Ethereum: The Permissionless Global Ledger
An institutional primer on the World’s largest smart contract platform and the ecosystem it supports
[Originally published December 8, 2023]
What is Ethereum?
Ethereum is a blockchain protocol. It is a decentralized, open-source, globally-distributed ledger home to smart contracts and applications that is powered by a global set of computers running a complex set of rules. The Ethereum Network is referred to as simply Ethereum or Mainnet. The native token, Ether or ETH, is used to pay fees and incentivize network participants. ETH is the oil which powers Ethereum and prevents on the network. The Ethereum Virtual Machine, (“EVM”) is the execution environment in which smart contracts operate on Ethereum. EVM is the most utilized execution environment for crypto and digital asset applications today.
How does an Ethereum transaction work? (Simplified)
The journey of a transaction on Ethereum is in and of itself a multi-billion-dollar industry today. It requires a number of highly specialized actors which operate with a high level of opacity. The most basic tenant of Ethereum is a user or Externally Owned Account (EOA). Anyone with an internet connection can create and use an EAO. Other key pieces of this supply chain include:
A) Wallets: A software program, for users to securely store and manage digital assets while also interacting with blockchains
B) Nodes: A distributed group of computers running software that verifies transactions and blocks
C) Validators and Searchers: A Validator is a virtual entity that lives on Ethereum and participates in the consensus of the network. A Searcher is an entity that runs complex algorithms to detect profitable transaction opportunities and automatically submits them to the network.
D) Relays: Entities used by validators to outsource block production. Relays are specialized actors who help validators earn extra revenue through the ordering of transactions, this excess revenue is often split between the relay and validator.
The Ethereum Ecosystem in the largest and most vibrant in crypto
Bitcoin is the largest digital asset by value but has little within its ecosystem. If Bitcoin is gold, Ethereum is oil with an extremely active and growing GDP. The impact is two-fold here, ETH benefits from activity on Ethereum and gains constituents as it matures.
Blockchains offer the promise of global composability, the EVM is the gold standard of this composability. By number and assets (represented by TVL), EVM blockchains represent the vast majority. By activity (measured by volume) and applications, they dominate even further.
Operating history is a trait rarely discussed when it comes to digital assets – the market accepts weeks or months (sometimes days) of operations as sufficient and hundreds of millions in assets climb aboard software that is lightly battle tested. Though it was not the first platform to deploy smart contract (this was Bitcoin), Ethereum has an extremely long history by digital asset standard. It is home to many “firsts” for crypto as well, as it enabled much of decentralized finance including trading markets, permissionless lending, and countless other decentralized applications (“dApps”).
Ethereum supports hundreds of dApps generating billions in annual fees with values well into the billions. Its top constituents include:
•Lido ($LDO), a staking provider which generates over $700M in fees annually, supports nearly $19B in assets, and has a current fully-diluted market cap (“FDMC”) of over $2.3B
•Maker DAO ($MKR), a decentralized lending and borrowing protocol who pioneered overcollateralized (read secured) stablecoins. Maker DAO generates nearly $200M in annual revenue, supports over $5B in assets including $3B of structured credit, and has a current FDMC of $1.5B
•Aave ($AAVE), a decentralized lending protocol, which supports over $5B in assets and has a FDMC of $1.4B
Growth vectors and the Ethereum roadmap
Ethereum has embarked on a roll-up centric growth path. Rollups are one type scaling solutions for Ethereum. Instead of using Mainnet for all transactions, roll-ups are utilized for cheaper transactions and higher throughput then written back to Ethereum Mainnet for security. The two primary solutions are Optimistic Rollups and ZK-Rollups which offer a variety of positives but also tradeoffs. ZK rollups provide higher privacy and more efficient aggregation but are computationally intensive and not yet broadly commercialized, leaders in this space are Starknet, Starkware, and Polygon. Optimistic rollups have been further commercialized, the two most notable being Optimism ($OP) and Arbitrum ($ARB).
•Optimism, the ecosystem supports nearly $500M of stablecoins and $500M of assets. The OP token has a FDMC of $7.3B
•Arbitrum, the ecosystem supports approximately $2B of stablecoins and $1B of assets. The ARB token has a FDMC of $10.0B
The modularity of the EVM allows multiple chains to be developed as rollups and beyond while all inheriting properties of Ethereum Mainnet and its validator set for security and decentralization. This path allows for i) cheaper transactions in dollar terms, ii) cheaper transactions in ETH terms, iii) higher throughput for blockchains, and iv) more customization than a single “one-size-fits-all” solution.
ETH as an asset
ETH is highly liquid but extremely volatile. Trading globally and 24/7 it responds violently in the short-term to changes in speculative demands and flow as well as market shifts. In the long term, future economics and roadmap are not absolute and can be shifted (although this is typically a slow process). Some trading metrics:
ETH possesses unique traits of each fixed income, commodities, utility assets, and equities
Fixed income: Equipped with an embedded yield, ETH provides a form of paid-in-kind interest however it is highly variable, not contracted, and position dependent (not paid equally to holders)
Commodity: ETH is scarce and can be used for and to fuel other activities similar to oil. Completely digital, it has little to no storing costs however
Utility asset: Like airline miles or credit card points (purely digital), ETH can be easily transferred at anytime and retain its monetary value. Unlike utility assets however, its benefits are defined externally and cannot easily be changed or altered. ETH can also be transferred to anyone where utility assets cannot
Equity: Defined operating metrics allow comparability like public (or private equities). ETH has users, the network generates fees, its operations enable various types of commerce. It is however not owned or controlled by a Board of Directors or single entity
The programmatic operations of Ethereum can limit the supply of ETH and even create deflation it its total supply
Ethereum burns a portion of the fees used to transact on the network. This supply change creates an upward bound on the total number of Ethereum in circulation if basic network activity were to persist. It also creates a deflationary mechanism if activity were to increase
The endogenous nature of Ethereum and EVM blockchains build an environment which naturally benefits ETH
Ethereum Mainnet is the most vibrant ecosystem in digital assets sporting the deepest liquidity, the most application, and the most assets in terms of number and value. Where certain ecosystems experience leakage, these benefits compound in that all activity flows back and further benefit ETH itself
Valuation parameters and considerations
What makes ETH appreciate or depreciate, in dollar terms? How much is a user willing to pay for the right to publish a transaction to Ethereum (dollar terms)? How much will this transaction cost to accomplish (ETH terms)? We can extrapolate to the entire network, the globe, or the universe, but basic parameters remains.
Ethereum transactions will only get cheaper in ETH terms as scalability increases
The average cost of a transaction over the last year was 0.0032ETH
Current costs to use the network, in dollar terms, are suboptimal for broad adoption
The average cost of a transaction over the last year was $5.07
In short, both should decrease. Using this methodology, we can also impute a price for ETH:
Price = Average transaction ($) / average transaction cost (ETH)
Methods for valuing ETH
Comparables analysis: Users, activity, assets, network metrics (validators, asset staked) and volumes can be helpful to evaluate ETH against other blockchain assets. They do not however provide a strong footing for valuation given nascency of many chains, revenue attributes, and security considerations.
Contextually, comparables are important but only for relative analysis
Earnings yield: While ETH itself has no earnings, all are distributed among participants and users in the network, it does have a yield (paid in-kind). From this yield, we can attribute a multiple for valuation purposes. The S&P 500 has an earnings yield that fluctuates in the 3% to 4% range, coincidentally similar to that of Ethereum’s ETH staking yield. There is however some nuance in this methodology.
Five of the top ten S&P 500 components do not pay a dividend, the dividend payers are typically seen as lower growth (hence return of capital)
Dividends are paid in cash, ETH staking yield is paid in ETH
Ethereum has higher growth prospects than the S&P 500
Dividend payouts rarely fluctuate, ETH staking yield has high variability
Earnings yield can provide a bounds on valuation but not an absolute
Dependence: Ethereum has thousands protocols that run on top of it which generate billions of dollars in annual revenue. Without Ethereum, they are of significantly less or no value. Because of the ecosystem that supports ETH, it can have a floor valuation level with staying power. We can deduce a price each of these parties might be willing to pay for an Ethereum transaction to preserve their business and therefore impute a price
Replacement cost and substitutes: What attributes are only available on Ethereum? How much might those be worth to me from a business standpoint? Approx. 18B ACH transactions occurred in 2022, over $1 quadrillion was facilitated by wires transfers. These numbers are useful starting points when positing a floor valuation for ETH.
Through dependence and replacement cost, we can arrive at a reasonable floor valuation for what ETH might be worth on a global scale
Ethereum floor value analysis (December 2025, unless noted)
Our analysis focuses on floor values of ETH given various operating scenarios. Note that these prices are not discounted to present value, optionality (stake ETH at home, liquid stake, hold spot, etc.) in how assets are deployed and various level of risk tolerance, one token today may not equal one token in the future.
Given the size of the Ethereum ecosystem, we believe it is easier to calculate what digital asset protocols (that require Ethereum) would pay in a burn-down scenario versus attempt to articulate and replicate the art of the possible as Ethereum disrupts more and more global industries. The basis for our assumptions relies on many knowns today and synthesizing growth levers:
We know Ethereum blocks have a gas limit of 30M and a target of just over 50%
We know rollups provide cheaper transactions than mainnet, we believe they are just beginning to scale
We know that the base fee of an Ethereum transaction is burned
We have estimated impact of blob transactions and varying levels of activity, among others
Our approach attempts to take a micro-level analysis on an average block basis in attributing a value to the ETH token.
Top-down analysis of imputed ether prices can provide a peak into potential upside valuation, ranges published have been well upwards of $50k per token with a market cap well into the trillions. We attempt provide insight into floor level numbers.
Additional support data
Product vs Protocol
Websters defines a protocol as “A set of formal rules describing how to transmit data, especially across a network.” It is important to delineate between products and protocols in the context of digital assets.
Products are more typically understood since they are more commonly consumed. One might use Google while underappreciating the fact they are utilizing web queries and TCP/IP. It is also more straightforward to understand how products generate revenue and accrue value versus their protocol counterparts, this does not make protocols any less valuable simply more complicated. Ethereum begins this shift.
Federal Reserve Transfer Data
Fed wire line and automated clearing house (ACH) transactions move a significant amount of money. $43T for ACH which is typically used for lower value transactions at a higher frequency (avg. transfer for approximately $2.3k). Over $1 Quadrillion (one thousand trillions) is moved via Fed wire lines with transaction values in the mid-single-digit millions.
This is not just US-based individuals moving funds so extrapolating it globally is inaccurate. However, these services are not free through financial institutions for users and are a significant source of fee revenue for banks, for business accounts wires typically cost $20 to $30 for execution and receipt. ACH is less for retail but comparable for business use.
Contextually, if 1% of ACH payments were conducted via Ethereum, it would represent 45% of total Ethereum transactions in 2022. For wires, if 0.1% of these funds sat in stablecoins it would increase the total supply of stablecoins in existence by 8x.
About Florin Digital
Florin Digital is a crypto-asset investment firm deploying at the intersection of finance and technology.
We seek out early-stage opportunities in liquid markets which present an asymmetric risk-reward profile. Our thesis-driven, hands-on approach allows us to unlock significant latent value in the teams and protocols that we partner with.