- The valuation model is based on Metcalfe’s law, the study says.
- Calculations include Ethereum Layer 2 active user base.
The valuation or fair price of Ether (ETH), Ethereum’s cryptocurrency, is 27% below what it should be, according to calculations by RxR Research, a market research firm.
The company’s calculations are based on Metcalfe’s law. This law determines that value is given by the number of users on a network. For example, a network with 100 users is ten times more valuable than a network with 10 users.
“The more active users the network has, the more valuable it will be. This also applies to cryptocurrencies like ETH.” According to an analysis by RxR Research, the company says its fair market capitalization is $275 billion.
This means that every ether should have, currently a fair price of around 2,200 USD, if we rely on the data provided by this research. This means that ETH is undervalued according to RxR Research.
The company states that the network’s value matched Metcalfe’s law index “fairly well” despite only focusing on the user base of Ethereum’s mainnet (mainnet or L1). This has caused their value to decrease over time as many have moved to Layer 2 (or L2) scalability solutions.
L1 is the main layer of the Ethereum network. It is the underlying infrastructure that provides the ability to settle and execute smart contracts, albeit with limited scalability.
Everything has changed for the company since 2021 Emergence of Layer 2 protocols on Ethereum. RxR Research cites as an example the launch of platforms such as Curve, Sushiswap, Decentraland and Aave, which launched on the Polygon sidechain between April and May 2021; and that together they have increased the total value of the Polygon network to $10 billion (although it should be made clear that Polygon is not exactly a second layer of Ethereum, but rather a side network or Side chain).
“In other words, spin-off networks like Polygon began to provide a scalable foundation for a growing number of users, who in turn contributed financially to their parent chain Ethereum,” says RxR.
In fact, the Arbitrum network, which is a rollup (second-layer network that executes transactions outside of the main network), has in some cases exceeded the number of daily transactions conducted on the main network, as CryptoNews reported. Rollups allow increasing the transaction capacity of the network by keeping a large portion of execution outside the L1. The idea behind rollups is to process and store most transactions outside of the main network.
With this in mind, RxR Research decides to make an adjustment to the data it selects to evaluate the network and include the active user base of Ethereum scalability solutions in order to “build a more relevant model.”
“The updated model, which takes these networks into account, puts the market capitalization of ETH at $275 billion.” Compared to the previous model, it is negotiated at a 27% discount.
As you can see in the graphic below, the green dot shows the current number of users and market capitalization. The red dot on the right shows what the fair value ETH should be at the moment.
In this new model, they have predicted the value of ETH based on Growth rates based on active users of the ecosystem that are expected in the coming years.
“We see a realistic possibility of 200% growth in daily active users in 2024, implying a fair network value of $800 billion by 2025,” he notes. This number refers to the market capitalization of Ether.