A new perspective on digital commodities, will the value of ETH recover?

Original author: sam.frax, founder of Frax Finance
Original translation: zhouzhou, BlockBeats

Editor's note: This article explores the difference between digital commodities (such as L1 tokens) and equity-like tokens, and proposes a new framework for evaluating digital assets, especially for the value of ETH. The author believes that ETH should be regarded as a sovereign commodity rather than an equity-like token because commodities cannot generate cash flow or dividends. At the same time, it points out how to eliminate the vague definition of ETH assets, reiterates the importance of commodity premiums, and points out possible value assessment errors in the future.

The following is the original content (the original content has been reorganized for easier reading and understanding):

In the field of cryptocurrency, I proposed a new system for evaluating digital commodities such as L1 tokens and the difference between sovereign commodities and governance/equity tokens. This view is crucial to ETH and various L2 tokens, and may completely eliminate the ambiguity of ETH assets.

In crypto, there are really only two types of tokens: digital commodities (usually L1 sovereign assets) and equity-like governance tokens. I’ve covered this in more depth in previous discussions.

By definition, commodities cannot pay “dividends” or have “cash flows”, so if an asset is indeed a digital commodity and not a governance/equity-like token, we must abandon this false evaluation criteria. Just like a sovereign state cannot meaningfully default on debt denominated in its own currency (only inflation can occur, not default), digital commodities actually have no real issuer, it is a scarce sovereign asset, and therefore cannot meaningfully provide dividends or cash flows if it is indeed a commodity.

Assets are products in themselves, like BTC. Labor and other real products can only generate economic demand for commodities.

Ethereum (network + chain) is currently the largest digital nation, a sovereign economy full of innovations from global workers and builders. This labor is tokenized in the form of governance/equity-like tokens, which are clearly distinct from digital commodities like BTC, ETH, SOL, etc. Where any entity pays holders of digital commodities to perform any action, whether it is liquidity provision rewards, DeFi incentives, or LSD and LRT, these can be measured empirically.

This metric should be defined as the commodity premium of the asset, rather than a monetary premium, sovereign premium, or speculative premium, which is a legitimate and fundamentals-centric valuation term for a class of assets.

Anywhere in the global economy anyone pays someone else in the form of labor or equity-like tokens to hold some form of sovereign asset, we can track the flow of value from labor to digital commodities. This demand is the global interest rate paid to all forms of ETH holders, including ETH holders who use it in liquidity pools, re-staking, L2, and new DeFi innovations that have yet to appear.

This is the global economic demand for commodities, the commodity premium. Obviously, this has a much greater value accumulation effect on the price and market value of sovereign assets than any PE DCF framework. This is also why BTC has a market cap of nearly $200 billion without any gas consumption. But in my framework, notice that there is no PE DCF premium in a class of tokens, because it is simply impossible.

Only equity-like tokens can have cash flows, and what we think of as "dividends/buybacks/burns" in an asset class is actually just commodity premiums. Similarly, there is no commodity premium in equity-like tokens.

This leads to the 1559 burn mechanism, which is often seen as the core value accumulation mechanism of ETH because it is considered that "Ethereum the enterprise" pays dividends/cash flows to ETH commodity holders.

But this is a ridiculous concept because commodities cannot generate cash flows. If a company uses gold in a new industrial use, thereby changing the molecular structure of gold and causing the element to be permanently removed from circulation, we will not start a PE or DCF cash flow analysis on gold, but only think that it has a new high-demand industrial use that consumes the commodity. No one will do a PE or DCF analysis on gold.

Similarly, no one does PE or DCF analysis on BTC. It's like gold, but in digital form. The PE DCF premium is not within the socially acceptable range for real or digital goods. Going further, the 1559 burning mechanism stems from user demand within Ethereum and its L2 sovereign economy. This is just another economic demand for $ETH sovereign assets, another industrial use case. The demand is paid through the Ethereum blockchain protocol itself, not through labor or manually issued equity/governance token rewards.

Ethereum is the first project to face the "Final Boss" challenge in defining its own social identity, but SOL is the next one, and once it reaches this stage, it may also struggle at this step, and other sovereign assets will face similar problems as they mature to these stages.

My thoughts on the digital commodity lifecycle and its associated pitfalls are laid out in a chart. $SOL has not yet reached stage 2, and note that $BTC and $ETH have taken different turns in stage 2 in my opinion.

It is very important for $ETH to establish this social contract now, to show the world before it is too late, that it is not just $BTC that has this privilege. In fact, it is not a privilege, but a social contract for the commodity premium - a very specific, quantifiable, rules-based system.

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

Until now, the PE DCF was the only fundamentals-based framework for discussing digital assets, except $BTC. It has been incorrectly applied to all assets (except BTC), but should only be used to value assets that represent labor, product, 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 a defined gas token, sovereignty of supply, and consensus, are necessary to establish a social contract for commodity premiums. If $ETH can be accidentally transformed into a second-class token, it is also possible to transform a second-class token into a first-class token, but it is a very difficult and sensitive process that is prone to errors.

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