Original author: sam.frax, Founder of Frax Finance

Original text compiled: zhouzhou, BlockBeats

Editor's note: This article explores the differences between digital commodities (such as L1 Token) and quasi-equity Tokens, proposing a new framework for evaluating digital assets, especially in relation to the value of ETH. The author suggests that ETH should be seen as a sovereign commodity rather than a quasi-equity Token, as commodities cannot generate cash flow or dividends. At the same time, it points out how to eliminate the ambiguous definition of ETH assets, reiterates the importance of commodity premiums, and highlights potential valuation errors that may occur in the future.

The following is the original content (for ease of reading and understanding, the original content has been edited).

In the field of Cryptocurrency, I propose a new system for evaluating digital commodities, such as L1 Tokens and the distinction between governance/equity Tokens and sovereign commodities. This perspective is crucial for ETH and various L2 Tokens, and may eliminate the ambiguity of ETH assets completely.

In Cryptocurrency, there are actually only two types of Tokens: Digital Commodities (usually L1 Sovereign Assets) and quasi-equity governance Tokens. I have elaborated on this in previous discussions.

According to the definition, commodities cannot pay 'dividends' or have 'cash flow', so if the asset is indeed a digital commodity rather than a governance/equity token, we must abandon this erroneous evaluation criterion. Just like a sovereign country cannot meaningfully default on debt denominated in its own currency (only inflation can occur instead of default), digital commodities actually have no real issuer, they are a scarce sovereign asset, so if they are indeed commodities, they cannot meaningfully provide dividends or cash flow.

Assets themselves are products, like BTC. Only labor and other tangible products can generate economic demand for commodities.

Ethereum (network + chain) is currently the largest digital nation, a sovereign economy filled with global workers and builders innovating. This labor is tokenized in the form of governance/equity-like tokens, which differ significantly from similar digital commodities such as BTC, ETH, SOL, etc. Anywhere a holder of digital commodities is paid for any operation, whether it is liquidity provision rewards, decentralized finance incentives, or LSD and LRT, these can be measured by experience.

This indicator should be defined as the premium of an asset, not the premium of a currency, sovereign or speculative premium. It is a legitimate and fundamentally-centered evaluation term for a class of assets.

In a global economy, where anyone pays others in the form of labor or equity-like tokens to hold some form of sovereign asset, we can trace the flow of value of labor to digital goods. This demand is the global Intrerest Rate paid to all forms of ETH holders, including ETH holders that use it in liquidity pools, re-stake, L2, and new decentralized finance innovations that are yet to emerge in the future.

This is the global economic demand for commodities, namely commodity premiums. Obviously, the effect on the price of sovereign assets and the value accumulation of Market Cap is much greater than any PE DCF framework. This is also why the Market Cap of BTC is close to $2 trillion without any gas consumption. However, in my framework, I noticed that there is no PE DCF premium in a class of Tokens because it is simply not possible.

Only quasi-equity Tokens can have cash flow, what we consider to be 'dividends/buybacks/burns' in a class of assets is actually just a premium on goods. Similarly, there is no premium on goods in quasi-equity Tokens as well.

This leads to the 1559 burning mechanism, typically seen as the core value accumulation mechanism of ETH, as it is considered the "enterprise of Ethereum" paying dividends/cash flow to ETH commodity holders.

But this is a ridiculous concept because commodities cannot generate cash flow. If a company uses gold for a new industrial purpose, thereby altering the molecular structure of gold and causing this element to permanently exit circulation, we will not start to conduct PE or DCF cash flow analysis on gold, but only consider it to have a new high-demand industrial application, consuming the commodity. No one will conduct PE or DCF analysis on gold.

Similarly, no one does PE or DCF analysis on BTC. It’s like gold, but in digital form. PE DCF premiums are not within the socially acceptable range for real or digital commodities. Furthermore, the 1559 burning mechanism originates from user demand within the ETH network and its L2 sovereign economic bodies. This is just another economic demand for $ETH sovereign assets and another industrial use case. The demand is paid for through the ETH network blockchain protocol itself, not through labor or manually distributed equity/governance token rewards.

ETH is the first project to face the 'final boss' challenge in defining its social identity, but SOL is also the next one, and once it reaches this stage, it may struggle at this step, as do other sovereign assets when they mature to these stages.

My views on the lifecycle of digital assets and its associated pitfalls are illustrated in a chart. $SOL has not reached the second stage, and it is worth noting that in my opinion, $BTC and $ETH have taken different turns in the second stage.

For $ETH, it is important to establish this social contract now, to show the world before it's too late that it is not just a privilege that $BTC holds. In fact, this is not a privilege, but a social contract based on premium for goods - a very specific, quantifiable, rule-based system.

I didn't mention the ill-defined 'speculative premium' in the paper. This is because I focus on defining and measurable framework for intrinsic value. Speculative premium is just an attempt to quantify trading activities based on fundamental value system in the future. Speculative premium is not a fundamental framework like commodity premium or PE DCF premium. Speculative premium is just market activity, trying to calculate how the asset will be valued in a distant future.

Until now, apart from $BTC, PE DCF is the only fundamental framework for discussing digital asset. It has been mistakenly applied to all assets (except BTC), but should only be used to evaluate assets representing labor, products, and governance rights, not sovereign digital commodities.

In the next part of this series, I will explain how and why certain technical steps, such as determining the gas Token, the supply of sovereignty, and Consensus, are necessary conditions for establishing the social contract of commodity premium. If $ETH can accidentally transform into a second-class Token, it is also possible to transform a second-class Token into a first-class Token, but this is a very difficult and sensitive process, and it is easy to make mistakes.

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