What is Ethereum's GDP?

Traditional methods for valuing blockchain networks often mischaracterize them, treating them like corporations and using formulas that were specifically designed to calculate fair stock prices based on very narrow considerations. This approach is fundamentally flawed. 

Blockchains, particularly smart contract platforms like Ethereum, are not businesses—as explained in my previous articles, they are emerging, sovereign, digital economies with their own reserve currencies. These currencies not only serve their original native networks but can also act as SoV, UoA, and medium of exchange “abroad” - in the case of ETH, the currency isn't limited to its original mainnet, but has permeated and become the reserve of several extensions (L2s) that are part of its monetary jurisdiction, and even thrived beyond these most immediate boundaries (akin to how USD operates today).

Additionally, proof-of-stake blockchains introduce mechanisms analogous to bonds, where participants stake their assets to secure the network in exchange for future returns. These dynamics reflect the structure of a nation-state’s economy, with financial instruments supporting its defense, as well as current and future operational stability.

In other words, smart contract-based blockchains like Ethereum are emerging network states—digital nations that manifest not only through a technological stack but also through a monetary jurisdiction and reserve currency, a shared set of values and beliefs, a common history and culture, and sometimes even foundational myths.

💡 'Gross Decentralized Product'

To address the need for a more suitable valuation framework for these emerging digital economies, we propose Gross Decentralized Product (GDP)—an approach that captures not only the monetary aggregate but also the economic activity of blockchain ecosystems. Unlike Gross Domestic Product (GDP) in traditional economies, Gross Decentralized Product incorporates a broader scope: it accounts for the economic activity generated within the ecosystem and the monetary base, as well as the market capitalization of the protocols, decentralized applications, and cultural assets built on a specific blockchain.

The rationale behind this expanded framework lies in the paradigm shift represented by blockchain economies. While these ecosystems share similarities with traditional national economies, they fundamentally differ in that every aspect of the economy becomes liquid and attains some degree of moneyness. In this paradigm, both output and productive factors are not merely elements of an economy but also forms of "money," tradable and monetizable on-chain.

As a result, the most efficient way to invest in such blockchain economies is through their native currencies. These currencies, with programmatically limited supplies, underpin all economic activity on the blockchain. Their value is inherently tied to the system's growth, as reflected by rising market capitalizations. Over time, the native assets of the most successful blockchain economies will develop monetary premiums, becoming the most pristine forms of collateral within their ecosystem, achieving store of value (SoV) reserve status in the broader crypto space and even in the real world.

Below, we outline key metrics that contribute to this framework, using Ethereum and other leading blockchains as examples.

ℹ️ All data used in this article comes from Token Terminal, DeFiLlama, and NFT Price Floor as of November 26, 2024.

1️⃣ Market Capitalization: Measuring Monetary Sovereignty

The market capitalization of a blockchain’s native currency serves as a proxy for its monetary base and economic scale, similar to how M2, M3, and M4 supplies apply for the dollar in the case of the United States. As mentioned previously, sometimes the monetary base is not only restricted to a blockchain’s mainnet because of its native currency becoming the reserve of a series of network extensions (like L2s/L3s in the case of ETH), and even other chains outside the same monetary jurisdiction where the asset can be bridged. It’s important to note again that because the monetary base (supply) of a blockchain cannot increase discretionarily, the phenomenon we observe—either when its native economy expands or when the blockchain's native currency transcends its own network boundaries and colonizes foreign economies—is an increase in its fiat-denominated value to sustain and underpin economic growth. That’s why here, every time we refer to monetary base, we mean market cap.

If we target the most simple monetary aggregate (M1/M2), the top blockchain economies are:

• BTC: $1,820B
• ETH: $400B
• SOL: $108B
• BNB: $90B
• TRON: $16B

Including LST and LRT tokens here would be akin to measuring M3 or M4 money supplies for a smart contract-based blockchain economy. In the case of ETH, we would have an M1/M2 of $420B, an M3 of $467B (LSTs), and an M4 of $481B (LSTs + LRTs).

2️⃣ Total Value Locked (TVL): Capital Utilization in DeFi

TVL measures the value of assets locked in decentralized financial protocols. Critics have questioned its utility, but it remains a robust indicator of active economic activity on a blockchain. For decentralized economies, this metric is analogous to tracking the volume of financial intermediation within a national economy. And not only that, it speaks about the reliability and security of the monetary jurisdiction, of its capacity to attract investors that are not only looking to make short-term trades, but to park their wealth aiming for longer time frames.

Top blockchain economies by TVL:

• ETH: $66.6B
• SOL: $9.25B
• TRON: $8B
• BNB: $5.5B
• BTC: $4.4B

3️⃣ L1 Transaction Fees: Revenue from Economic Activity

The fees generated by a blockchain reflect the value users place on accessing its services. These fees represent the blockchain’s “tax revenue” and directly contribute to its GDP calculation. Having a robust and sustainable fee market is fundamental, it has to strike a perfect balance to grant global accessibility for users and protocol/app deployers, preserve operational stability and network security, while ideally offsetting monetary emissions - else you may end up with a dysfunctional system as we see with highly indebted economies today.

Top blockchain economies by annual fee revenue:

• ETH: $2.6B
• TRON: $1.87B
• BTC: $1.23B
• SOL: $590M
• BNB: $191M

For the purpose of this calculation, we left out REV because a) it's not protocol enforced at mainnet level and b) though not all forms of MEV are super harmful for users, many are, and there's a case to be made that they will gradually tend to 0 and mostly be captured by apps, seeking to return it to their users offering better rates.

4️⃣ Stablecoins: Foreign Capital and Monetary Integration

Stablecoins represent exogenous capital within blockchain economies. Same as with TVL, they represent a key indicator of a blockchain’s ability to attract non-native forms of capital, or in other terms, the onboarding of RWA wealth. Among blockchains, Ethereum dominates, hosting $101B on its mainnet and an additional $10B on Layer 2s.

Stablecoin holdings by blockchain:

• ETH: $101B (+ $10B on L2)
• TRON: $59B
• BNB: $5.8B
• SOL: $4.65B
• BTC: ~$1B (Omni)

While not a stablecoin or a real-world asset (RWA), wrapped versions of BTC (e.g., WBTC and cbBTC) can also serve as an interesting proxy for foreign capital attraction within smart contract-based blockchain economies. In this case, Ethereum stands out as well as the most dynamic economy, hosting $15B in wrapped versions of bitcoin across its mainnet and Layer 2 ecosystems.

5. Protocols, Applications and NFTs: The Economy’s Infrastructure and Culture

In a blockchain economy, protocols, applications and NFTs play roles similar to the industrial and cultural sectors in traditional economies. Protocols and apps are the infrastructure and factories that drive value creation, encompassing decentralized finance (DeFi), social finance (SocialFi), decentralized science (DeSci), and more. On the other hand, NFTs represent the cultural, entertainment, and media industries—key components of a blockchain's soft power, as culture is integral to its influence and identity as we stated in a previous article.

Ethereum dominates in both sectors, with a combined value of approximately $110B in fungible tokens (excluding stablecoins and liquid staking tokens) and $4.1B in NFTs. This highlights Ethereum's leadership in both economic and cultural dimensions.

• ETH: Fungibles ~$110B, Non-fungibles ~$4.1B
• SOL: Fungibles ~$18B, Non-fungibles ~$100M
• BTC: Non-fungibles ~$500M

*Data Based on the top 100 coins by Marketcap according to CoinGecko and top 50 NFTs according to NFT Price Floor

6. Protocol and Application Fees: Economic Activity by Enterprises within Blockchain Economies

To further refine our understanding of blockchain economic activity, we analyze the fees generated by the top protocols and applications hosted on each blockchain. This metric serves as a proxy for the economic output of companies and organizations that operate within these ecosystems, akin to the contribution of businesses to a nation's GDP.

Ethereum leads by a significant margin, with fees generated by its top protocols reaching $6B, reflecting its status as the most mature and diverse blockchain economy. Solana and BNB Chain follow, showcasing considerable activity but on a smaller scale.

Estimated fees of the top 50 protocols and applications by blockchain economy:

• ETH: ~$6B
• SOL: ~$1.95B
• BNB: ~$300M

These figures also account for the share of fees generated by top stablecoin issuers operating on each blockchain. Stablecoin issuers such as Tether (USDT) and Circle (USDC) contribute meaningfully to the overall fee base, given the high volume of transactions involving stablecoins across various protocols.

By including this metric in our Gross Decentralized Product framework, we gain deeper insights into the economic vitality of blockchain ecosystems and the level of enterprise activity they host.

By combining these metrics, the concept of Gross Decentralized Product offers a more holistic way to measure blockchain economies. It highlights their complexity, breadth, and potential for global economic integration.

Determining how to weigh and integrate the different metrics that make up the GDP of a blockchain economy is a task for future specialized economists. For now, we can simply aggregate these numbers to compare the two largest smart contract-based blockchain economies:

• ETH: 1) $400B + 2) $66.6B + 3) $2.6B + 4) $101B/$110B + 5) $114M + 6) $6B = $700B
• SOL: 1) $108B + 2) $9.25B + 3) 590M + 4) $4.65B + 5) $18B + 6) $1.95B = $142.5B

Ethereum, as the largest and most diversified smart contract-based decentralized economy, showcases robust performance across monetary sovereignty, DeFi activity, revenue generation, stablecoin liquidity, and cultural impact.

Ethreum’s economy has an aggregate value (excl. monetary base) of $300B, with a monetary base/aggregate value ratio of 1.33 - due to the triple point asset nature of ETH and its ability to permeate into “foreign” networks, a fair comparison with the U.S. economy would have to be made to the M3/GDP or M4/GDP, sitting currently between 1.2 and 1.5.

As blockchain networks continue to evolve, frameworks like GDP will help investors, policymakers, and builders better understand their true value as digital sovereign economies. Metrics like Gini coefficients and economic diversity indexes may also be valuable for evaluating the economic health and future potential of these ecosystems. Once again, this is not about determining the fair value of a company share; it’s about gaining exposure to an entire blockchain economy.

Let’s consider the example of the U.S. economy in the 1940s, a period on the verge of an economic boom. How would an investor at that time gain broad exposure to the "U.S. play"?

The options could have included:

1. Dollars: For liquidity and reserve currency exposure.
2. Treasuries: Before the petrodollar advent in 1971, treasuries acted solely as debt instruments, not yet as a global store of value.
3. Stocks: For growth-oriented returns.
4. Art: As New York emerged as the center of the art world.

As we see, gaining exposure to traditional economies involves investing in a mix of assets that end up performing differently depending on macroeconomic conditions—dollars may strengthen during uncertainty, bonds offer safety during downturns, and stocks thrive during expansions.

Getting Exposure to a Blockchain Economy

In a smart contract-based economy (let’s take Ethereum as an example), the native currency offers a unique advantage as a triple-point asset: it functions simultaneously as a reserve currency, a store of value, and a bond (when staked). Instead of needing a carefully weighted portfolio of assets with divergent properties, a single asset (like ETH) provides consolidated exposure to the entire blockchain economy.

This streamlined approach simplifies investment decisions while aligning incentives with the network’s growth and security. You could also add a basket of native DeFi protocols and blue-chip NFTs of the blockchain economy of choice, and you’re all set!

Applying GDP Modeling to Estimate a Blockchain Economy’s Future Value

As we have emphasized throughout this article, blockchain native currencies should not be valued using frameworks designed for joint-stock companies. Blockchain economies are better understood and valued as digital counterparts to the traditional nation-states, which emerged in the post-Westphalia era—the same time that joint-stock companies came into existence. And similar to traditional nation-states, they find themselves in a state of perpetual competition for capital, security, and human resources (i.e., builders, customers, and, generally speaking, settlers). That is something the Crypto Twitter psyche innately recognizes—hence the tribalism and maximalism. It is human nature: a community feeling threatened, its immune system activating to protect an idea, a technology, or a set of values deemed valuable.

But it’s important to note that, despite some similarities with traditional natio-states, blockchain economies represent a new paradigm. In these ecosystems, the boundary between finance and other sectors of the economy becomes so blurred that everything, even art, entertainment, and attention, achieves a certain degree of moneyness. This liquid nature makes it challenging to separate the monetary base from the domestic product it denominates. However, traditional economies remain our closest point of reference and serve as benchmarks for forecasting their growth.

Now, as a thought experiment, let's imagine what an Ethereum growth story rivaling one of the past century's most extraordinary nation state ascension's might mean for ETH price. Ethereum’s current economic aggregate (excluding the monetary base) of $300B is comparable to what China’s economy looked like in 1986. It took China around 30 years to grow to a $18 trillion GDP, a figure equivalent to the current market cap of gold. China’s economic growth has been extraordinary, a rare feat for economies of its size. But it's interesting to imagine a world where a network state like Ethereum could replicate that unprecedented pace of economic growth.

While this comparison could already be causing your eyebrows to rise, in my opinion, there’s a real case for leading blockchain economies to rival the performance of modern nation states:

• Their digital and open nature
• Global accessibility
• Lack of capital controls
• Suitability as financial infra for an AI dominated economy

Let’s suppose Network States flourish, Ethereum cements its dominance in a vastly expanded DeFi and AI landscape, and the ultimate bull case plays out, with the network reaching an aggregate economic value of $18 trillion by 2054—matching China’s 30-year trajectory! How would we apply the GDP model to calculate ETH’s price in that hypothetical scenario?

If we apply a conservative monetary base/economic aggregate ratio of 1.2 (similar to the current U.S. M3/GDP ratio), Ethereum would have a market cap of $21.6 trillion, resulting in an ETH price of $180K (not accounting for potential monetary base deflation due to fee burns). However, if we consider the possibility of Ethereum transcending its native ecosystem—similar to how the U.S. dollar became ubiquitous through the Eurodollar system—it could achieve a monetary base/aggregate value ratio of 1.5 (comparable to the U.S. M4/GDP ratio). In this scenario, Ethereum’s market cap would reach $27 trillion, translating to an ETH price of $225K.

Now, this is not any sort of ETH price prediction or financial advice, but it is interesting to think about how GDP frameworks can offer a compelling lens to understand blockchain economies, revealing their true nature as emerging digital states or economies. This framework also highlights that, much like traditional national economies, multiple dimensions must be evaluated before making investment decisions.

Under this framework, investing in Ethereum is justified by its status as the most dynamic and diversified blockchain economy, with an ecosystem that spans financial services to cultural products —which not only confers substantial hard power but also establishes significant soft power influence. This is further evidenced by Ethereum’s ability to attract and retain 'sticky capital'—a sign that, despite short-term price fluctuations, investors regard it as the most secure and promising smart contract-based economy for long-term wealth preservation.