Ether, the native cryptocurrency of the Ethereum ETH 0.53% blockchain, is currently trading at a significant 27% discount to its perceived fair value. This revelation comes from a comprehensive analysis conducted by the research firm RxR. This firm is a collaborative venture between Republic Crypto and Re7 Capital.
The valuation model used by RxR for this analysis is a blended version of the Metcalfe law. This law posits that the value of a network is directly proportional to the square of its user count. In the context of Ethereum, this means considering not just the active users on the Ethereum mainnet but also those on the rapidly expanding Ethereum scaling networks. Traditional models, in contrast, tend to focus solely on the mainnet’s active user base.
Ether’s primary function allows users to execute transactions on the Ethereum blockchain. Additionally, users can earn interest, participate in the network’s security through staking, store non-fungible tokens, and engage in various other activities. As such, the value proposition of Ether has always been intrinsically linked to the usage of the Ethereum network.
Lewis Harland, an analyst at RxR, pointed out in a recent research note that Ethereum’s network valuation aligns more closely with the updated Metcalfe law index when the active user base of Ethereum’s scaling networks is considered. Without factoring in these networks, the valuation of ETH stands at $275 billion, which means the current market capitalization is trading at a 27% discount.
Furthermore, Harland emphasized that Ether’s market capitalization aligns better with the blended Metcalfe law model than with the traditional model. This is evident when considering the increasing activity on layer 2 networks or off-chain solutions developed atop the mainnet to alleviate scaling and data bottlenecks.
Layer 2 solutions have emerged as a significant area of interest in the market. Protocols within this space have found their unique selling points. In contrast, Arbitrum leads in transaction volume, and Optimism is carving a niche with its superchain vision.
Over the past two years, the total value locked in layer 2 protocols has surged, tripling to exceed $9 billion, as per data from L2Beat. Harland highlighted a pivotal shift in April 2021 when scaling networks began significantly contributing to Ethereum’s blockspace.
This was evident when platforms like Curve, Sushiswap, Decentraland, and Aave launched on Polygon MATIC 4.81% (PoS) between April and May 2021, driving the total value bridged to Polygon to a staggering $10 billion.
Over 250 applications on Ethereum have a total value locked of more than $1 million. Nearly 30 layer 2 networks have an aggregate total value locked of $10 billion, primarily due to the rise of rollup-centric solutions. Harland underscored the importance of incorporating layer 2 activity when determining the fair value of Ethereum using the Metcalfe law models.
