~6.7x multiple, which implies the market pricing 6.7x growth of its MSOV or +$85 billion (Figure 15).

 By establishing a floor value for each L1 token, the key question investors can ask themselves is, how much additional demand will each L1 token attract as MSOVs, and over what time horizon?

The MSOV framework breaks down L1 tokens like ETH and SOL into the underlying fundamentals that matter most for accruing long-term value, allowing investors to quantify the monetary value that underpins each token and the future growth the market is pricing in (Figure 16).

We can see the market is currently placing a higher growth multiple on SOL as compared to ETH. However, over the last two years, usage of ETH as an MSOV has grown significantly more than SOL (Figure 17).

ETH MSOV growth accelerated post its transition to proof of stake, and this growth trend for ETH’s Staking Value has been a major factor in ETH’s Price to MSOV multiple compressing in the last 12 months. If this growth trend continues at current pace, the MSOV framework suggests the market is materially mispricing ETH’s future MSOV growth.

When we look at SOL, we see the beginnings of an MSOV inflection starting in 2023, although the nominal scale of its growth here is still relatively small. Despite this, the market is expecting even more significant growth than for ETH, which appears in our framework as higher price to MSOV multiple. This raises the question of how much growth is fair expect, as the market today is expecting use of SOL as an MSOV in its Onchain Finance ecosystem to experience a lot of growth in the future, even though currently it’s very nascent and not a market leader.

For simplicity, we believe the key question for each L1 token is boiled down to its essence by applying the MSOV Framework:

1. ETH - Will Total MSOV grow by more than $142 billion?

2. SOL - Will Total MSOV grow by more than $85 billion?

If answer is yes to these questions, then investors should then ask, by how much and what time horizon?  This answer provides the investor with an estimated forecast to the upside of ETH and SOL, but this forecast does not account for the market multiple which could be vastly different in the future.

There are many other qualitative aspects important to consider here, and it’s not so different than how equity investors think about other technology sectors. Things like market position, category leadership, market share of key drivers like scale and maturity of each token’s Onchain Finance Ecosystem, developer activity, distribution channels and network effects should all be considered. Each investor will have their own views on what the right weighting is for these key variables, and we’re glad to share our specific views here in a future memo.

Our view on capturing value from L1 tokens categorically is that investors should be highly focused on the growth of each token’s Onchain Finance ecosystem, as we believe larger Onchain Finance ecosystems will drive the most monetary value for the native L1 token.  Specifically, we see larger ecosystems producing the largest addressable markets for Total Onchain Asset, which translates to greater demand for using that L1 token to anchor the deposits base of Onchain Finance, as well as increased transaction activity, which grow the L1 token’s Real Yield to attract greater Staking Value.  

We’ve open sourced our long-term MSOV model and made it available for anyone here: MSOV Model

We invite investors and researchers to download the model and experiment with their own views on long-term expectations for MSOV Totals. Once downloaded, users can adjust projected growth rates for certain drivers and adjust the premium multiple they think is fair or expect the market will pay in the future.

Although in this memo we applied the MSOV framework to ETH and SOL specifically, this framework works for all L1 tokens. It is critical for all tokens (except tokens that collect income in a non-native asset) to be used as MSOVs to accrue long-term value, regardless of what the intended use case for an L1 ecosystem might be. In the future, if additional usage patterns emerge for L1 tokens that are clearly monetary in nature (like Staking and Deposits), we’d consider adding these as additional variables in our MOSV framework.

Overall and most importantly, the sooner we as investors accept the reality of how L1 tokens accrue value long-term (stop confusing “revenue” with Yield) and focus more on quantifying the use of L1 tokens as MSOVs, the sooner we can all make smarter long-term investment decisions[9] to the “most asymmetric and most inventible opportunity.”[10]

Frequently Asked Questions

1. Isn’t money for payments?

Paraphrasing John Pfeffer, there are two ways that assets are used as money. First is money for payments. Second is money for store of value. Our store of value framework is focused on money as a store of value because this value is long-term durable. By contrast, value accruing to a L1 token based on its use for payments is not durable against the long-term deflationary effects of blockchains scaling their capacity to process more of these onchain payments at once.

2. How do you measure Deposit Value of L1 tokens?

To measure Deposit Value for L1, we measure the US dollar value of L1 tokens deposited in Onchain Finance. As L1 tokens are deposited into Onchain Finance (whether in exchanges or lend protocols), they are actively supporting overall growth of all onchain assets and activity due to the pooled nature of these L1 token deposits alongside other assets or loans, just like traditional banks deposits.

3. Can this framework be applied to L1 tokens other than ETH or SOL?

Absolutely. This MSOV framework works for all L1 tokens. It’s necessary for all tokens that collect income only in its own native asset to be used as MSOVs to accrue long term value, regardless of what the intended use case for an L1 ecosystem might be. And in the future, if there are additional usage patterns that emerge for L1 tokens that are clearly monetary in nature (like Staking and Deposits), we’d consider adding these as additional variables in our MOSV framework.

IMPORTANT NOTICE: This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their own due diligence, considering their specific financial circumstances, investment objectives and risk tolerance (which are not considered in this document) before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.

[1] On page 2 of his paper, Pfeffer lays out two key types of uses for money – payments and monetary store of value. This is a key point.

[2] Blockworks Manager values L1 tokens using p/s ratios based on ‘revenue’ https://x.com/_ryanrconnor/status/1821527933732770170

[3] An (Institutional) Investor’s Take on Cryptoassets, pages 2-3 outline the deflationary effect of higher velocity on L1 token

[4] Pages 9 and 10, Pfeffer explains how scaling a blockchain’s capacity to process transactions, absent any other constraints, has deflationary effect on the net value accruing to the blockchain token used to pay for those transactions.

[5] https://www.theblock.co/learn/245701/what-is-maximal-extractable-value-mev

[6] Page 12, Pfeffer explains what distinguishes an asset as money from other run-of-the-mill assets 
* This definition is key, and we rely on it consistently throughout the memo

[7] https://www.coinbase.com/learn/crypto-basics/what-is-defi

[8] Omid Malekan, High Quality Liquid Asset, https://omid-malekan.medium.com/eth-is-the-high-quality-liquid-asset-of-crypto-4d27ee77c12

[9] https://x.com/VitalikButerin/status/1828448417585971661

[10] Dan Morehead, https://panteracapital.com/blockchain-letter/crypto-takes-the-national-political-stage/