Valuing blockchain networks is an evolving challenge reminiscent of the early internet era's valuation dilemmas. Analysts and investors are grappling with a rapidly maturing technology that doesn't neatly fit into existing financial models. Just as internet companies were once valued based on metrics like page views or monthly active users, today's blockchain networks are being evaluated through an array of diverse, often experimental approaches.
During the dot-com boom of the late 1990s, companies were frequently valued based on potential rather than profitability, leading to the infamous bubble's burst. A similar pattern is observable in the blockchain world, where the excitement around technological potential sometimes overshadows economic fundamentals. However, unlike the early internet companies, blockchains operate as decentralized platforms, creating unique challenges for traditional valuation models.
Traditional financial metrics such as Discounted Cash Flows (DCF) are often inappropriate for blockchains, as these systems are not designed to generate profits in the conventional sense. Instead, they facilitate decentralized transactions and interactions without a central authority. This public infrastructure role of blockchains makes them fundamentally different from companies that aim to maximize shareholder returns.
A more fitting approach might be found in the adaptation of internet-age models during the Platform Era, where valuation began to concentrate more on network effects and ecosystem depth. For instance, companies like Facebook and Google have been valued not just on earnings but on their user engagement and data capture capacities-elements that enhance their market dominance over time. Similarly, blockchain networks could be valued based on the network effects they facilitate and their ability to support a thriving ecosystem of applications.
Emerging models like the Monetary Store of Value (MSOV) and Onchain GDP attempt to capture this, though as noted in a recent CoinDesk article, they are not without their flaws. These models either static or overly complex, struggle to capture the dynamic and decentralized nature of blockchain networks effectively. A potentially more promising approach could involve looking at the velocity and flow of tokens within the network, reflecting its economic activity and utility.
For example, the velocity of stablecoins or other assets on a blockchain can indicate how widely and frequently they are being used, which reflects the network's health and vibrancy. This perspective aligns with the economic principle that value is created through utility and exchange. By examining aspects such as transaction volume, fee structures, and inter-token dynamics, we can gain insights into the fundamental value provided by a blockchain network.
Conversely, focusing solely on protocol fees or validator revenues might offer a skewed view of a blockchain's utility and potential. Such metrics may not fully account for the broader economic impact and user engagement on the network. As we've seen in the evolution from viewing websites as mere ad spaces to recognizing them as integral parts of digital ecosystems, our understanding of what constitutes value in the blockchain space will continue to evolve.
Moreover, integrating blockchain with real-world applications continues to grow. With blockchains facilitating everything from cryptocurrency exchanges to complex financial products, understanding their economic impact requires a robust and flexible valuation framework. This framework should not only reflect current usage but also potential future expansions and integrations.
In conclusion, while blockchain valuation currently lacks a standardized approach, this is indicative of a young and evolving field rather than a permanent state. Just as the internet needed time and experimentation to develop mature financial models, so too will blockchain. The key will be developing metrics and models that reflect the unique properties of blockchains as decentralized, dynamic platforms for economic activity.
The future of blockchain valuation lies in finding a balance between existing financial theory and the innovative, often unconventional functionalities of blockchain technologies. By drawing lessons from the evolution of internet valuations and adapting them to the specific characteristics of blockchain, a more coherent and predictive framework for assessing value in this new era of technology can emerge.
