If Ethereum were a country, what would be its GDP?

Author: Diario

Translation: MetaCat

Typesetting: MetaCat

Traditional blockchain network valuation methods often have misunderstandings. They treat blockchain networks as businesses and use formulas designed to calculate fair stock prices. These formulas are only based on very narrow considerations. This approach is fundamentally flawed.

Blockchains, especially smart contract platforms like Ethereum, are not businesses. As I explained in my previous article, they are emerging, sovereign digital economies with their own reserve currencies. These currencies not only serve their native network, but can also play the role of store of value (SoV), unit of account (UoA) and medium of exchange "overseas" - taking $ETH as an example, its role is not limited to the original main network, but also Penetrate and become a reserve currency in multiple extended networks (L2) that fall under its monetary jurisdiction and even thrive outside those borders (similar to how the US dollar operates today).

In addition, proof-of-stake blockchains (POS) introduce a mechanism similar to bonds, where participants pledge assets to protect the network in exchange for future returns. These dynamics reflect the structure of a nation-state's economy, with financial instruments supporting its defense and current and future operational stability.

In other words, smart contract-based blockchain networks like Ethereum are becoming emerging network states - digital states, which are not only demonstrated through technology stacks, but also through monetary jurisdictions and reserve currencies, common values ​​and beliefs, shared history and culture, and sometimes even foundational myths.

Gross Decentralized Product

To meet the needs of these emerging digital economies for a more appropriate valuation framework, we propose Gross Decentralized Product (GDP), a method that captures not only monetary totals, but also blocks economic activities of the chain ecosystem. Unlike the gross domestic product (GDP) of a traditional economy, decentralized GDP covers a much broader scope: it takes into account the economic activity generated within the ecosystem and monetary base, as well as the protocols built on a specific blockchain , decentralized applications and the market capitalization of cultural assets.

The rationale behind this expanded framework lies in the paradigm shift represented by the blockchain economy. While there are similarities between these ecosystems and traditional national economies, their fundamental difference is that every aspect of the economy becomes liquid and has some degree of currency. In this paradigm, output and production factors are not just components of the economy, they also become a form of “currency” that can be traded and monetized on the chain.

Therefore, the most efficient way to invest in such a blockchain economy is through its native currency. These currencies support all economic activities on the blockchain through programmable supply caps. Their value is tied to the growth of the system, which is reflected in rising market caps. Over time, the native assets of the most successful blockchain economies will generate monetary premiums and become the original form of collateral in their ecosystems, gaining access to a store of value (SoV) in the broader crypto space and even in the real world. ) status of reserve assets.

Below, we outline the key metrics that make up this framework, using Ethereum and other leading blockchain networks as examples.

ℹ️ All data used in this article comes from Token Terminal, DeFiLlama and NFT Price Floor, as of November 26, 2024.

1️⃣ Market capitalization: measuring monetary sovereignty

The market value of the blockchain's native currency can be used as a proxy for its monetary base and economic scale, similar to the role of the U.S.'s M2, M3, and M4 supply on the U.S. dollar. As mentioned before, sometimes the currency base is not limited to the blockchain's mainnet, as its native currency becomes the reserve for a series of network extensions (such as ETH's L2s/L3s), or even other blockchains outside the same currency jurisdiction. , these assets can also be transferred via bridging. It is important to note again that since the monetary base (supply) of a blockchain cannot be increased at will, what we observe is that both when its native economy expands and when its native currency transcends the boundaries of its own network and colonizes foreign economies At all times, their legal value increases to maintain and support economic growth. This is why every time we refer to the monetary base, we are referring to market capitalization.

If we take the simplest monetary aggregate (M1/M2) as an indicator, the top blockchain economies are:

• BTC: $1.82 trillion
• ETH: $400 billion
• SOL: $108 billion
• BNB: $90 billion
• TRON: $16 billion

Including LST and LRT tokens here is like measuring the M3 or M4 money supply of a smart contract-based blockchain economy. Taking ETH as an example, M1/M2 is US$420 billion, M3 is US$467 billion (LST), and M4 is US$481 billion (LST + LRT).

2️⃣ Total Value Locked (TVL): Capital utilization in DeFi

TVL measures the value of assets locked in decentralized finance (DeFi) protocols. Critics question its utility, but it remains a strong indicator of active economic activity on the blockchain. For decentralized economies, this metric is similar to tracking the scale of financial intermediation activity in the national economy. More than that, it speaks to the reliability and security of a currency jurisdiction, as well as its ability to attract investors who not only want to trade short-term, but also store their wealth for longer periods of time.

Top blockchain economies ranked by TVL:

• ETH: $66.6 billion
• SOL: $9.25 billion
• TRON: $8 billion
• BNB: $5.5 billion
• BTC: $4.4 billion

3️⃣ L1 transaction fees: income from economic activities

The fees a blockchain generates reflect how seriously users place access to its services. These fees represent the blockchain’s “tax revenue” and are calculated directly into its GDP. Having a strong and sustainable fee market is fundamental and must strike the perfect balance to provide global accessibility to users and protocol/application deployers, maintain operational stability and network security, while ideally offsetting currency issuance. Otherwise, you could end up with a dysfunctional system like we see today in debt-ridden economies.

Top blockchain economies ranked by annual fee revenue:

• ETH: $2.6 billion
• TRON: $1.87 billion
• BTC: $1.23 billion
• SOL: $590 million
• BNB: $191 million

For the purpose of this calculation, we ignore REV because a) it is not a protocol enforced at the mainnet level, and b) while not all forms of MEV are extremely harmful to users, many are, and there are reasons to think so They will gradually approach 0, and most of them will be captured by applications that try to give them back to users who offer better rates.

4️⃣ Stable currency: integration of foreign investment and currency

Stablecoins represent foreign capital in the blockchain economy. Similar to TVL (Total Locked Value), stablecoins are an important indicator of the blockchain’s ability to attract foreign investment, in other words, how the blockchain introduces real-world assets (RWA). Among the major blockchains, Ethereum dominates, with $101 billion hosted on its mainnet and another $10 billion on Layer 2.

Blockchain stablecoin holdings:

• ETH: $101 billion (+ L2 $10 billion)
• TRON: $59 billion
• BNB: $5.8 billion
• SOL: $4.65 billion
• BTC: ~$1 billion (Omni)

While not stablecoins or real-world assets (RWA), wrapped versions of BTC such as WBTC and cbBTC could also serve as interesting indicators of how smart contract-based blockchain economies are attracting foreign investment. In this context, Ethereum stands out as the most dynamic economy, hosting $15 billion worth of wrapped Bitcoin on its mainnet and layer 2 ecosystem.

5️⃣Protocols, Applications and NFTs: Economic Infrastructure and Culture

In a blockchain economy, protocols, applications, and NFTs play similar roles to the industrial and cultural sectors in traditional economies. Protocols and applications are the infrastructure and factories that drive value creation, including decentralized finance (DeFi), social finance (SocialFi), decentralized scientific research (DeSci), etc. NFTs, on the other hand, represent the culture, entertainment, and media industries, a key component of the soft power of blockchain networks, because, as we said in our previous article, culture is an integral part of its reach and identity.

Ethereum dominates both areas, with the total value of fungible tokens (excluding stablecoins and liquidity-staking tokens) at approximately $110 billion and the total value of NFTs at $4.1 billion. This highlights Ethereum’s leadership on both an economic and cultural level.

• ETH: Fungible assets are approximately US$110 billion, and non-fungible assets are approximately US$4.1 billion.
• SOL: Fungible assets are approximately US$18 billion, and non-fungible assets are approximately US$100 million.
• BTC: Non-fungible assets are approximately US$500 million

Data based on CoinGecko's top 100 market cap cryptocurrencies and NFT Price Floor's top 50 NFTs.

6️⃣ Protocol and application fees: economic activities of enterprises in

the blockchain economy

To further our understanding of blockchain economic activity, we analyzed the fees generated by the top protocols and applications hosted on each blockchain. This metric serves as a proxy for the economic output of companies and organizations operating in these ecosystems, similar to the contribution of businesses to a country's GDP.

Ethereum leads the way, with fees generated by its top protocol reaching $6 billion, reflecting its status as the most mature and diverse blockchain economy. Following closely behind are Solana and BNB Chain, which are quite active but smaller.

Cost estimates for the top 50 protocols and applications in the blockchain economy:

• ETH: ~$6 billion
• SOL: approximately US$1.95 billion
• BNB: approximately $300 million

These numbers also take into account the share of fees generated by the top stablecoin issuers operating on each blockchain. Given the high volume of transactions involving stablecoins across various protocols, stablecoin issuers such as Tether (USDT) and Circle (USDC) contribute significantly to the overall fee base.

By incorporating this metric into our decentralized total product framework, we can gain a deeper understanding of the economic vitality of the blockchain ecosystem and the level of enterprise activity it hosts.

By combining these metrics, the concept of decentralized gross output provides a more comprehensive way to measure the blockchain economy. It highlights the complexity, breadth and potential of the blockchain economy for global economic integration.

Determining how to measure and integrate the different indicators that make up the GDP of a blockchain economy is the task of future professional economists. For now, we can simply aggregate the numbers to compare the two largest smart contract-based blockchain economies:

ETH: 1) $400 billion + 2) $66.6 billion + 3) $2.6 billion + 4) $101 billion/$110 billion + 5) $114 million + 6) $6 billion = $700 billion

SOL: 1) $108 billion + 2) $9.25 billion + 3) $590 million + 4) $4.65 billion + 5) $18 billion + 6) $1.95 billion = $142.5 billion

As the largest and most diverse smart contract-based decentralized economy, Ethereum is strong in monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural impact.

The total value of the Ethereum economy (excluding the monetary base) is $300 billion, and its ratio of monetary base to total value is 1.33. Since $ETH has the characteristics of a "triple attribute asset" and can penetrate into the "external" blockchain network, comparison with the US economy needs to refer to the ratio of M3/GDP or M4/GDP, which is currently between 1.2 and 1.5.

As blockchain networks continue to evolve, a GDP-like framework will help investors, policymakers, and developers better understand their true value as a digital sovereign economy. At the same time, indicators such as the Gini coefficient and the economic diversity index may also be valuable in assessing the economic health and future potential of these ecosystems. It’s important to stress that this is not about determining the fair value of a company’s shares, but about how to fully participate in the blockchain economy as a whole.

Let's take the U.S. economy in the 1940s, a time of great economic prosperity. How could investors at that time gain broad exposure to the “American market”?

These options may include:

1. USD: For liquidity and reserve currency exposure.
2. Treasury bonds: Before the advent of the petrodollar in 1971, Treasury bonds were merely debt instruments and had not yet become a global store of value.
3. Stocks: For growth-oriented returns.
4. Art: New York gradually became the center of world art.

As we've seen, exposure to traditional economies involves investing in a variety of assets that ultimately perform differently depending on macroeconomic conditions: the U.S. dollar can strengthen during times of uncertainty, bonds provide safety during downturns, and stocks thrive during times of expansion .

Gain exposure to the blockchain economy

In an economy based on smart contracts (take Ethereum as an example), the native currency provides unique advantages as a triple-property asset: it simultaneously acts as a reserve currency, a store of value, and a bond (when pledged). Rather than needing to own a carefully configured portfolio of assets with different characteristics, a single asset such as $ETH can provide integrated exposure to the entire blockchain economy.

This streamlined approach simplifies investment decisions while aligning incentives with the growth and security of the network. You can also add a basket of blue-chip NFTs from native DeFi protocols and blockchain economies, and you’re all set!

Apply the GDP model to estimate the future value of the blockchain

economy

As we emphasize throughout this article, blockchain-native currencies should not be valued using a framework designed for joint-stock companies. Blockchain economies are easier to understand and assess as the digital counterpart to traditional nation-states, which emerged after the Treaty of Westphalia—the period when joint-stock companies began to emerge. Similar to traditional nation-states, blockchain economies are in a constant state of competition for capital, security, and human resources (i.e., developers, users, and settlers in general). This is exactly what is instinctively identifiable with the crypto-Twitter mentality—hence the tribalism and maximalism that emerges. It’s human nature: when a community feels threatened, its immune system kicks in to protect an idea, technology, or set of values ​​deemed valuable.

It is important to note that although blockchain economies have some similarities with traditional nation-states, they represent an entirely new paradigm. In these ecosystems, the boundaries between finance and other economic sectors become blurred to the point where everything: even art, entertainment, and attention, reaches some degree of monetization. This fluid nature makes it difficult to distinguish the monetary base from the GDP it represents. However, the traditional economy remains our closest reference point and provides the benchmark for predicting the growth of blockchain economies.

Now, as a thought experiment, let’s imagine what it would mean for the price of ETH if Ethereum’s growth story rivaled the most extraordinary rise of nation-states in the past century. Ethereum's current total economic volume (excluding the monetary base) is $300 billion, which is comparable to the size of the Chinese economy in 1986. It took China about 30 years to grow its GDP to $18 trillion, a figure equivalent to the current market value of gold. China's economic growth has been extraordinary, a rare feat for an economy of its size. But what’s interesting is that we can imagine a world in which a network like Ethereum State is able to replicate this unprecedented rate of economic growth.

While this comparison may already surprise you, in my opinion, the leading blockchain economies do have a case to be made to rival the performance of modern nation-states:

• Digitalization and openness
• global accessibility
• no capital controls
• Financial infrastructure suitable for an AI-led economy

Assuming that the network nation flourishes, Ethereum consolidates its dominant position in the extremely expanding DeFi and AI fields, and the final bull market situation occurs, the total economic value of the Ethereum network will reach 18 trillion US dollars by 2054, which is the same as China’s past 30 years. The development trajectory of the year matches! Under this assumption, how would we apply the GDP model to calculate the price of ETH?

If we use a conservative monetary base/economic aggregate ratio of 1.2 (similar to the current US M3/GDP ratio), Ethereum's market cap would reach $21.6 trillion, resulting in an ETH price of $180,000 (not accounting for burning due to fees resulting in potential deflation of the monetary base). However, if we consider the possibility of Ethereum transcending its native ecosystem, similar to the U.S. dollar becoming ubiquitous through the Eurodollar system, it could achieve a monetary base/total value ratio of 1.5 (comparable to the US M4/GDP ratio). In this case, Ethereum's market capitalization would reach $27 trillion, equivalent to an ETH price of $225,000.

Now, this is not an ETH price prediction or financial advice of any kind, but it is certainly interesting to think about how the GDP framework can provide a powerful lens into understanding blockchain economies, revealing what they really look like as emerging digital countries or economies. This framework also highlights that, as in traditional national economies, multiple dimensions must be assessed before investment decisions are made.

Within this framework, the rationale for investing in Ethereum lies in its status as the most dynamic and diverse blockchain economy, with an ecosystem covering a wide range of fields from financial services to cultural products, which not only gives it a strong In addition to hard power, it has also established significant soft power. This is further evidenced by Ethereum's ability to attract and retain "sticky capital," a signal that despite short-term price fluctuations, investors still view it as the safest and most promising smart contract-based economy , used for long-term wealth preservation.