Bankless - ETH to $50k by 2030?! VanEck's Bull Case

Episode Date: May 25, 2023

Can the price of Ethereum really reach $30,000 by the end of the decade? On the show we go on a journey through VanEck’s new report detailing how exactly Ethereum can get there. ------ 📣 CONSENSYS | DILIGENCE FUZZING https://bankless.cc/diligence-fuzzing ------ 🚀 Airdrop Alpha is waiting for you on Bankless.com  https://bankless.cc/Alpha   ------ BANKLESS SPONSOR TOOLS:  🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2   🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask  👾STADER LABS | ETHX LIQUID STAKING https://bankless.cc/Stader  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku  🎮IMMUTABLE | GAMING ECOSYSTEM https://bankless.cc/Immutable  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  ------ Topics Covered 0:00 Intro 6:37 ETH to $11.8K 11:17 ETH Versus T-Bills 14:29 Predicting Ethereum Revenue 19:12 ​​ETH As a Currency 25:21 Ethereum Security As a Service 30:20 Base vs Bull vs Bear Case 36:15 $300 or $50k? 45:14 The Impact of L2's 50:08 Ether vs Gold vs Bitcoin 53:56 Applying The Model To Solana 59:47 Inflows Are Important 1:01:45 Van Eck's Investing Strategy 1:05:06 When is The Next Bull Market 1:08:22 Closing And Disclaimers ——— Resources: Matthew https://twitter.com/matthew_sigel  Patrick https://www.linkedin.com/in/patrick-bush-9a21a7b  VanEck’s Ethereum Report https://www.vaneck.com/us/en/blogs/digital-assets/matthew-sigel-ethereum-price-prediction-118k-by-2030/   ---- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures   

Bankless Nation, we have a special bonus episode for you today. We have Van Eck on the episode today. They've made a bold call for the price of ETH. Yes, they brought the numbers. Is Eith Price going to 50K? That's what they call their bull case by 2030. They also have a base case and a bear case. We'll talk about all three of those and the variables that go into it.

And I've got to say, this is probably the best report that I've read on Eith Price, definitely all year, maybe ever. And it's by one of the most respected institutional analysts in the game. This is Van Eck speaking today. A few things that we're going to cover. And by the way, it's just me solo today. David is out. But I've got this covered.

Super excited to talk about what happens when we model eth the asset as we might model an equity based on block space sales. We also talk about the base case, the bull case, the bear case for ether the asset. 50K is the bull case. We talk about how we got there. and the variables that went into this analysis and the puts and takes, can we model ether the asset as we might model Bitcoin the asset? Or is it different in some way? How about Solana? How about Adams?

How about other alternative layer? Once we talk about that today, we also talk about what other institutional investors think about ether the asset. Are the institutions even here yet? Are we about to get another bull market or are we going to have to wait? Maybe another bull market doesn't come. I asked the analysts at Vanek those questions today. Guys, before we get into the episode, I want to introduce the concept of diligence fuzzing to you.

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And that's what consensus is doing here with diligence fuzzing. If you are a developer and you need this tool, access the link in the show notes. You can find out more. At this point in the intro, I usually ask David what the significance of this episode is. But since he's not here, I'm going to answer the question today. You've heard the mental model for Ether the asset on Bankless before. We've talked about how to think about Ether, the asset, but we don't often have the opportunity to get into concrete numbers.

Here in today's episode, Van Eck has brought the numbers. That's what's significant and exciting. And I think this episode will help you think like an investor. It'll help you reestablish your conviction on this asset class. It'll help you check your assumptions. It'll arm you with data to predict what will happen next. For instance, at one point we talk about one layer two. What happens if one layer two on Ethereum gets disproportionate market share?

They become really big. Is that a good thing or a bad thing for the price of ETH? According to our analysts today, it might be a bad thing for Ether. And they give their reasons why. Another concept this model reveals, will another alternative layer one outstrip Ethereum? Will there be an Ethereum killer? This is the opportunity to look at the actual numbers that would provide a clue to that. the leading indicator of something like that happening. I also think this is an opportunity to see

how institutional investors are viewing ether the asset. Van Eck is in a position to know. Are the institutions seeing what we see? Is there still an opportunity for retail to front run the opportunity? That's what we always talk about in bankless. And I think there still is. So this is one of my favorite types of episodes. It's an episode that's really going to sharpen your tools as a crypto investor. and we're going to get right to it with Matthew and Patrick, the analysts over at Van Eck. But before we do, we want to thank the sponsors that made this episode possible, including our number one recommended exchange, Cracken, go set up an account. Cracken Pro has easily become the best crypto trading platform in the industry.

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Dow treasuries in the world. Bit Dow. Mantle already has subcommunities from around Web3 onboarded to help the growth of Mantle, like Game 7 for Web3 gaming or EduDau for the world of D-Sai and buybit for TVL, liquidity, and on-ramps. Check out Mantle at mantel.xyz and follow them on Twitter at zero-x Mantle. Immutable is at the forefront of Web3 gaming on a mission to bring digital ownership to every player offering the world's best games and game development platform. Immutable lets game builders and players focus on great gaming experiences. So, build your next Web3 game on easy mode with Immutable's leading full-stack Web3 gaming platform. It's built-in Ux features like the Immutable Passport are designed for games to scale to the next billion players coming to Web3.

With Immutable, players can sign up with an email, pay with a credit card, and experience a frictionless purchase flow inside of games. So, discover your next favorite game and explore a network of 150 games building on Immutable, including such titles as, Gauzen chains, guilds of guardians, alluvium, embersword, and metalcore. So join Web3's largest ecosystem of games and players. Build, play, and connect at immutable.com. Bankless Nation, we are super excited to introduce our next guest from Van Eck. We have Matthew Siegel. He's the head of digital assets research at Van Eck.

He joined Van Eck in 2021. After 10 years in research investment bank, he now leads a team of 10 working full time on crypto at Vanek. And his first hire was Patrick Bush. At least that's what my notes say. Hey, Patrick, he is an analyst at Van Eck, digital research as well. His role at Van Eck is to focus on finding tokens that go up. I don't know who wrote this, but it's brilliant.

That's my job, too. I try to do that too. He does a lot of financial modeling around crypto assets. These two gentlemen, I believe, were responsible for the report that we're going to be talking about today. Matthew, Patrick, it's great to have you on bankless. How you doing? Great to see you, Ryan. Thanks for having us.

Yeah, good to see you. Good to be here. It's, well, you know what? It's good to have you here. It's good to have you writing like this in this space. I think David and myself on Bankless, we've been on a quest to actually try to understand this asset called Ether, you know, the asset that Ethereum produces. And I think you guys have done a fantastic job in this report. And I almost feel like we should just dig right into the report.

I've got a lot of side questions for you, but like it kind of starts here. and here's the report. I'm going to show it on screen. Ethereum price prediction, 11.8K, that's almost 12K, by 2030. And here's the opener for me. That just kind of like hooks the reader right into this. In light of Ethereum's recent hard fork,

which allows users to withdraw staked Eth, and in our view, creates a major new competitor to UST bills. We revisited our Ethereum estimates, and this is the report, a major new competitor to U.S.T. Bills. How dare you? Like, that sounds so audacious. Matthew, over to you. How can you say something like this in a report like this? Well, we are an audacious shop. Vanak is a macro shop. We were founded in 1955 with a history of

trying to manufacture innovative new products that will capture the investment zeitgeist. And in the 1970s, that was gold stocks, believe it or not, right? Gold had been illegal to own for three decades. And the founder of this firm got conviction that something was going to change. And he pivoted an international mutual fund into almost entirely gold stocks in the early 70s. So he was an Austrian economist with a hard money bent. And that mutual fund ended up being the best performing mutual fund in the country throughout the decade of the 1970s. And the firm's DNA was built around that ethos, which is going off the gold standard is going to have unintended consequences.

It might take a decade. It might take five decades. But here we are. And we are on the hunt and have been on the hunt for alternative storage of value that will retain the characteristics of hard money during uncertain times. So the founder who did that as deceased, but his son, Janvanek, now owns and runs the firm. And he got conviction in 2017 that Bitcoin could be a major competitor, competitor or alternative to gold. And we began investing our gold profits into BTC, into ETH, into venture capital investments in the crypto ecosystem and startups. And we have a number of products that we offer to investors and also off of our own balance sheet that have helped us gain insight and a network and some confidence in the space to try to model.

something like ETH. So we first took a crack at this in 2021. That was before the hard fork to proof of stake. And we staked a de minimis portion of our funds after the hard fork last September. And now with the Chappellea upgrade, we really got a lot more conviction. We've increased our staking by an order of magnitude. And what gave us the conviction to do that is the fact that you can now withdraw. So a lot of the institutions, money managers are operating on a monthly calendar. Our private funds get subscriptions and redemptions monthly. And it's crucial to be able to withdraw your staked digital assets in order to satisfy your customer redemption request. Hopefully we don't have too many of those, but should

they come? So when Chappella came, we thought it would make sense to revisit our estimates in light of the consensus mechanism changes and see what price target came out. So that's what Patrick and I have done. You know, it's so cool here. And I'll say this to the bank list listener. Hearing financial analysts use the term chapella just brings like a lot of warmth to my heart. I mean, these are like esoteric Ethereum hard fork names. And that's how closely this group is kind of paying attention to it.

And I think that comes out in the model. I want to ask more questions in the background of Van Etc because I know it's a trusted name in the institutional space, but I feel like a lot of crypto folks don't know too much about it. So we'll get to that in a minute. But I want to throw the first, I want to throw the same question to Patrick. So this, this, a major new competitor to US T-bills calling ETH that. Okay, Patrick, did Matthew put you up to this? Like, how did you have the audacity to write this in a report? Is ETH really a competitor to T-bills? What makes you say that? And how does that sound to the typical institutional investor? I'll throw that one to Patrick.

Yeah, I think Ethereum represents the Gordi... and not finance, at least all crypto does. Whoever can figure this out controls the future of finance, in my opinion. And I don't think that's too far to say. I think a really interesting point to look at is the way we see this is it's accruing a lot of value from use case more than monetary premium. The monetary premium comes in and changes the multiple more than anything else. I think that's kind of how we view it.

Other institutions do not view it in such a way. that you have more as an asset that's similar to like a really high beta NASDAQ type stock. We see it as that, but also more. Okay, well, that's good. Before we get back to Vanek, then maybe since you've opened the door, Patrick, let's talk a little bit more about the model itself and the numbers here, which are very precise. So we've got 11.8k by 2030, and that's one of the cases unp pictured here. But I'm going to pull up the full chart here.

This is Ethereum Revenue and Price Targets. We've got today what the price was at the time of this report, you know, around, well, actually, this isn't price, sorry. This is Ethereum revenue that we're looking at. And that's where you're deriving the price target. Around today, we've got the bottom here. $1,900. That's what ETH is trading at approximately right now-ish, although I haven't checked the price

in the last five minutes. We could be over under by, you know, 25% or something because it's crypto. We've got the base 2030 case of 11 point or 1.1.1. sorry, 11,849. We've got the bear case, which I don't like to look at, but $343 for the price of ETH. And we've got the bull case of 51K, all the dates there by 2030. If you're listening on the podcast, you can't see this. I encourage you to go check out the report in the show notes or take a look at the YouTube

so you can get the visual here. And the way you're modeling this, as I understand it, to your point, Patrick, is you're basing this on revenue, on cash flows. This almost looks like the way you might model an equity of some sort. So I think the substance of this report, to your point, Patrick, ignores monetary premium entirely. We'll come back to monetary premium, what that might mean. I think we're looking at this as a cash flow type asset, I guess similar in some ways to a piece of property or an equity or something like this,

something that can be modeled as an asset that produces cash. Can you talk about this a little bit more? And let's talk about how you're actually able to try to predict the revenue, because I think it breaks down to categories. So I'll throw this one to you first, Patrick, and we'll come back to Matthew. Yeah, maybe I'll just take the first part, because there's a top-down element and then there's a bottoms-up element. And the top-down element is what are the principal and markets that intermediate

transfer of value. So we divide into three. There's finance, which covers like banking and brokerage and lending. There's Metaverse, which encompasses gaming, social networks, advertising. And then there's infrastructure, which is decentralized storage, decentralized compute. Those are the principal end markets. And we look at what are the revenues that are being generated by those end markets today. And we make some initial assumptions as to what percent of the value in each of those end markets will be intermediated by open source blockchains. So that's a starting point. I see. By the way, how did you break that down in Ethereum like transactions? How did you determine, you know, which of those, you know, like which portion of this is attributable to

finance banking payments versus, is this a whole like total addressable market? type of analysis here? Yes. So the total addressable market is divided into those three segments, finance, Metaverse, and infrastructure. We look at existing business models and how much revenue they're producing in those three end markets. And then we make some admittedly unknown assumptions about what percent of that revenue opportunity can be captured by open source blockchains. So just to dimension that, in the case of finance, our base case, we're only assuming that 5% of all banking, brokerage, lending, payments, activity, the current revenue stream,

only 5% can be or will be addressed by open source blockchains. In the case of Metaverse, where we incorporate social media as well as gaming, the estimates are much higher, 20% because we think new markets will be born off of this technology and new use cases. And then for infrastructure, a more modest 10%. So think of that as the percent. of like AWS or Azure market share that might be chipped away at by decentralized alternatives, which right now might be more costly, but provide other use cases. So it's with those penetration levels, I guess, that we kind of set the TAM. And then to what extent can Ethereum address those end markets? What are the possibilities that Ethereum can take a meaningful

market share of those penetration? That's where the kind of a line by line estimates come in, and I'll toss it over to Patrick for that. Yeah, so like the way that we think about this is that these end markets have this large revenue base and going to the future, they're going to look at crypto as an opportunity, both to reduce costs and find new revenue opportunities. So we thought like a logical way to think about a take rate was a construction of how that business would unfold in terms of what they would pay. So in our model, we talk about what current businesses that deploy to blockchain, like

uniswap or obvi or compound or paying in terms of block fees versus like what they accrue in revenue. And so we thought that be like a logical split. One of the things that this looks at is it says, okay, the transaction rate is going to have some sort of take rate. We don't precisely know what that take rate will be and why. And that gets a little bit more into the modeling going forward. Like one of the problems we run to in a model is if you see significant execution use case on Ethereum, you have substantial burn going forward. And we're not sure if that's kind of a way to look at the ecosystem being value positive for burning a substantial amount of supply. Like in some years, if you have a massive adoption or massive growth in adoption, you might burn 20 to 30 percent of the supply.

And so we don't really know precisely how the value will be accrued by blockchain, but transaction seems like the best point for it. But that's kind of like the starting point. So businesses are deployed a blockchain or they're going to save costs on blockchain or a combination of both. And some of that will accrue value to Ethereum. Can you talk about like the current state of Ethereum? Because I think some people aren't aware that Ethereum basically produces revenue today, right? They haven't even really looked at Ethereum from this perspective. So how do you get the numbers in the today column over here?

Yeah, that's simply the gas usage. So we look at total gas use sheds going back a year. And then using Artemis data, we're able to segment the different use cases that are currently using gas to the Ethereum. So looking at finance, baking, and payments, we found the protocols or applications that logically fit in those segments for an estimate of what the percentage breakdown of the current usage of the chain was. And so if you extrapolate that further, you look at, okay, what's the burn rate versus what's the base rate, the burn rate versus the, the, tip fee. That's kind of how we looked at it. So we include that as transaction revenue. The next line item was was MEV revenue. Looking at the MEV revenue was a little bit difficult to estimate. There's various sources like flashbots and others. But we figured long term there'd be some sort of take

rate on the assets. And that would kind of mirror something you'd see in Tradify, looking at like something like the CME group and in the relation to prop traders. That's kind of how I got my estimates for long-term M-EV was, okay, how much capital is deployed on the blockchain and what's the approximate revenue of these proprietary trading firms? What units am I in right here? So if I go to Ethereum total revenue today, I see 2,539. What is that? That's $2.5 billion.

So we have today's annualized revenues for ETH at $2.5 billion, growing in our base case to $51,000. And you're right that we're looking at this as a traditional cash flowing equity, so to speak. So we take that revenue, we tax it, and then we discount it back to today at a weighted average cost of capital of 12%, which we get by analyzing Ethereum's beta to equities over the last number of years. But that's the best part of this whole thing, though. Like the margins are enormous. This kind of business model is very high cashful.

Like there's a ton of value that comes to this directly in cash. It's why I think it's a very exciting asset class compared to like a traditional company that has large amounts of overhead. Like you don't see any of that here. And to the point on kind of monetary premium, our terminal valuation, so what multiple on that revenue number will investors pay in 2030? That's kind of the $100 trillion question, we hope. And we're assuming that the market will pay something like, you know, 30 times free cash flow. So that equates to like a 3% yield, which is something that feels very normal. And to those who-

Yeah, how does that compare to equities 30 times free cash flow? It's a growth stock. So similar to like a Netflix or, you know, Amazon? Yeah, probably higher, higher, a little bit higher than those names. So in a speculative, leverage-driven bull market in which, like, say, emerging market consumers are just desperate to get their hands on a hard asset that is different from the dollar and willing to borrow to do so, like could that 30 times free cash flow go to 300 times? Maybe. Like, if you look at an asset like gold, that essentially has no free cash flow except for a de minimis stream. If you lend your gold out, you can earn a small stream of income that may cover.

your storage costs. Gold's free cash flow is not 3% at all, right? It's maybe an order of magnitude lower than that. So to those who look at this and say like, oh, it's too conservative, you know, maybe that's, maybe that's the reason is we're not assuming a leverage-driven bubble conditions. This is more about the cash flow. That's the beauty of this model. That's what I really like about this. And so I want to make sure that listeners understand this so far. So today, on an annualized basis, we have Ethereum total revenue that we see of $2.5 billion annualized, okay? Transaction fees, that is the gas fees, essentially, make up $1.9 billion.

The team at Vanek have split this into a few segments, basically, and you can kind of do that, the finance banking payments, the Metaverse infrastructure. Those are the sub-segments that compose that $1.9 billion in ETH transaction fees. But it doesn't stop there because we also know bankless listeners about this thing called MEV. Of course, this is block builder revenue and sort of the kind of the take rate you can make as an MEV block builder. That's $497 million annualized. We have this other category. That one is really hard to estimate.

We're not sure what that is. Like 500 million is like a decent ballpark, yes. But it's really hard to know how that's going to play out going forward. regulatory concerns, what users want to pay. Because the end of the day, that's just contention for state, right? You're looking at blocks space you need it now. That's what you're willing to pay essentially, right? Yeah, I mean, Justin Drake came on the podcast a couple weeks ago. Bankless listeners may have caught that episode. And so basically, the summary of that episode is what does Ethereum sells a product, what product does a sell? It sells blocks. And what you can buy in those

blocks is either, you know, congestion fees. So that that is purchased the actual block. your transaction in the block and there's an overcharge for congestion fees. Those are gas fees. And then contention, which is block ordering, right? So Ethereum sells blocks, congestion, contention, that's what you pay for. That's what the market demand is. And that's what's reflected here in transactions and MEV. And to Patrick's point, we don't quite know. It's very difficult. We don't have enough data points to really model what MEV revenue is going to be in the future. But right now we can see it. Maybe it's something like $500 million dollars annualized. This other category, though, Ethereum Security is a Service, that's the third leg of the stool here of Ethereum revenue drivers.

Explain this category. What does that actually mean? Is that different than selling block space? Because it's not monetary premium. It's something else. What is this category? So that's taking the approach of looking at what EGNlayer is doing and extrapolating that as a new value accrual to ETH. So the idea is like, okay, maybe you can take the ETH token.

You can use it to do everything from securing. a new blockchain, maybe securing an oral network, maybe looking at some kind of contractual agreement where Ethereum is the collateral. So there's this massive new use case that you can take with something that you know has value. And that's where we get this Ethereum security as a service. And we derive that value from what we think the opportunity cost would be for not staking each times a multiple. So we give it a multiple because we think, okay, well, if you're going to use maybe

Eiglayer or maybe even if you enshrine the ability to have ETH's security, service within the protocol, there's going to be some kind of like, there's going to have opportunity cost of that. And so that's where we get those figures from. You guys are doing your homework. So this is basically restaking yield as sort of what we're seeing here and the potential for that. And it's zero to date, but we're seeing some growth here. And I think these numbers are somewhat conservative by the year 2030 on what this could be because it's somewhat of an unknown. Okay, so we have 2.5 million in annualized revenue, basically in blocks-based sales for Ethereum. and that's today.

And just to refresh us on the base case for this, in order to get to almost a $12,000 ETH price by 2030, you're assuming total Ethereum revenue gets to $50 billion, $51 billion annualized. That is the base case here. And some might argue a kind of a conservative case. It sort of depends. You also have the bull case, which we could get into.

But I just want people to understand. the mechanics of this model is not unlike modeling cash flows for a stock. Like that there's no voodoo here. It's just like you're taking this product and this network which produces blocks and you're projecting the sales moving forward and you're doing a discounted cash flow of what those sales might be. It's not that complicated. I guess I'm wondering high level how this type of model lands with institutional investors

who look at this asset, because I think if you try to model other crypto assets for monetary premium, or even like you guys have been doing this in 1970s, it sounds like, try to model gold. There are no cash flows for gold, and that's the way we've sort of had to model Bitcoin in the past, and even people tried to apply that to Ethereum. This is a departure from that. This is much more kind of the way you might look at an equity. How is this landing when you talk to institutional investors or, like, you know, serious financial analysts about this? Are they seeing the picture here? Are they in disbelief? Like, how does this land?

Ryan, I think you make a good point about the valuation of gold, for example, and how commodities are usually valued, which is what's the marginal cost of production, right? Like, if the price falls below X, then some number of producers of that commodity will not have the money to keep digging the shovel in the ground and they'll have to shut down. That will decrease supply. And, and bring the market back into balance. And with ETH's transition to proof of stake, like that type of analysis is no longer is relevant because the cost of goods sold, like the electricity,

the need for electricity went down dramatically. And now we have to really look at what are the underlying cash flow of this asset. And that's why it's been so gratifying to see the performance of ETH supply since the transition of proof of stake and the deflation tenancies, the fact that ETH earnings are now so solidly positive, and that gives us the

ability to do this type of cash flow analysis. But there are a few drivers in the model that move the needle pretty dramatically that I think maybe we should chat about, because we did have to make some assumptions about, you know, what is the value capture that accrues to the L1 versus the L2? Because you'll see. see in this model that Patrick has, I think it's 95% of all transactions happening on the L2s, right? And if you have just a handful of dominant L2s, they might have better bargaining power to take a higher percentage of the value from Eath, whereas if that tail is extremely long, then the balance of power might shift a little bit. So it might be instructive just to have

Patrick kind of lay out where we landed with those assumptions. So let's talk about those assumptions because I think that that drives it. And while we're getting there, let me just set the context. So the base case by 2030 is 50 billion per year in annualized Ethereum total revenue. But there's also a bare case here, which is only $2.5 billion in annualized revenue, which is basically flat from where we are now. Only that's in seven years. That's by 2030. If we do that, the model spits out a number that I don't like so much, which is an eth price of $343, dollars quite low and that could happen too that's on the table too then we also have the the bull case by 2030 if you dial all the numbers up which patrick is going to explain for us the difference between

barren bullcase we dial everything up and you get 136 billion dollars in annualized revenue we get an eath price target of 50k all right now we're talking in seven years an eath price of 50k that's if you want to go extremely bullish on this asset. So, okay, Patrick, get into the variables that really drive this and kind of the assumptions behind the model that separates the bare case from the base case and the bull case. Yeah, sure. One thing I want to mention, though, I think one of the most unpalable things to the whole model before we're going deeper is the MEV construct. So when you talk to institutional investors, the initial reaction is that's front running, right? You're ordering transactions and doing things as you see fit and then sorting orders as you want to.

And so we make in this piece, a logical analogy, this is essentially like a supermarket monetizing shelf space. It's where you walk into a supermarket, you look at the different shelf at eye level, you look what's below you. And there's a premium to things that are eye level versus things that are below you. There's a reason why that's monetizable, right? Because it's the first thing you see. And that's similar to what you see here, I think, in Ethereum. It's kind of like the way we look at it, if that makes sense. I should also, and I'm going to toss it back to you, Patrick, to actually answer Ryan's questions, which we're not doing very well.

I'm not there yet. Like, how is this landing with institutional investors? Like, the stage here is that in the U.S. there is no institutional investment. It's family offices. It's rich people. but the typical institutional buyers, which are the wirehouses, right, the brokers, the independent advisors, they're not allocating to crypto full style. Why? Why? Because they can't, because this SEC is hostile to the space and has proposed rules specifically around the custody of digital assets that make it impossible for a bank with retail customers to offer, crypto projects. So it's really regulatory uncertainty right now. Is that true in just the U.S.? Or is that also

globally true? Would you say institutions aren't allocating here? It's especially true in the U.S., but it is largely true globally that the traditional distributors of financial products are banks. And they are not in this game at all. So that's the hurdle we have is like, okay, well, if we can't onboard institutions into proof of state crypto, then we have to read, we have to rethink what an institution means. And that's why, like, personally, I'm quite focused on Bitcoin adoption as legal tender, Bitcoin as a reserve asset. And we have done a lot of research on what are the types of countries that might adopt Bitcoin under those circumstances? And then we ask ourselves, well, what about Ethereum? Why wouldn't they adopt Ethereum? And I think it comes

down to time horizon and the types of countries. If you're a country that is extremely poor in human capital, but you are rich in energy capital, then it makes sense to try to monetize some of that energy by mining Bitcoin. And then you can sell that Bitcoin and build whatever physical infrastructure that you want. If you're a country that is rich in intellectual capital with the wherewithal to maximize the use of the Ethereum blockchain by staking, restaking, asset creation, like all the types of smart contract functionality that Ethereum has to offer, you know, that's a different type of country. That's a country that is quite advanced from a technology perspective, and maybe those are the countries that are going to be buying ETH for their central bank reserves.

That's not the types of countries that are likely to acquire Bitcoin for reserves. So I personally, I think we're just a little bit further off on the adoption of ETH as a, as an institutional asset at the state level. And we're in this. pause where the world is waiting to see what's going to happen in the U.S. from a regulatory perspective. And until we get that clarity, there ain't no banks that are going to be buying Ethereum anytime soon. That's a really good perspective. And before we kick it back to Patrick, I just want to kind of finish that thought. So when I ask you the questions about like, how are the institutions thinking about this? And as if if you could write the perfect report or

explain ether the asset better, that suddenly institutions would pop aboard. And you're saying that's not it at all. They ain't touching it because we don't have the regulatory clarity. You might get the family offices and the high net worth individuals kind of more interested through a report like this. But for the institutions, something like this, understanding an asset like ether to this level is not going to get them interested in the space. For that, we actually need more regulatory clarity, particularly on the banking level worldwide and maybe most particularly in the U.S. Is that a good summary, Matthew? I agree with that take.

All right, more work to do. But great news for you, bankless listener. Of course, none of this is financial advice. It never is. But this is a program all about front-running the opportunity. If the institutions aren't here, then maybe retail gets a shot at this one. Patrick, let's talk about the difference, though, in the variables between the base case and the bear case and the bull case. What is the bear based on?

Like, what are the dials that make the most difference in this model and take us from $300 eath to like 50K, eth? The biggest principal components to this is the understanding of what the underlying markets will do in terms of adopting crypto. So as Matthew mentioned earlier, we're seeing a base case for 5% or so of revenue banking is applied in some way to crypto and public blockchain. So that would be the base. And so we dialed up a notch in our bowl case.

to let me look real quick to make sure to 10%. Likewise, we do the same thing with each of the other categories, metaverse infrastructure. In the bare case, we pulled that down to 1%, 5%, or 1% or 1% respectively. And the idea behind that is that we see regulatory climate or adoption curve failing in each of those. So that's kind of like the first construct of this model.

The way to think about it is it's basically a waterfall. And Ethereum's got its cup at the end of it. And each level to get there is how much of its take rate it is. So the first level just be, what's the adoption of those underlying businesses? The next says, okay, what is the logical take rate? What's a take rate and what kind of revenue will a theory get from those places? That's just this transactions. And so we see something like finance banking and payments,

whether it's fine new revenue opportunities or reducing costs, that would be 3%. And so then the next level down is, okay, we see the crypto market taking that kind of percentage, what percent of the crypto market is Ethereum? And so that's the third case. And so for each the bull bear in base cases, we tweak Ethereum's market share to reflect that outcome. So in the bear, hyper-bear scenario, not only is like the end market's not using blockchain, but Ethereum has a very small market share. And so that's like in the transactions category. The layer two settlement category, which feeds in the transactions, kind of also reflects this.

So we think about like the value capture of Ethereum and the L2s, Matthew mentioned earlier, that depends upon the structure of L2s. Our assumption in the basin in the bull case is there's thousands of interchangeable L2s that don't have any real way to differentiate themselves. They're just using Ethereum as a blockchain to settle Ethereum essentially as a monopoly. There's no real differentiation that takes place at L2. And so in that kind of scenario, you can see the cut rate that Ethereum could take of those settlements would be much, much higher or the underlying businesses. So that's kind of like the basic idea for how it works.

MEV, that's also going to be tied to just generally how much of adoption rate of those underlying businesses. In that case, it's just going to be digital assets on blockchain. So when we think about like how MEV works, it's really just how much on-chain activity is. And that's a reflection of how many assets there are. So that's kind of like the base in how we see this. Okay. We do one of these models in our base case. We think there are a lot of winner take all characteristics to digital platforms, right?

We've seen that in Web 2, that the dominant platform tends to take 70 plus percent market share, and the top 1% of creators on that platform often take 90% of the economics. And we think that that our base case is that that is going to be even more true in Web 3. And so when we model one of these tokens, in our base case, we assume that Ethereum will take 70% market share of all open source blockchains. And when we do our models on Solana, like our base case is that Solana takes 70% on Adam. That atom takes 70%. And then we see what type of upside we get when we put in those assumptions. And we look at owning each of these tokens is basically we're owning a bunch of call options that each protocol will become the dominant protocol, even though it's impossible that they all could do so.

And then we manage our position size based on what type of upside we see. Does that make sense? It does. And it's really smart, actually. It's a good way. It's a good way to look at this, I think. Learning about crypto is hard. Until now, introducing Metamask Learn, an open educational platform about crypto, Web3,

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market in the metaverse and payments and all that we're doing with finance? How much does crypto kind of eat the banking world, if you will. So that's your first level of analysis. You have to put some assumptions on that. And then your second level is, okay, how much of the market will Ethereum actually dominate, right? So we've got chains that sell blocks, smart contract blockchains, maybe Ethereum, you said in your base case is like 70%. Is that what I'm looking at, the terminal market share?

70%. In the bear case, it's 15%. in the bull case, it's 90%. And then the final variable, it sounds like, or the big driver of this is really, is it, make sure I understand this, Patrick, is it how many L2s there are? Basically, if there's a large number of L2s,

not very concentrated, it's kind of a multipolar type world out there, then Ethereum does better in that world. But if there's a few concentrated L2s, the ideas they'd have greater bargaining power, maybe Ethereum is not able to charge kind of the block space fees that it would hope to in selling its product. And so that kind of world would be a bit more bearish for Ethereum. Is that the third spot on the waterfall here? Yeah, the third spot is actually like what percent of those underlying revenues that Ethereum accrues in some way.

So we said before that banking would be like roughly 3% of that revenue base that is settled on public blockchain. And then the fourth layer would be the breakdown split between L2s and the theorem. The theorem is ecosystem. It's an execution centric probat for the L2s. For Ethereum itself, it's becoming more a settlement layer. So the idea is that, okay, like that next construct is, okay, like the transactions will happen on the L2s, the L2s of the pay fees. How does that breakdown occur? What does that, what does it look like logically?

And as you cited, that just reflects like what the dynamic of the political economy, for lack of bariturn is between the L2s and L1s. It's similar to like, you know, an empire with lots of set traps. The set traps are the L2s. But the set trap becomes really, really big. Maybe they push around the boss and say, hey, like, we're going to not pay as much tribute. Like that's kind of how we see it. Okay. So for Ethereum, you see it as being, I guess, bearish.

If one particular L2 gets too big, then starts to pay too much. I would almost argue that's in the theory in favor to push lots of non-differentiated L2s, like make sure they have as much tooling, as much ability to access block space as possible, and make sure that nothing is enshrined within advantage. That comes into context. I mentioned that because of the arbitrage from buying prismatic and there's something interesting there long term. Not precisely sure, but it looks like it's the startup some kind of capture, and that's something that worries us. Have you guys done any analysis on L2 tokens themselves or is that kind of a next layer?

It sounds like you've done some of the similar analysis on other layer one tokens. How about L2s? Most of our deep dives have been on either layer ones or application-specific projects like D-YDX as an example. We have not done one of these models for L-2s. And I think there's just more uncertainty around how that's going to play out. And the market caps are smaller. And there was a considerable amount of farming and kind of artificial activity that we want to see play out before we make a big bet on the L2s here. Yeah, Ryan, to go further, like one of the things that we're really interested in is looking at how addresses churned from using Ethereum exclusively to using L2 exclusively.

And that's something we're kind of looking at right now. Because right now what you see is you see a lot of users on daily active user accounts and on value. But you're not really sure like, okay, are people really migrating their execution to the L2 for sure? That's something that we're doing right now as a long-term analysis. Would you guys model Bitcoin this way or can you model Bitcoin this way? Or do you have a different model for that? We really look at Bitcoin as a distinct asset. So in our token strategies, they are largely, they are X Bitcoin.

We see Bitcoin as a competitor to gold, and we've been valuing it based on a percentage of the gold market cap. Now, the fee dynamic in Bitcoin has changed dramatically, right? It's an order of magnitude. Bitcoin transaction fees were 2% of issuance a few months ago, and now it's 20%. So there is a possibility. We'll have to see how this develops with some of the L2s that are being built on Bitcoin. But if the cash flow story changes, then we would look at it in a different way. But for now, we're looking at it as a very different type of asset.

This is too simple to say Bitcoin is kind of like modeled in the same way gold is and Ether is modeled as the same way what? I mean, in the intro, you said a new competitor to T-bills. Can you compare Ether to the bond market? Is Ether the Internet bond? Or, I mean... No, it's the Philip Morris, right? It's the high-yielding equity. Okay.

Well, hopefully not as toxic. but, you know, dividend-paying asset that can be held over a number of different time horizons. What do you think is bigger? Is the TAM, I guess, I mean, it seems like you could also make the case to also model Ether in the same way you model gold, too. I've ever looked at it from just a pure moneyness perspective, or do you just don't think it takes that kind of adoption path? Like, do you need to choose one or the other, or could you do a hybrid model? where you do this to get the kind of the base level of ether, and then you add this gold-like monetary premium aspect of it over here

and kind of combine that analysis to get a synthesized analysis for this. Does that even make sense? I personally think that by introducing the restaking business line, we are already assuming some moneyness, right? because that eth is going to be reused by, and it could be slashed validating another chain. And so it is a form of leverage. It is a form of moneyness to even have that exist.

It makes the entity more levered. And our cash flow multiple should incorporate the moniness, right? So that goes back to like my comments at the beginning. Like we're assuming 30 times cash flow for this. If it went to 300, that would be more like, that would be a gold type situation. We just think that that's unlikely to happen in the near term, although the team debates it, you know, internally we all have different views on this. I think it's less likely to happen because I don't think a nation state is going to be buying Ethereum because

I don't think there's the same stranded energy dynamic that there is in Bitcoin. Like, why would you buy ethos if you have stranded computer devs who have no Web 2 options to work on? So let's stuff them all into Web 3 and then put our central bank reserves behind that network. I just think we're many many years off from that, whereas for Bitcoin, the opportunity is a nearer term. But, you know, Patrick may disagree. Others may disagree. Even within the Van Eck team that you've created, there's kind of like this question, there's debate of how much monetary premium should Ether have versus Bitcoin, which is, I think the entire market's trying to figure that out, quite honestly. I don't think the market's taking a position on it yet. And we'll have to see.

So what are people saying? What are the arguments for Ether to have more monetary premium that you're hearing in your team, Matthew? Patrick, maybe you know, you were kind of rolling your eyes as I was given my bullish Bitcoin spiel there. Like maybe you have a more of an ETH maxi take than I do. Well, I mean, I think, I think like if you look at it just money by itself, like Bitcoin definitely has a monetary advantage and a monetary premium. It has it built right in the code.

Only 21 million. It's immutable and that's very powerful. I think what Ethereum's value proposition would just be like an alternative financial system where the rules are written in code and you have followed the rules and you can't break those rules. Everything you see is transparent. So the example would be like when I was a proprietary trader, I traded in the CME. I kind of knew how the execution algorithm works and I would see in practice how it would work when I could fill some my trades. But in reality, it's all closed end. You don't know what's going on on the back end.

You don't know how you're getting allocated precisely. And so having something like this on Ethereum, having the ability to trade value of Ethereum, which is incredibly neutral, I think in building out programs and services that are completely open and transparent, I think is a really powerful narrative. So, like, I don't think it's really fair to, like, give it like kind of monetary premium by itself. And if you really felt the need to, you can just reflect that in the price multiple. Because at the end of the day, it's still a consumable asset. And what you're using it to buy is block space.

And so what is the block space? Let's see ETH go a few years without a hard fork and then the monetary premium will increase, right? There it is. There's the Bitcoin take here. Can I ask you what this would look like if you a model, then maybe you already have, and I haven't seen it yet, another layer one like a Solana or like an atom. What do the numbers look like just in comparison? I've never modeled those chains out or I'm not Sina model to this extent, I have to imagine the total revenue is a lot lower. And you also have much higher dilution. So what do the numbers spit out from those layer ones and how are they different or similar

to the model that you've put forth for Ethereum? Yeah. The idea is that we organize them according to the same first principles, the idea that they're taking revenue share and there's some kind of trickle-down effect based on how the ecosystem structured. So something like an Ethereum where you have a clear use case, you have a clear idea of like how it's going to accrue value and what that will be. You see what stands in the way of it getting full value capture. It might be like the L2. So they have to remit some portion of the total ecosystem revenue to the L2s. The same is not true for Solana. So Salon is going to be

a single monetary execution layer. So under its bullish case and its bear case, I mean, it's In its base case, it logically is going to get a higher percentage of the ecosystem take rate. And then likewise, for Adam will have a lower ecosystem. So Adam in its current standing, it's kind of like a, it's replicated security model. Eventually, it's a mass security model. But the idea is at the end of day, you're having some sort of revenue share between the chains that are allowing Adam to validate it. And so it's more like a revenue take percentage. So under that idea, like our bull case for our salwana would be higher.

because it's going to have more value capture logically under that assumption. Adam would have the lowest in that Ethereum somewhere in the middle. That's kind of like the understanding. In terms of upside, once you layer in like our top two assumptions of the penetration rate, and then if you assume that Solana takes 70% of all open source blockchain activity, the upside becomes much higher, but with a much higher level of risk as well. And the other thing that we observe, especially with Solana, is that the MEV is a much higher percentage of the revenue line,

and that points to issues of centralization, right? There's opacity in that chain, fewer number of really active participants extracting value, and that just introduces question marks. So even though we have more upside in tokens like Adam and Solana, it's smaller position sizes because of the unknowns. The thing about like a Salana though is the fact that you have a separate client being created by one of the larger proprietary trading firms in the world than Fire Dancer. So you really don't know like in terms of the value capture how Solana is going to be able to capture most of the value that would fire dancer will probably be made just a way that jump will be able to take advantage of it.

Right. Like that's one of the issues with we have with M. And Salana as well. I see. So it doesn't necessarily mean the sole take the sole. the sole token owners will be recipients of that MEV if they're cycling off in some other way, maybe by a client or something like this. Right, right.

And also the other thing I think about it is because most of the execution of Ethereum or even Adam, it's going to even happen on the L2s or other chains. It's like, okay, what portion of that's going to drip down to Ethereum? That's like a big question, right? So like the L2 political dynamic with the L1 is really going to matter, right? At the end of day, if you have thousands of different L2s competing for block space to settle the Ethereum, well, then they're going to have. have to remit a substantial portion of the revenue to Ethereum just for that privilege, right?

Otherwise, you might be seeing like one dominant L2 have like really massive margins. It's really fascinating. It's also fascinating to consider like are the non-Etherium layer ones, are they competing directly against Ethereum? There's a way in which they certainly are. Are they also competing against block space of Ethereum layer twos? There's a way in which they are as well, right? And so what are the substitutes for, you know, a non-Etherium layer one?

It's kind of a question. One other question I had for you is like, so right now, we couldn't say this in 2018 or 2019 for Ethereum, right? There was not two point. This is a bear market, by the way, right? $2.5 billion in annualized revenue, right? This was like minuscule back in 2018, 2019. This would have been a very, very sad analysis. Would you have published the report at that point in time?

Also, some other layer ones are kind of like there right now. now, right? And the question is, can they get out of that? So I'm looking at seven-day average fees and you have to scroll down pretty far. Binance is actually kind of impressive. I don't know if you've done a B&B sort of analysis. I know that has different dimensions entirely. Maybe we're dealing with a whole other class of asset here. But you have to scroll down before you get to like the pretty far before you get to like Solana or I guess Avalanche used to be on here. It's not. And then what you have with some of these alternative non-Etherium layer ones, that is, is a lot of daily issuance, which is kind of different from, like, there was a time where

Ethereum's issuance far surpassed its revenue on the daily. And now since proof of stake and since kind of the burn mechanism, that's kind of reversed. So I'm kind of wondering about when you look at non-Ethereum layer ones, you look at kind of total revenue and you model out the cost, like it's got to be pretty, pretty low at this point in time. You have to inject like a lot of growth assumptions on those block space sales to actually model it out.

I don't know if I'm correct in this, Patrick and Matthew, but do you guys have any comments on that? Yeah, I mean, you're, I think it's important to remember that this is an asset class that still requires inflows to keep the price flat, right? Because in aggregate, the whole ecosystem is inflating. And so everyone's getting diluted. if they're not staking or buying more.

And there are very few exceptions to that, and Ethereum seems to be one of them. So when we think about our overall macro views right now on the market where we're pretty cautious, like we think a new inflationary normal began in 2021. It's driven by these structural underinvestments and like the most reliable and cheapest form of energies. It's exacerbated by the politics.

It's breeding this disillusionment across the world, a search for alternative systems, but it's not a great time to be in risk assets right now. And so, like, investors around the world are focused on cash flow and what type of equities are producing cash flow. And they're not all that interested in buying really speculative, long-duration assets that aren't producing cash flows. And that's where, unfortunately, most of these alternative layer ones are, where it's a theoretically interesting technology. They found some level of product market fit, but not enough to be producing cash flow at scale. So we can make our assumptions about where the world may be. And in that

environment, if Solana or Adam were to take that 70%, like they would be 50 baggers or more, but right now the activity on those blockchains is not indicating that. And so we're tilted more towards the profitable blockchains, the cash flowing assets. And we're on alert for a change in the macro that would make us kind of get more aggressive around the more speculative. chains. So there you go, guys. We solved it. We know the price of Eath by 2030. It's between 350K, according to our models here. And that doesn't include monetary premium. But in all seriousness, I want to ask the question. So like, you model something like this. What do you do with this information? How does it inform your strategy at Vanek and where you allocate? And how seriously

should we treat models like this? Yeah, we have a few different strategies. Like we have a beta strategy that aims to outperform an index of layer ones that we created, and that type of strategy would be fully invested at all times, and it tries to capture the growth in the space at a reasonable fee. And we might own like 50% ETH in a strategy like that, because we're looking for broad exposure to the space. And then we have an alpha, we might have something like an alpha strategy that aims to own like the best 20 tokens that have the most clear,

the clearest value accrual and the best kind of product market fit demonstration. And then we would manage cash aggressively and try to bring down our investments when things are very frothy and redeploy when the market's very bearish. And in that strategy, we're focused on themes like stable coins used for payment settlements, NFT form factors used by traditional companies, simple defy, decentralized physical infrastructure. And in that type of strategy, ETH might be a much smaller percentage, just because there's less upside, right? So we have like eight times upside in our base case for ETH in the model that we just went through. But for some of our other tokens, we get to 20 to 50 times

upside with a lot more volatility. And so it's about kind of managing that volatility and bringing position sizes down when everyone is really optimistic and then trying to increase the position sizes when there are big drawdowns or de-leverging events. Yeah, I think the activity is really important because it gives you an understanding, okay, like what is the potential of this system? Like, how does that value look compared to where it's trading now? And then you position size accordingly. Also as a relative exercise, you say, okay, like, how does this thing improve value versus

something very similar? Like, what is a token economic dynamic? And how does it look like when you actually put pen to paper and model it out? So I can't speak much more on that, but that's kind of how we see this. Just is an interesting exercise. Yeah. And the ETH model really serves as a benchmark because in our token strategies, we're looking to outperform ETH.

That's the benchmark asset. So if we have, yeah, very hard. If you have seven or eight times upside on ETH, like you need to have a multiple of that to get conviction on a much smaller project. Guys, thank you for putting together this report. It's been incredibly useful. And I was mentioning this to David in the roll-up. Like I've not seen kind of a, you know, I would group Van Eck.

I hope you're not offended by this as traditional finance, certainly. But you guys are delving into crypto in a way that is supremely crypto-native and actually understanding this asset class. And like, great work, Matthew and kind of building this team and Patrick as, you know, Matthew's first hire. To put this level of report out really take some understanding. of the technology and economics and the networks that you're investing in, which I guess, I mean, your investors, that's what you'd want to do.

I just want to close and ask kind of this question because it's been on my mind and on the minds of a lot of bankless listeners. So it's 2023 and we're trying to figure out where we are in the market. I've kind of called this the apathy market, the board market. It feels like it's that part of the cycle. Some people, as they always do at this type of the cycle, and maybe I'm trying to, you know, lead the witness here. but I don't mean to.

I really genuinely want to know if we get another bite at this. Does crypto make a comeback? Are we just, is there another bull market ahead? If so, how long out is that? Or is this kind of like, hey, you know, that was, we had crypto's biggest, big rise, and now we're sort of on the other side of that. And it'll be like there'll be some growths and some appreciation,

but the biggest gains are over. what's your take on where we are? Will we get another huge uptick cycle? Maybe I'll ask you that, Matthew, since you kind of started this whole thing in Vanek. Yeah, but I mean, both Patrick and I left our jobs in Tradfye because we believe that there's asymmetric upside in these decentralized systems and that an innovator's dilemma is keeping the biggest Web2 and banking companies

from embracing this technology. You know, right now there are headwinds that are politically driven and inflation driven, but they seem to be abating right on schedule. So we're a year out from the next Bitcoin halving, and Bitcoin looks to be tracking along similar halving cycles. So it's not that hard to imagine a year from now, a very different political backdrop in the U.S. and a different environment for Bitcoin specifically. I personally think that Bitcoin is the asset, like on the back of which that all these other decentralization assets, which are a spectrum, are levered to.

So we think there's going to be adoption cycle that's driven by countries outside the U.S. And that's likely to be most pronounced next year. So that's why we're all here is to hopefully capture the upside from that adoption cycle. Patrick, what would you add as we close? Yeah, I would say we're clearly in the phase of the market of the gut check where a lot of the things you believe in, a lot of the crypto lords turned out to be hollow. And going forward, I'm really encouraged by all the things that are being built and the progress screen being made.

You don't see that reflected in the price, but the potential is enormous. There are tens of thousands of the smartest people that are working on the space, and they're trying to think and apply this technology, really interesting use cases. Every single day, I'm encouraged by the things I see on Twitter and person with the conversations I have with the people and the interactions I have. So I can only say it's going to be up only from here. There's going to be a lot of rocky roads.

There's going to be a lot of gut checks still. But I'm extremely positive about the space going forward. Time to test your conviction, bankless listener. And if you want that conviction tested or maybe reinforced, make sure you check out this Van Eckery. report will include a link in the show notes. Matthew, Patrick. It's been a pleasure to have you on bankless. Thanks so much. Thanks for having us. Risk and disclaimers. You're welcome. Risk and disclaimers, time for me to remind everyone. None of this has been financial advice.

Heath could be 300 in a couple years. It could be 50K. We really have no idea. Play it at your own risk. Of course, all crypto is risky. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot. Thank you.