Ethereum's business model and valuation

In traditional investment fields and venture capital, business models are one of the key elements for investors to examine a company or project.

But in the crypto industry ecosystem, investors seem to be less keen on discussing this element. But I think it is necessary to return to normal logic and common sense. Except for Bitcoin and similar collectibles, its business model should be discussed for all other projects.

I'll start with Ethereum.

To see what Ethereum’s business model is, we need to see how Ethereum works, what services it provides to users, and what its revenue source is.

As a one-layer blockchain, Ethereum provides services to support the deployment, operation, and transfer of upper-level applications (smart contracts) and users (wallets). Its revenue source is these applications and the GAS fees paid by users for these actions (transactions).

The GAS fees it receives can be further subdivided into two categories: one is tips to miners, and the other is burning GAS.

The tips to miners can be seen as Ethereum's expenses to maintain the system.

At the same time, Ethereum will issue additional tokens every year to reward miners for mining. I also use this part as a expense.

The burned GAS is rewarded with meaningful income to all Ethereum token holders. This income can be regarded as used to repurchase and destroy the token, benefiting all coin holders.

Therefore, the total burned tokens will be deducted from all additional tokens issued, which is the truly effective "net profit" of the Ethereum network.

This is the business model of Ethereum.

On Etherscan ( https://etherscan.io/chart/dailyethburnt ) you can check the daily burning of Ethereum. After EIP-1559 comes into effect in August 2021, the daily burning volume during the peak period of 2021 is about 10,000 to 20,000 ETH.

On Etherscan (https://etherscan.io/chart/ethersupplygrowth), it can be found that Ethereum issued about 3 million ETH in 2024, and issued about 8,300 ETH every day.

If we calculate based on the daily destruction of 10,000 ETH, the annual revenue of the Ethereum network during its peak period is 3.65 million ETH. If we calculate based on the daily destruction of 20,000 ETH, the annual revenue of the Ethereum network during its peak period is 7.3 million ETH.

Subtracting the amount of additional issuance from the total amount destroyed, we get that the "net profit" of Ethereum during its peak period is about 650,000 ETH ~ 4.3 million ETH.

Based on the approximately average price of Ethereum in 2021, its annual net profit is US$1.3 billion to US$8.6 billion.

Let's compare the maximum value of US$8.6 billion with Alibaba, which is also a platform:

Alibaba's latest annual report shows that its net profit in 2024 is about US$21 billion.

It can be seen that Ethereum's annualized net profit maximum during its peak period is close to half of Alibaba.

In 2021, when the net profit peaks, Ethereum's price is about $2,000 to $4,000, and its corresponding market value is about $200 billion to $500 billion.

So Ethereum’s largest market value was US$500 billion, and Alibaba’s current market value was US$300 billion; but Ethereum’s largest annualized net profit back then was less than half of Alibaba’s.

It seems that Ethereum's market value was overestimated back then, but it was not as overestimated as we subconsciously think.

So overall, traditional valuation methods are also applicable to crypto ecosystems.

We further imagine that if the Ethereum ecosystem prospers again in the future and its scale can reach Amazon's current scale, we can also roughly calculate its corresponding market value in analogy.

Amazon's net profit in 2024 was US$59.2 billion, and its current market value was US$2 trillion.

If Ethereum can also reach this level, then its corresponding unit price is about US$17,000, the daily "net profit" is about 9,500 ETH, and the corresponding ETH burned every day is about 18,000 (here assumes that the speed of Ethereum issuance remains unchanged).

It should be noted that these 18,000 ETHs are the average burning value per day. To convert to the actual daily situation, I estimate that the actual burning ETHs per day will be between 15,000 and 30,000 ETHs.

So to be more conservative, when Ethereum burns about 20,000 ETH every day, Ethereum's unit price and market value will be considerable.