In the traditional investment world and venture capital, the business model is 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 to discuss this element. But I think it’s important to go back to normal logic, back to common sense, and discuss its business model for all other projects except Bitcoin and similar collectibles.
I’ll start with Ether.
To see what Ether’s business model is, we have to look at how Ether works, what services it provides to its users, and what its revenue streams are.
Ether acts as a layer of blockchain, and the services it provides are to support the deployment, running, transferring, etc. of upper layer applications (smart contracts) as well as users (wallets). Its source of revenue is the GAS fees that these applications as well as users pay for these actions (transactions).
The GAS fees it receives can be further subdivided into two categories: tips to miners and burned GAS.
Tips to miners can be viewed as Ether’s expenses to maintain the system.
At the same time, Ethernet issues additional tokens every year to reward miners for mining. This part I also consider as an expense.
The GAS that is burned off is meaningful revenue that goes back to all Ether token holders, and this revenue can be viewed as being used to buy back the tokens and destroy them, to the benefit of all token holders.
So the total amount of tokens burned minus all the additional tokens issued is the real effective “net profit” of the Ether network.
This is the Ether business model.
The number of Ether burned per day can be found on Etherscan (https://etherscan.io/chart/dailyethburnt). After EIP-1559 comes into effect in August 2021, the peak daily burn in 2021 will be about 10,000 to 20,000 ETH.
On Etherscan (https://etherscan.io/chart/ethersupplygrowth) you can see that Ether is growing by about 3 million ETH in 2024, which is about 8,300 ETH per day. The daily incremental issuance is about 8,300 ETH.
If we calculate the daily destruction of 10,000 ETH, the income of the peak of the Ethernet network for one year is 3.65 million ETH. If we calculate the daily destruction of 20,000 ETH, the income of the peak of the Ethernet network for one year is 7.3 million ETH.
Subtracting the incremental issuance from the total amount of destruction, we get the approximate annual “net profit” of the peak of the Ethernet network. The “net profit” is 650,000 ETH ~ 4.3 million ETH.
Based on the approximate average price of Ether in 2021, which is $2,000, the net profit is $1.3 billion ~ $8.6 billion.
Let’s compare the maximum value of $8.6 billion with Ali, which is also a platform:
Ali’s latest annual report shows that its net profit in 2024 will be about $21 billion.
As you can see, Ether’s annualized maximum net profit at its peak is close to half of Ali’s.
In 2021, the year of peak net profit, Ether’s price will be around $2,000 to $4,000, and its corresponding market capitalization will be around $200 billion to $500 billion.
So Ether’s maximum market cap that year was $500 billion, and Ali’s current market cap is $300 billion; but Ether’s maximum annualized net profit that year was less than half of Ali’s.
So it looks like Ether was overvalued back then, but not by as much as we subconsciously think.
So overall it looks like the traditional valuation approach is applicable in the crypto ecosystem as well.
Let’s further envision that if the ether ecosystem were to boom again in the future, and its scale were to reach the size of Amazon today, we could also calculate its corresponding market capitalization roughly by analogy.
Amazon’s net profit in 2024 is $59.2 billion, and its current market capitalization is $2 trillion.
If Ether could reach this level, then its corresponding unit price would be about $17,000, and its “net profit” would be about 9,500 ETH per day, which corresponds to about 18,000 ETH burned every day (assuming that Ether grows at the same rate).
It should be noted that this 18,000 ETH is the average of the daily burns, and I estimate that the actual daily burns will be between 15,000 and 30,000 ETH when converted to the real daily situation.
So as a conservative estimate, when Ether burns off around 20,000 ETH per day, Ether’s unit price and market capitalization will be more significant.
