Why Ethereum Is Winning the Tokenization Race, Per Schwab

**Steven Ehrlich** (0:00)
Let's talk about ETH. You have a different type of relative value metric there. I think it was your approximation of the Buffett coefficient.
I'd love to. Yeah, please go ahead.

**Jim Ferraioli** (0:16)
In equities, the Buffett indicator is when you divide the market cap of the S&P 500 relative to the GDP of a country to measure how value, how expensive are the top 500 companies relative to the actual economic output. When I think of smart contract platforms like Ethereum or Solana, I think of these as decentralized micro economies. Normally, you wouldn't do competitive analysis against two economies like that. You would just look and say, okay, country A is growing, expected to grow its economy this much this year. Country B is expected to grow the economy this much. But these are micro economies. And again, all the data is available, so you can see. And so I look at the sum of all fees generated across the theory of network and the Solana network. And so this is looking at applications that are built on layer 2, so it's not just the base network as well.
And if you sum up the trailing one-year fees, that's an equivalent of GDP, right? GDP is the total output of all goods and services produced, right? And so whether you're using some sort of application for trading or lending or just I'm transferring someone some ether, whatever it be, I'm creating fees to do this. And so the sum of that is my GDP for a decentralized economy. And then you can look at the market cap of ether at any time and see, is this expensive or cheap relative to where the rest historically has been? And so I think that's a great way to quantify whether one smart contract platform is maybe more attractive than the other. Now, right now, there's no one's really doing forward estimates as to like, oh, we think this type of activity is going to grow this much next year, or this much is going to grow, whatever. But over time, I think that's something reasonable that you would expect people to start pricing in forward expectations of economic activity on these platforms. And then you'd probably start looking, as your denominator, forward estimates of GDP. I think right now, just using point in time trailing metrics is the best way to do it. But that's the best way to kind of, in my opinion, value like, is this attractive or not? And what I've found is, you know, Bitcoin doesn't necessarily always reach a peak before these other altcoins do. But when you get these altcoins to the top of their range, I mean, that can be a good sign to maybe if you're a more active investor, reduce your exposure and add somewhere else or maybe shift back to Bitcoin or just take some off the top for a gain. I think those are very helpful because they've actually traded in some reliable ranges over the past couple of years. Now, history is short on all this and things could change, but that's generally how I think about both Ethereum and Solana and really any smart contract platform.

**Steven Ehrlich** (3:21)
Yeah. It's interesting you did this.
I published a story in Forbes a couple of years ago. It probably was my best read besides the Sandbank Refree cover, but definitely my most controversial. It was $20 billion crypto zombies. I published it in 2023 in the springtime.

**Jim Ferraioli** (3:40)
I remember that article.

**Steven Ehrlich** (3:43)
I did something similar to what you had. I tried to come up with a few valuation metrics, frameworks to eliminate the noise. We didn't count number of active wallets because that can be so easily gamed. We didn't look at transfer volume. Frankly, that had a lot to do with just moving assets between exchanges and platforms. We looked at active developers. We looked at TVL, which I know is something that you pay attention to. Then we basically created a metric, sort of like a price to sales equivalent, almost like what you did, market cap to fees. Look at the ones like XRP. Some of these numbers, the numbers in and out don't mean much, but some of the numbers are just astronomical, especially in relation to some of the other, even like a tech equity like NVIDIA or something like that that might have a price to fee ratio at the time of 36 and XRP was 61,000.
But Ethereum, the number would seem really high. Solana, the number would still seem really high, but those weren't zombies because there was clearly activity happening there. I get the relative value aspect of it and trying to figure out where they are in these cycles because of the momentum. But I'm curious how you also just account for the fact that these are momentum plays. If you had to put into buckets like 90 percent momentum, 10 percent value or how would you fit with that? I wonder too, at some point, when do we have to assume that some of these tokens are mature enough that it should really be almost like 90 percent value and 10 percent momentum? I mean, there's blockchains out there. I mean, some of the ones I called down an article, I mean, Tezos or Algorand or I mean, XRP was a big one, now they're transitioning to smart contracts. I mean, they've been around for almost 10 plus years at this point. And when I heard back from some of those teams, they would say, well, we're still early or our fees are super low on purpose to drive growth. But at some point, you kind of need to get that growth. So how do you respond when you get questions like that?