Why Analysts Are Valuing ETH All Wrong

This episode challenges conventional Layer 1 token valuation, arguing that metrics like Realized Store of Value (RSOV) offer a more accurate lens by treating these assets as money rather than equities, fundamentally shifting how investors should assess their long-term potential.

1. The Trillion-Dollar Question: Why Layer 1 Token Valuation Matters

• Jonah Weinstein, from the investment firm Skycatcher, opens by emphasizing the critical need for investors to understand what drives returns for Layer 1 (L1) tokens. L1 tokens are the native cryptocurrencies of foundational blockchain networks like Bitcoin or Ethereum.
• A robust valuation framework allows analysts to determine if an L1 token is over or undervalued and enables meaningful, "apples-to-apples" comparisons between different blockchains (e.g., Solana, Bitcoin, Ethereum).
• The hosts highlight that L1 tokens constitute the vast majority (around 95%) of the total crypto market capitalization, which hovers above $3 trillion. Bitcoin alone accounts for a significant portion, followed by Ethereum, Solana, and others like Bittensor.
• Jonah notes, "all of those applications, for example, that are built on these platforms are really levered to the value that these sort of base layers are accruing." This underscores the foundational importance of L1 valuation for the entire crypto ecosystem.

Actionable Insight: Understanding L1 token valuation is paramount as it essentially means understanding the valuation of the bulk of the crypto market. Investors need a clear framework to assess risk and potential returns.

2. A Historical Look at L1 Valuation Models

• The discussion revisits past attempts to value L1 tokens, starting with MV=PQ. This monetary theory, popular around 2016-2017, centers on money supply, velocity (rate of spending), price, and output. It has largely fallen out of favor for L1 valuation.
• Stock-to-Flow (S2F), popularized by Bitcoiners, was another prominent model. S2F assumes scarcity, measured by the ratio of existing supply to annual issuance, directly drives value, often drawing comparisons to gold.
• Jonah Weinstein critiques S2F for being overly supply-side focused, arguing it "really just assumes like infinite persistent demand." He suggests that while scarcity is a factor, the demand picture is crucial and S2F alone is insufficient.
• The conversation touches on relative valuation, particularly for Bitcoin, where its value is often compared to gold's total addressable market (TAM). If gold's TAM is around $18 trillion, Bitcoin's value is projected based on the percentage of that market it might capture.

Strategic Implication: Past models like MV=PQ and S2F have proven limited. Investors should be wary of single-factor models and recognize the evolving nature of L1 valuation, moving towards more nuanced approaches that consider demand dynamics.

3. The Current Consensus: Bitcoin's Special Status and "REV" for Others

• The hosts describe a prevailing view among analysts: Bitcoin is treated as a "special snowflake," valued based on its potential as a non-sovereign store of value, akin to digital gold.
• Other L1 assets, according to this consensus, are often valued using metrics like "REV" (revenue), typically through a Discounted Cash Flow (DCF) model. A DCF model values an asset based on the present value of its expected future cash flows.
• Jonah Weinstein explains REV as "a metric that measures how much fees users are paying to L1 validators or how much value those validators are capturing from transaction activity on the chain."
• He notes that some analysts interpret this REV as akin to company cash flows, feeding it into DCF models to argue L1 tokens can be valued like equities. The DCF method itself became standard for stocks gradually, first appearing in a niche 1938 textbook before gaining widespread acceptance.

Technical Clarity: REV in this context refers to the total fees paid by users for transactions on a blockchain, captured by validators. DCF (Discounted Cash Flow) is a valuation method that estimates an investment's value based on its expected future cash flows, adjusted for the time value of money.

4. Critiquing the DCF/REV Model for Layer 1 Tokens

• Jonah Weinstein argues strongly against using DCF models for L1 tokens, stating, "these tokens are not company shares. They don't accrue value like company shares."
• The core issue he identifies is that validators don't collect revenue in a non-native currency (like USDC); they earn more of the L1's native token (e.g., ETH, SOL). This creates a circular reference, unlike a company like Apple, which compounds value in a non-native asset (fiat currency).
• "You need a non-circular fundamental driver to measure so that you can value this asset in dollar terms," Jonah asserts.
• While acknowledging REV as a "naturally pure metric" for snapshotting demand to use a blockchain (by converting native token fees to USD for comparison), David Hoffman (host) points out Jonah's critique: the dollar conversion step muddies the waters for true valuation.
• Jonah further refines this, stating REV isn't a complete measure of demand, as it only captures payment/transaction demand, missing other crucial demand aspects for L1 tokens.

Actionable Insight: Investors should be cautious about applying traditional equity valuation models like DCF directly to L1 tokens due to the circularity of native token rewards. The nature of value accrual is fundamentally different.

5. The "Litmus Test" and Metcalfe's Law: Why L1s Aren't Stocks

• Jonah proposes a "mental quick test": If one entity owned all shares of Apple, Apple's intrinsic value (based on its ability to generate fiat cash flows) wouldn't change. However, if one entity owned all of an L1 token (like ETH or SOL), its value would plummet to zero because the network utility and monetary properties would cease.
• This illustrates that L1 value is tied to network effects and distributed ownership, akin to Metcalfe's Law, which states the value of a telecommunications network is proportional to the square of the number of connected users.
• David Hoffman (host) suggests L1 valuation might be a "synergy of multiple valuation inputs" (REV, Metcalfe's Law, MV=PQ) rather than an either/or choice, seeking a balanced approach.
• Jonah, however, emphasizes Skycatcher's goal: "to put together a framework and a metric that is rooted in sort of what we believe is driving long-term value."

Strategic Implication: The network-dependent nature of L1 tokens, highlighted by the "one owner" thought experiment, strongly suggests that valuation models must account for network effects and distributed use, unlike traditional equities.

6. Scope of Valuation: L1s vs. DeFi Applications

• The discussion clarifies that the critique of REV/DCF is specific to L1 tokens. For DeFi protocols and applications (e.g., Aave) that generate cash flows in non-native assets (like stablecoins), REV and DCF models are considered appropriate and valuable.
• Jonah reiterates the litmus test: "if I own the entire supply of Aave, it's still generating revenue and I'm still collecting... because it's compounding non-native."
• The hosts acknowledge that REV/DCF metrics have been beneficial, helping the crypto space move away from purely narrative-driven valuations of the "dark ages" (circa 2016) towards more "fundamental" analysis.
• The focus of the new framework is strictly on L1 tokens possessing monetary properties.

Actionable Insight: Different crypto assets require different valuation lenses. While REV/DCF is suitable for cash-flow-generating applications, L1 tokens with monetary characteristics demand a distinct approach.

7. Layer 1 Tokens as Money: A Definitional Argument

• Jonah Weinstein posits that L1 tokens are money, based on a specific definition: "Money is any asset that's primarily used to make payments and as a store of value."
• He argues L1 tokens fit this:
  • Payments: Used for on-chain services and goods (e.g., transaction fees paid in the native token). No transactions on an L1 can be confirmed in any other token.
  • Store of Value: Used for staking (earning yield, like bonds) and as a deposit asset in DeFi.
• This contrasts with the common perception of money being solely nation-state fiat currency. Jonah uses the example of copper: if hoarded and used for payments, it would become money by definition.
• David Hoffman (host) refines this, suggesting L1s are a hybrid, "splitting the difference between a nation-state fiat money and a commodity money like gold or copper," because they have an internal economy (like Ethereum's "GDP") where "taxes" (gas fees) are paid in the native unit of account.

Technical Clarity: Staking involves locking up cryptocurrency to support a blockchain network's operations (like validating transactions) in return for rewards, typically in the same cryptocurrency.

8. Prioritizing Store of Value (SOV) Over Payments for L1 Valuation

• While L1s serve both payment and store of value functions, Jonah argues the Store of Value (SOV) use case is the dominant value driver, similar to how the US dollar's strength is driven by global demand to store wealth in dollar-denominated assets.
• He contends that the payments use case for L1s is less significant for value accrual because blockchain transaction costs tend to deflate rapidly as networks scale (e.g., 100-500% year-over-year). This deflation negates value accrual from increased payment adoption.
• Conversely, demand for the SOV use case can grow significantly (e.g., 200-400% a year) while the token supply inflates minimally (e.g., ETH at ~0.5% or even deflationary for stakers). "With transactions, demand growth is met with more supply growth... but in the SOV use case, demand growth is not met with more supply. So price goes up," Jonah explains.
• David Hoffman (host) summarizes this as "REV is fleeting, store of value is permanent."

Strategic Implication: Investors should focus on metrics that capture an L1's strength as a store of value, as this is likely to be a more durable and significant driver of long-term token appreciation than transaction fee revenue, which is prone to compression.

9. The Vast TAM for Digital Non-Sovereign Money

• Jonah presents a compelling argument: L1 tokens should be recognized as money because their value accrues like money, and this perspective unlocks a significantly larger Total Addressable Market (TAM).
• A slide comparison shows "Digital Crypto Money" (L1 tokens, ~ $2.5 trillion market cap) against "Analog and Government Base Money" (Gold + physical cash/bank reserves of fiat currencies, ~ $45 trillion market cap). This suggests a potential 20x upside.
• Jonah believes Bitcoin is a "Trojan horse," paving the way for other digital crypto monies to be seen as increasingly credible stores of value, especially as traditional fiat systems face crises. He states, "I've never known an analog incumbent that is being disrupted by the digital disruptor to sort of, you know, remain bigger."
• The hosts discuss the implication: analysts pushing DCF/REV for L1s are implicitly "bearish" because they are targeting a much smaller TAM (like comparing to tech stocks) rather than the multi-trillion dollar market for non-sovereign money.

Actionable Insight: Viewing L1 tokens through a monetary lens expands their potential TAM significantly. This framing is crucial for investors assessing the long-term growth trajectory of the crypto asset class.

10. Challenging the "Bitcoin is Special" Narrative

• The current consensus often isolates Bitcoin as the sole L1 deserving monetary valuation, relegating others (ETH, SOL, etc.) to REV/DCF models.
• Jonah Weinstein counters this: "all of these tokens accrue value in the same way... Bitcoin, ETH, SOL, TON, all of these circular reference assets that are used as money... accrue value... as money."
• He suggests that Bitcoin is merely the first to capture inflows from investors seeking non-government stores of value due to its perceived stability ("changes the least").
• However, he argues that other L1s like Ethereum, as they mature, offer increasingly reliable, transparent, and autonomous monetary systems that are in many ways superior to traditional fiat and even offer advantages over Bitcoin due to their programmability and utility.

Strategic Implication: Investors should critically evaluate the narrative that only Bitcoin can achieve monetary premium. Other L1s with strong monetary characteristics and growing ecosystems may offer significant alpha if the market begins to recognize their similar value accrual mechanisms.

11. Introducing RSOV: Realized Store of Value

• Jonah Weinstein introduces Realized Store of Value (RSOV), a metric developed by Skycatcher to track the primary drivers of SOV demand for L1 tokens.
• RSOV is defined as the sum of:
  1. The realized value of L1 tokens staked.
  2. The realized value of L1 tokens in DeFi (Decentralized Finance).
• Realized value is inspired by Bitcoin's "realized cap" metric. It measures the value of tokens at the time they were moved into staking or DeFi, effectively representing a cumulative net inflow or aggregate cost basis for these SOV use cases.
• Jonah explains, "This is a fundamental measure of the net inflows that any given L1 token has." The focus is on "ground truth real usage" like staking or using tokens as collateral in DeFi, which are considered fundamental SOV behaviors.
• This framework is inspired by John Pfeffer's 2017 paper, which defined SOV use as "hoarding" or "buying and holding."

Technical Clarity: RSOV (Realized Store of Value) tracks the aggregate cost basis of L1 tokens committed to store-of-value activities, specifically staking and DeFi deposits. DeFi (Decentralized Finance) refers to financial applications built on blockchains that operate without traditional intermediaries.

12. Deconstructing RSOV: Building on Realized Cap

• The concept of Realized Cap for Bitcoin is foundational to RSOV. Bitcoin's Realized Cap values each Bitcoin at the price it last moved on-chain, providing an aggregate cost basis for the network. It moves slower than market cap and reflects actual economic activity.
• Jonah clarifies RSOV is an "adapted version" for smart contract platforms, measuring the aggregate cost basis specifically for tokens committed to staking and DeFi, rather than just any on-chain movement.
• David Hoffman (host) illustrates: if 10% of ETH supply is staked at a $5,000 price, RSOV increases, reflecting a significant inflow of capital committed to holding ETH long-term. This also applies to ETH deposited into DeFi protocols like Aave, MakerDAO, or Uniswap.
• This is reminiscent of early Ethereum metrics like "ETH locked in DeFi," which signaled reservation demand.

Actionable Insight: RSOV aims to provide a more stable, fundamentally-grounded measure of an L1's value based on actual capital commitment to its SOV use cases, distinct from speculative market cap fluctuations.

13. RSOV, REV, and the Flow of Value

• Jonah Weinstein argues that RSOV "very elegantly captures Rev" because when validators earn transaction fees (REV) in the native token and compound those earnings by re-staking, it increases the realized value of tokens staked, thus boosting RSOV. "One block at a time, Rev grows RSOV," he states.
• During periods of high REV (e.g., NFT mania on Ethereum, memecoin frenzy on Solana), there's a rapid transfer of the L1 asset from spenders to savers/stakers, which is reflected in RSOV.
• Beyond fees, manias like memecoin trading on Solana also lead to the L1 token (SOL) being locked up in liquidity pools and bonding curves, directly contributing to RSOV as SOL becomes the reserve asset for that sub-economy.
• The hosts emphasize that focusing solely on REV (cash flows from fees) misses the larger picture of the L1 asset itself becoming money or a reserve asset within its ecosystem, a phenomenon RSOV attempts to capture.

Strategic Implication: High transaction fees (REV), while seemingly a direct cash flow, also contribute to RSOV by incentivizing staking and reflecting the L1 token's use as a core economic unit within its ecosystem. RSOV provides a broader context for REV's impact.

14. Analyzing L1s Through the RSOV Lens: Data and Ratios

• A chart displaying Ethereum's RSOV shows its components: realized value of ETH staked and realized value of ETH in DeFi, totaling around $120 billion at the time of recording, compared to a market cap of roughly $350 billion.
• The gap between market cap and RSOV ($176 billion for ETH in the example) represents "how much future growth effectively that the market has currently priced in" for RSOV.
• A comparison of Price-to-RSOV ratios for various L1s is presented:
  • Bitcoin: ~2x
  • Ether: ~2x
  • Solana: ~6x
  • TAO (Bittensor): ~7x
  • Sui: ~185x
• Jonah interprets Sui's high 185x multiple as indicating "the market cap of Sui is much higher than the actual usage of Sui the asset as a store value asset. There is a lot of future growth priced in."

Actionable Insight: The Price-to-RSOV ratio can be a tool for investors to gauge market expectations for an L1's growth in fundamental SOV adoption. A very high multiple suggests significant future RSOV growth is already priced in, potentially indicating higher risk or an overvalued asset relative to current fundamentals.

15. Drivers of RSOV: What Investors Should Watch

• Factors that grow RSOV include:
  • Inflows into staking: Driven by higher staking yields or increased market demand for the existing yield (perceiving the asset as lower risk).
  • Inflows into DeFi: More of the L1 token used as collateral, in liquidity pools, etc.
  • Growing asset issuance on the network: More diverse assets (stablecoins, tokenized BTC, RWAs) that can be paired with the L1 token in DeFi.
  • Reliable issuance policy & hardened protocol rules: Monetary attributes that enhance trust and predictability, making the L1 a more attractive SOV.
• The discussion highlights that L2s can be synergistic for RSOV if they drive more usage of the L1 asset in DeFi on the L2, even if they initially compress L1 staking yields by diverting transaction sequencing. "Base rollups" that allow the L1 to retain more sequencing value while L2s drive L1 asset usage in DeFi are seen as an optimal scenario.

Strategic Implication: Investors should monitor developments that enhance an L1's utility as collateral in DeFi, increase staking attractiveness (yield and perceived safety), and foster a rich ecosystem of paired assets. These are leading indicators for RSOV growth.

16. The Nuance of "Money": Good Money, Bad Money, and Censorship

• The hosts raise a scenario: if an L1 like Sui allows validators to freeze assets (as reportedly happened to a hacker), does it disqualify it from being valued as money via RSOV?
• Jonah Weinstein argues that such an L1 is still a currency by definition of its use, but "the fact that it can be censored maybe just means it's not very good money." This might lead to a decrease in its RSOV over time as users lose trust, but the valuation framework (as money) still applies.
• This ties into crypto tribalism: Bitcoiners often prefer minimal utility on the L1 blockchain to maximize Bitcoin's purity as an RSOV-driven asset. Ethereum, in contrast, aims for both SOV properties and utility (driving REV via blockspace demand and mechanisms like the burn).
• Jonah suggests that higher yields on some L1s might indicate the market perceives higher monetary risk for those assets, requiring a premium to attract SOV capital compared to assets like ETH or Bitcoin.

Actionable Insight: The "quality" of an L1's monetary properties (e.g., censorship resistance, decentralization) is crucial. Events that undermine these properties can negatively impact RSOV and long-term value, even if the asset technically functions as a currency within its ecosystem.

17. RSOV as a Call to Action for Analysts and Data Providers

• Jonah Weinstein hopes the RSOV framework will spur further research and refinement from the analyst community. He invites input on identifying other measurable SOV use cases (e.g., ETF inflows).
• An Excel template and Dune dashboard for RSOV are available (links in show notes) for analysts to experiment with and contribute to.
• He also calls on data providers (Artemis, Blockworks, DeFiLlama) to help improve the quality, accessibility, and reliability of the data underpinning RSOV calculations.
• Jonah clarifies Skycatcher is chain-agnostic, and RSOV was developed from a data-driven, first-principles approach to understand L1 value, not from a maximalist viewpoint. From an RSOV perspective, he sees Ethereum as potentially undervalued relative to Bitcoin, given its ecosystem and upcoming catalysts like real-time proving and base rollups.

Strategic Implication: RSOV is presented as an evolving framework. Crypto AI investors and researchers can engage with this model, contribute to its development, and use it to identify potential mispricings or emerging trends in L1 valuations.

Conclusion
This episode argues L1 tokens primarily accrue value as monetary assets, best measured by RSOV, not as companies via DCF. Investors and researchers should analyze L1s based on their strengthening store-of-value characteristics and network inflows, rather than solely on transaction-based revenue, to identify long-term opportunities.