How to Value an L1 Asset + How Solana Fares vs The Competition
Crypto assets are a brand new asset class, with completely unique properties, and as such there has been much confusion to date about the best way to value an L1 asset like Solana.
Tradfi has spent over 100 years perfecting their valuation methodologies for stocks and commodities — while crypto is an entirely new asset class, with highly unique properties — and only 15 years on the clock.
Debunked Attempts
There have been many, now largely debunked, methods for valuing L1s.
One of the first was the “Stock to Flow” model popularised by Bitcoin advocates, stating that the reduction in supply will necessarily result in continued growth of the Bitcoin asset price. However this model only deals with the supply side — completely ignoring demand. It also doesn’t help us to value L1 assets which are also income producing, such as Ethereum and Solana.
There have also been some failed attempts to value monetary-type assets such as Bitcoin, based on their money velocity (similar to valuation techniques of the US dollar) using the economic equation “MV=PT” — yet there are plenty of arguments against this method, and crucially again they fail to take account of yield producing Layer 1 assets such as Ethereum and Solana, which also share some of these same moneyness properties.
Asset Classifications
The reason that the crypto industry has taken so long to settle on a uniform method of valuation is because — well, we’ve never seen assets like these before.
As suggested by Robert Greer in 1997, all the world’s assets can be classified into three separate categories, namely:
- Capital Assets : Income producing assets such as stocks
- Commodities : Assets used to transform into another, more useful, asset such as Oil into petrol, wheat into bread etc. Crucially these assets can not then be returned to their original state
- Store of Value / Medium of Exchange : Assets where people tend to store their wealth, such as Gold and the US Dollar
Traditional Assets
Historically, some assets cross between two categorisations. For example, Gold is both a commodity (one can turn it into jewellery). However it is also considered a store of value, due primarily to its low inflation rate which can not be easily manipulated (newly mined gold) — as well as social consensus agreeing on the fact it has value.
Likewise — stocks and real estate are capital assets, producing yield for their holders — while they have also been excellent stores of value for the baby boomers.
In order to value an asset which crosses between different categories, one needs to consider the cumulative value of all its constituent, value providing qualities.
This is especially complicated when one of its qualities is that of a Store of Value. For there is no direct way to ascribe value — as there is no income to speak — and yet this is arguably the quality which will have the most material impact to the overall valuation.
Take gold for example. If gold were valued solely on the basis of its utility in the real world, it wouldn’t be worth 10% of its current $13tn price tag. It is its ‘Store of Value’ properties which provide a premium over its intrinsic worth as a capital asset.
Layer 1 Assets as Triple Point Assets?
Now back to smart contract Layer 1 Assets. These are the first asset types to actually traverse all three asset classes.
Take Ethereum for an example:
- Capital Asset — Eth is used to stake and receive a proportional yield from fees, MEV and inflationary rewards. These amount to a real yield of c. 5% today for anyone staking the Eth asset. It also provides a minimal real yield to non-staking holders as well, due to the supply currently being deflationary.
· There is therefore demand to purchase Eth, to then stake it and receive a share of this yield
- Commodity — Eth is used to pay for blockspace on the Ethereum blockchain.
· There is therefore demand from users of the Ethereum blockchain to purchase Eth in order to transact on the network.
- Store of Value / Medium of Exchange — Eth is used as the medium of exchange for NFTs on the blockchain, and could be considered a SOV.
· There is therefore demand from investors looking to store their capital, or purchase digital assets with the token.
As you can see — for the first time in history, there are assets which cross all three qualities, and as such further cloud the ability for analysts to assign consensus valuation methods onto the assets.
Other Layer 1 Assets
While most Layer 1 assets can make a claim to the first two asset classes to some degree, the SOV / MoE argument is much harder to make for an asset like Cosmos — since no other L1 in the Cosmos ecosystem is required to use Atom the asset. Likewise Avax is not required to pay for blockspace on Avalanche’s subnets and so it loses a lot of the value accretion benefits that have boosted Eth’s price.
How Does Solana Fare?
Therefore Solana stands as one of the few assets besides Eth which, due to its property of scaling via a single shard, ensures that all activity taking place on Solana accrues to the Sol asset.
This includes both fees, priority fees — and also any additional MEV which might accrue to the validators of the chain.
Regarding its Store of Value properties, Solana is often considered to struggle in this area. Yet I believe this is only due to its initial high inflation schedule (currently this sits at around 6% pa).
However, this inflation rate reduces by 15% pa to 1.5% terminal rate in 2031, and 50% of fees are burned to further reduce the supply (much how EIP1559 now burns Eth fees and reduces the supply).
Ultimately, once this inflation rate is <1% in a few years — complaints around the inflation will become a non-issue and Sol’s SOV properties will be able to truly flourish.
This is because Sol has its own architecture and Virtual Machine. And therefore, Sol will be the canonical asset of the entire SVM ecosystem — be it:
· Solana’s monolithic Layer 1
· Layer 2s on Solana
· SVM Alt-L1s
· SVM rollups on other chains.
Solana Value Accrual Versus Ethereum?
In fact, in many ways Solana offers a more compelling vision for value accrual to Ethereum because:
Solana:
- On Solana, all MEV capture occurs on the L1, and therefore accrues to the Sol asset via the validators.
- Additionally all base and priority fees will be payable in Sol
Ethereum:
- On Eth, the scaling roadmap requires that virtually all users be pushed to the L2 layer due to a lack of focus on scaling / improving the L1. The ever increasing fees are therefore assumed to be the catalyst to force all but the wealthiest users elsewhere
- This therefore means that virtually all MEV will be captured at the L2 and L3 levels. Value will accrue either to the centralised sequencer’s coffers, or potentially to a token once decentralisation of the sequencer is achieved. It will not accrue to Eth the asset.
- Likewise — user fees will now need to be divided between L3s, L2s, other DA layers such as Celestia, and finally — what is left over will accrue to the Eth stakers at the L1 level.
There will therefore be significant value leakage from Ethereum’s primary sources of income going forwards.
Should the Ethereum and Solana ecosystems achieve the same levels of volumes and fee accruals at some future point — Sol would theoretically be valued higher as a result of its reduced leakage.
Therefore, due to Solana’s vision of scaling on a single shard, it also best preserves the qualities of these three asset classes.
