This podcast dives into the knotty challenge of valuing Layer 1 (L1) blockchain tokens, exploring why there's no single answer and outlining the key factors currently driving market perception.
No Simple Formula for L1 Valuation
- "It's pretty clear that right now there is no market-agreed-upon way to value L1s."
- "Anybody who claims that there's a clean formula of how they're valuing L1s is either lying to you or they're lying to themselves."
- The crypto market lacks a consensus method for L1 token valuation, making it a complex blend of different factors rather than a straightforward calculation.
- Beware of anyone presenting a definitive, clean formula; the reality is far murkier. Current valuations reflect a confluence of elements, not a simple equation.
The Three Pillars of L1 Value
- "L1 valuation is a confluence of things... the three general components are one, consumptive use/utility... The second is equity... And then lastly is the monetary use."
- "This network generates fees. You know there's some kind of implied cash flow... you get more SOL if you're a Solana staker."
- Utility/Consumptive Use: Tokens have a baseline value derived from their necessity to operate on the network (think gas fees), acting as a pure commodity.
- Equity-like Value: Tokens represent a stake in the network's success, capturing value from transaction fees and rewarding holders through mechanisms like staking (e.g., earning more SOL on Solana).
- Monetary Use: Tokens can serve as a medium of exchange within their specific ecosystem, creating a small, but potentially growing, internal economy (e.g., pricing NFTs or memecoins in the native token).
The Evolving Monetary Dimension
- "There is an economy that is priced in this asset. It's not big and it's not the lion's share of the explanation, but there's nothing to say that... that kind of phenomenon seems to keep coming back and when it comes back it sort of takes a bigger form each cycle."
- While the internal economies for most L1s are currently limited compared to Bitcoin's monetary use case, they are not insignificant.
- Activities like memecoin trading and NFT sales demonstrate this monetary function, priced in the L1's native asset.
- This monetary aspect appears cyclical, potentially growing larger with each market cycle, suggesting markets assign some value to this future potential.
Key Takeaways:
- Valuing L1 tokens remains more art than science, blending utility, network economics, and monetary potential. Investors should approach L1 valuation frameworks critically.
1. No Magic Number: Accept that L1 valuation isn't solved; it's a dynamic mix of utility demand, network cash flows (via fees/staking), and speculative monetary use.
2. Three-Lens Analysis: Evaluate L1s by considering their token's role as a consumable commodity, its claim on network revenue (equity-like), and its potential as ecosystem money.
3. Monitor Monetary Evolution: Keep an eye on the nascent monetary use cases (NFTs, memecoins); while small now, their cyclical growth suggests potential future value drivers.
For further insights and detailed discussions, watch the full podcast: Link
This segment unpacks the complex challenge of valuing Layer 1 blockchains, highlighting that no single market-agreed formula exists, forcing investors to weigh a blend of utility, equity-like characteristics, and monetary potential.
The Elusive Nature of L1 Valuation
- The speaker opens by stating unequivocally that the market currently lacks a consensus method for valuing Layer 1 (L1) blockchains.
- L1s, or Layer 1 blockchains, are the foundational networks like Bitcoin or Ethereum upon which other applications and tokens can be built. Their valuation is not straightforward.
- Instead of a single metric, current L1 valuations emerge from a confluence of different factors and perspectives.
Component 1: Consumptive Use and Utility
- The first component identified is the token's consumptive use or utility value – essentially treating the L1 token as a necessary commodity.
- This perspective establishes a baseline or "floor" value, representing the demand for the token simply to pay for transactions or interact with applications on the network.
Component 2: Equity-like Characteristics
- The second angle views the L1 token akin to equity in the network itself.
- This network generates fees from user activity, and token holders, particularly those staking their tokens, can receive a share of these fees or newly issued tokens as yield.
- The speaker notes, "You know there's some kind of implied cash flow... you get more SOL if you're a Solana staker," illustrating how staking rewards function like dividends, albeit paid in the native token (in-kind).
Component 3: Monetary Use Potential
- The third, more speculative component is the token's potential monetary use – its function as a medium of exchange within its own ecosystem.
- While currently small for most L1s besides Bitcoin, the speaker observes nascent economies forming around assets priced directly in the L1 token, citing memecoins and NFTs as past examples.
- This "monetary premium" is volatile but tends to reappear cyclically, potentially growing larger each time, suggesting markets assign some value to this future possibility.
Valuation as a Complex Blend
- Ultimately, the speaker argues that L1 valuation is a dynamic mix of these three distinct components: commodity, equity, and money.
- There is no clean, universally accepted formula to weigh these factors precisely.
- The speaker strongly cautions investors and researchers: "Anybody who claims that there's a clean formula of how they're valuing L1's is either lying to you or they're lying to themselves." This highlights the subjective and evolving nature of L1 valuation.
Conclusion
- L1 valuation remains a blend of utility demand, network cash flow potential, and speculative monetary use, lacking a precise formula.
- Investors and researchers must analyze these distinct components, acknowledging the inherent uncertainty and avoiding simplistic valuation models when assessing Layer 1 blockchain investments.
