Author: Tom Dunleavy , Head of Venture Capital at Varys Capital
Compiled by: Yuliya, PANews
Editor's Note: The current market generally views Ethereum as a traditional company, calculating its price-to-earnings ratio based on transaction fees and concluding that it is overvalued. However, Tom Dunleavy proposes a completely different framework: transaction fees are not revenue, but network friction; Ethereum is not a company, but a "vault" protecting hundreds of billions of dollars in assets, and ETH itself is that lock. The following is a translation of the original text:
TLDR
Stop focusing on transaction fees when valuing Ethereum. Fees are actually a stumbling block; a successful network will always find ways to reduce fees to zero. ETH's fees have dropped from a high of over $50 in 2021 to around $0.20 now, but transaction volume has more than tripled. This dramatic drop in fees indicates a network's success, not its impending demise.
After switching to Proof-of-Stake (PoS), ETH became the lock protecting the asset vault. To attack Ethereum, you need to control the staked ETH. Controlling one-third can paralyze the network, controlling two-thirds allows for data tampering. Regardless, the cost of malicious activity is calculated in ETH, and once malicious activity occurs, that ETH is directly destroyed by the system. This tightly binds the value of ETH to the security of the network. Before the advent of staking mechanisms, no network operated this way.
Currently, there are approximately $250 billion in assets on the Ethereum blockchain (including stablecoins, tokenized assets, and L2 network cross-chain funds), but the total value of the ETH staked to protect these assets is only around $72 billion. This is like using a cheap, shoddy lock to protect a safe full of gold bars. Logically, the reasonable price of ETH should be around $6,900 (it's currently only $2,070). If the on-chain assets rise to trillions in the future, the price of ETH would need to rise to tens of thousands of dollars to justify its security responsibility.
Some people say that "Ethereum is like a free Linux system" or "like the DTCC (American Depository & Clearing Corporation)," but this is incorrect. The security of Linux and the DTCC comes from others (such as the passion of the open-source community or legal guarantees from governments and banks). However, Ethereum's security is purchased with its own money, using its own token, ETH. Therefore, ETH must have value, while Linux does not.
If ETH fails, Crypto will most likely fail as well.
Transaction fees are not revenue, but rather friction.
Last week, Bankless founder David Hoffman announced that he had finally sold all his ETH, causing a stir in the crypto world. While I respect David's decision, I believe that the way people evaluate ETH and other PoS public chains is outdated. I've discussed my new framework with many people on my show before, but they didn't seem to take it to heart (perhaps it's a problem with my expression), so today I'll just lay everything out in one go.
New things need to be viewed with new perspectives. Here's a brand new ETH valuation model for you.
Many people treat Ethereum like a company, equating transaction fees with the company's revenue. If they see lower fees, they assume the "company" is failing and the token is overpriced. This is completely misguided. Once you understand this, you'll never think that way again.
In reality, transaction fees are like taxes; the higher the fees, the less willing people are to use the service. Lower fees encourage participation, leading to more on-chain applications and funds. The data doesn't lie: the average transaction fee has dropped from over $50 in 2021 to around $0.20 now, while transaction volume has reached a record high, more than three times that of 2021. L2 now handles approximately 85% of transactions. It's cheaper to use, and more people are using it. A successful settlement network should ideally reduce transaction fees to zero.
Ethereum transaction fees have plummeted, while transaction volume has hit record highs. It has become cheaper, and more people are using it. L2 now handles approximately 85% of the throughput.
So, if transaction fees are a flawed metric, what is the correct one?
Ethereum is a huge vault, and ETH is the lock.
Stop thinking of Ethereum as a company; think of it as a massive vault. This vault contains approximately $160 billion in stablecoins, $20 billion in RWA (such as US Treasury bonds, money market funds, and private lending), and $35 billion in L2 cross-chain assets. The L2 network inherits Ethereum's consensus mechanism by design. In addition, there are approximately $12 billion in encapsulated Bitcoin, and about $20 billion distributed across DeFi positions, NFTs, and on-chain vaults. In total, on-chain assets amount to approximately $250 billion, and this figure is growing every quarter.
The security of a vault depends entirely on that lock. But everyone has miscalculated the value of that lock. On Ethereum, this lock is made of ETH.
In the old Proof-of-Work (PoW) system, you used mining hardware to secure the network. Locks were purchased externally, and their cost was unrelated to the token's value. But now with Proof-of-Stake (PoS), everything changes. To attack Ethereum, you now need to buy and control the staked ETH. Locks are made with the tokens themselves. This means that the security level of the vault and the market price of the tokens become synonymous. You can't distinguish between them.
The current situation where locks are cheaper than safes
This is a problem the market is ignoring. Today, all the ETH staked to protect Ethereum is worth only $72 billion. But the assets they protect are worth a staggering $250 billion. The money in the safe is more than twice as valuable as the locks protecting it.
This is too dangerous. If the cost of protecting something is higher than the cost of destroying it, then your vault is poorly constructed. For Ethereum to reliably protect its $250 billion, the collateralized funds used for defense must be greater than $250 billion, not less than a third of that.
Currently, only about 30% of ETH is staked. Therefore, just to make this 30% of staked funds equivalent to on-chain assets, ETH's total market capitalization would need to be more than three times the on-chain assets (1 divided by 0.30). Currently, ETH's market capitalization is roughly the same as the assets it protects (about 1x). But according to my logic, it should be more than three times. Based on the current market capitalization of $250 billion, a reasonable price for ETH should be around $6900, not the current $2070. In other words, even without any new money entering the market, the price of ETH should more than triple based solely on the assets it currently protects. This is very close to the directional model of BitMine Chairman Tom Lee.
"But Circle can freeze USDC, so it doesn't need to rely on ETH for protection at all."
Every time I say this, someone jumps out to refute it, but that's completely wrong. Here's why:
Many believe that if Ethereum is attacked, Circle, the company that issues USDC, can simply freeze the attacker's addresses and reissue the token. Therefore, these billions should not be attributed to Ethereum's security responsibilities.
But consider this: Circle's freeze mechanism operates based on smart contracts, executes on Ethereum, and relies on the Ethereum ledger. If Ethereum's consensus is compromised, there will be no universally accepted honest chain, and the freeze mechanism will be ineffective.
Furthermore, Circle could have easily opted for a private database instead of Ethereum. Their choice of Ethereum stemmed from its neutrality, deep liquidity, and compatibility with other projects. However, the trade-off is that USDC's security is now inextricably linked to Ethereum's. If you want to benefit, you must accept the risk of dependence.
Furthermore, many people assume the attackers were trying to steal USDC. That's not the case at all. If Ethereum were to collapse, the over $150 billion wouldn't be stolen; instead, it would be trapped on a blockchain without consensus, making it impossible to redeem. All loans and transactions based on this blockchain would be thrown into chaos. The value of these assets wouldn't be appropriated by thieves, but rather destroyed. And this destroyed value is precisely the crucial factor that security must consider.
Attackers don't even need to steal money to make money. They can profit by shorting ETH, shorting the entire ecosystem, or they might simply be a hostile force that can make a fortune by paralyzing the network. The more money on the chain, the greater their incentive to cause damage. Therefore, our security budget must increase in line with the total assets on the chain, rather than just protecting against the small amount that thieves can steal.
As long as you put your money on Ethereum, you're consuming its security, regardless of whether you have the "freeze" button or not. All money is accounted for.
"Ethereum is just Linux" or "Ethereum is DTCC".
There's another type of rebuttal that smart people love to use.
The first argument is that Ethereum is like the Linux system. It's the underlying infrastructure that powers the entire internet, but as an asset, it's worthless. Open-source infrastructure is a free public good; what makes money are the applications running on it, not the underlying protocols. Therefore, ETH will be the same: extremely important, but practically worthless.
The second argument is that Ethereum is like the DTCC (Depository and Clearing Corporation of the United States), the infrastructure behind almost all U.S. securities trading. The DTCC processed $3700 trillion in transactions in 2024, generating approximately $2.5 billion in revenue, but less than $500 million in profit. It is crucial and regulated, but its value represents only a fraction of the total trading volume. The infrastructure cost is low, and even if you can't live without it, even if Ethereum processes significantly more transactions in the future, it will only account for a small portion of the practical profit, nothing more.
Both of these statements are wrong in the same way.
Both Linux and DTCC rely on external security. Linux relies on the open-source community, its reputation, and decades of code censorship. DTCC relies on US law, federal regulators, and guarantees from large banks in US dollars and Treasury bonds. Their security is entirely outside the system. This is why DTCC can settle enormous sums of money yet capture almost no value. It's a member-owned utility designed to operate at cost; it doesn't need a valuable token because trust is provided by the government and banks.
Ethereum lacks these external safeguards. No government enforces it. No member banks back it. No law can reverse stolen settlements. The only barrier between Ethereum and the attackers is the market value of the staked ETH used to protect it. Ethereum must purchase security for each block on the open market, using its own assets.
This is the fundamental difference. Linux is software; no one is required to own a scarce asset to run it. DTCC uses US dollars as collateral, which is external to itself. Ethereum's collateral is ETH, which is internal to itself. You can't commoditize it to zero because security isn't a line of code; it's a quantity of value that must be locked and placed at risk. Strip away the value of ETH, and you're not building a more streamlined Linux. You're building an unsecured chain, and no one would feel comfortable entrusting a dollar to it.
So stop comparing Ethereum to Linux or DTCC. Instead, compare it to the dollars and Treasury bonds backed by DTCC. Nobody uses DTCC's transaction fees to assess the value of the dollar. You assess the clearinghouse fees separately, and the dollar and Treasury bonds used as collateral for the entire system as the monetary base, worth trillions of dollars. ETH is not the clearinghouse. ETH is the collateral that builds the clearinghouse. That's the asset you're buying.
Linux has never needed a national treasury. Ethereum's security budget is a national treasury, and it's denominated in ETH.
Looking to the future and competing with the market
Following this line of thought, this model completely ignores transaction fees and market speculation. It only cares about one core question: How much money will be settled on Ethereum in the future? And how much must ETH be worth to protect that money?
Stablecoins are poised to break the $1 trillion mark in the next few years. RWA tokenization is estimated to reach trillions by 2030. Add to that various on-chain applications, and the assets Ethereum needs to protect will skyrocket from the current $250 billion to trillions. As long as that "more than 3 times" security factor remains unchanged, you can calculate how high the price of ETH must rise as the amount of capital increases.
Even if you're pessimistic, it's okay to lower the safety margin a bit. On-chain funds are increasing (this is a variable), and the safety margin (this is leverage) is also a factor. No matter how you calculate it, the overall trend is upward.
"That's blind optimism. The market will never price things that way."
This is the most fair rebuttal. Indeed, I was talking about what ETH "should" be worth, not what the market will "immediately" price it at. There's no forced arbitrage mechanism to smooth out the price difference. Moreover, my logic that "ETH should rise" has indeed been proven wrong in terms of coin price over the past few years. Let's explain it point by point.
Regarding what can bridge the gap: Ethereum isn't about arbitrage, but about the demand for a system-wide denominated asset. As value settles on Ethereum, ETH is used as collateral, a pairing asset, and staked to earn the network's underlying yield. This demand grows with the activity it supports. Reserve assets aren't priced based on income; they're priced based on how urgently the surrounding system needs to hold them. Gold is worth over $18 trillion but doesn't generate any cash flow. ETH is the reserve asset for on-chain finance, and this framework is simply measuring how large this reserve must be.
Regarding the staking multiplier: My mental model treats the staking multiplier as a range, not a fixed target. At the current staking rate, parity (staking ETH equals the protected value) is approximately 3.3x. A reasonable range is from 1.7x at the loose end to 5x at the strict end, where the cost of launching an attack with two-thirds of the staked amount must equal the total protected value. The price tracks the protected value at some multiplier within this range. Fixing it to a specific number would compromise rigor, which is where rational people can disagree without breaking the model.
Regarding reflexivity: The model does indeed have more than one equilibrium point, and nothing definitively chooses the highest one. Today, Ethereum is secure enough with coverage below the lower bound because obtaining a third of the staked amount has very poor liquidity, the staking mechanism is extremely brutal, and the social layer can fork attackers. This is real, but these defenses determine whether an attack succeeds, not whether coverage is sufficient as risk escalates. Weak coverage is tolerable when protecting $250 billion. When it comes to two trillion or five trillion in regulated institutional funds, coverage is no longer an academic issue. As adoption increases, the gradient for bridging the gap monotonically increases.
Finally, the most ironic thing is the price of ETH over the past 5 years. Logically, it should have risen, but in reality, it has consistently fallen. I think the main reason is that previously, there wasn't enough money on the blockchain, and people didn't consider security a major issue. When there were only 50 billion on the blockchain, no one was worried; when it rose to 175 billion, people started to feel something was wrong; and when it reached 1 trillion, the first question large institutions asked before entering the market was definitely, "Is this blockchain secure?" And the answer to this question was entirely supported by the price of ETH. My model can't predict when it will rise, but it tells you that as the amount of money on the blockchain increases, this upward momentum will become stronger and stronger, and even those who are bearish on the market can't deny the fact that "the amount of money on the blockchain is increasing."
Some argue that Bitcoin's security budget is negligible compared to its market capitalization. However, Bitcoin primarily protects itself. Ethereum, on the other hand, protects other people's US dollars and various assets—a much heavier responsibility! Moreover, the trend is already clear: more and more ETH is being staked, compliant products are continuously buying ETH, and with increasing on-chain activity, the burning mechanism is constantly destroying ETH. All of this confirms my point about growing demand.
Those who only focus on transaction fees and cash flow will continue to claim that ETH is overvalued. They've completely reversed cause and effect. On-chain activity comes first, followed by the need for security. ETH must have value to protect the security of the entire ecosystem. Transaction fees are a stumbling block you should strive to eliminate, not a bargaining chip you use to value ETH.
