Frax Finance founder: Viewing the value of Ethereum from the perspective of digital commodities

Authored by: sam.frax, Founder of Frax Finance

Compiled by zhouzhou, BlockBeats

Editor's note: This article explores the differences between digital goods (such as L1 Token) and quasi-equity tokens, proposing a new framework for evaluating digital assets, especially for the value of ETH. The author believes that ETH should be considered as a sovereign commodity rather than a quasi-equity token because 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 premium, and points out potential valuation errors that may arise in the future.

The following is the original text (for ease of reading and understanding, the original content has been reorganized):

In the field of Crypto Assets, I have proposed a brand new system for evaluating digital commodities, such as L1 Token and the distinction between sovereign commodities and governance/equity Token. This perspective is crucial for ETH and various L2 Tokens, and may even eliminate the ambiguity of ETH assets entirely.

In Cryptocurrency, there are actually only two types of Token: digital commodities (usually L1 sovereign assets) and quasi-equity governance Token. I have elaborated on this in previous discussions.

By 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 assessment standard. Just as a sovereign country cannot meaningfully default on debts 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 it is indeed a commodity, it 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 full of global laborers and builders' innovations. This labor is tokenized in the form of governance/equity-like Tokens, which are distinctly different from BTC, ETH, SOL, and other similar digital commodities. Anywhere rewards are paid to the holder of digital commodities for any operation, whether it's Liquidity provision incentives, Decentralized Finance incentives, or LSD and LRT, these can be measured through experience.

This indicator should be defined as the commodity premium of assets, not the currency premium, sovereign premium, or speculative premium. It is a legitimate and fundamentals-centric evaluation term for a class of assets.

In the global economy, wherever anyone pays others in the form of labor or similar rights Token to hold a form of sovereign assets, we can track the value flow of labor to digital commodities. This demand is to pay the global Intrerest Rate to all forms of ETH holder, including using it in liquidity pools, stake again, L2, and new Decentralized Finance innovations that have not yet appeared in the future.

This is the global economic demand for goods, namely the premium of goods. Obviously, this has a much greater effect on the price of sovereign assets and the value accumulation of market capitalization than any PE DCF framework. This is also the reason why the market capitalization of BTC is close to 200 billion US dollars without any gas consumption. However, in my framework, it is noticed that there is no PE DCF premium in a class of Tokens, because it is simply impossible.

Only quasi-equity tokens can have cash flow, and what we consider as "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.

This leads to the 1559 burning mechanism, which is commonly seen as the core value accumulation mechanism of ETH, as it is considered as 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 in a new industrial application, thereby changing 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, BTC is not subjected to PE or DCF analysis. It is like gold, but in digital form. PE DCF premiums are not within the social acceptable range for real or digital commodities. Furthermore, the 1559 burning mechanism originates from the user demand within the ETH zone and its L2 sovereign economy. This is just another economic demand for $ETH sovereign assets, another industrial use case. This demand is paid for through the ETH zone 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 also struggle at this step, as do other sovereign assets when they mature to these stages.

My view on the lifecycle and related pitfalls of digital goods is presented through a chart. $SOL has not reached the second stage, and I notice that in my opinion, $BTC and $ETH have taken different turns in the second stage.

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

Note that I did not mention the ill-defined 'speculative premium' in the paper. This is because I focused on a well-defined and measurable framework for fundamental value. The speculative premium only attempts to quantify trading activity based on a value system of future fundamentals. The speculative premium is not a fundamental framework like commodity premiums or PE DCF premiums. The speculative premium is only market activity that attempts to calculate how the asset will be valued in a distant future framework.

Until now, apart from $BTC, PE DCF is the only fundamental framework for discussing digital asset. It has been wrongly 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 gas Token, the supply of sovereignty, and Consensus, are necessary conditions for establishing the premium social contract of commodities. If $ETH can inadvertently 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 that is prone to errors.