Why Ethereum Is Winning the Tokenization Race, Per Schwab

Transcript

Uh, let's let's talk about ETH. Uh, you have a different type of relative value metric there. I think it was sort of your um I I guess your approximation of like sort of like the Buffett coefficient. And I love to Yeah, please go ahead. Yeah, so 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, you know, how value you know, how expensive are you know, the top 500 companies relative to the actual economic output. And so when I think of smart contract platforms like blockchain like Ethereum or Solana I think of these as decentralized microeconomies. And

normally you wouldn't kind of do competitive analysis against you know, two economies like that. You would just kind of look and say like, okay, you know, country A's growing expected growth its economy this much this year. Country B's expected to grow at the economy this much. But these are microeconomies and again all the data is available. So you can see. And so I look at um the sum of all fees generated across the Ethereum network and the Solana network, right? And so this isn't looking at applications that are built on layer two. So it's not just the base network as well. And if you sum up the trailing you know, 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 um you know, the rest historically has been. And so I think that's a great way to quantify whether um one smart contract platform is maybe more attractive than the other. Um now right now there's not there's no one's

really doing forward estimates as to like, oh we think you know, this type of activity is going to grow this much next year or this much is going to grow whatever. Um but over time I think that's something reasonable that you would ex expect people to start pricing in forward expectations of economic activity on these platforms. And then you'd probably start looking you know, as your denominator forward estimates of GDP. 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 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 just back to Bitcoin or or just take some off the top for a gain. So I think those are very helpful cuz they've actually traded in in some reliable ranges over the past couple years. Now history is kind of short on all this and things could change. But that's that's generally how I think about both you know, Ethereum and Solana and really any smart contract platform. Yeah. I it's interesting you did this. I mean I I published a story in Forbes a couple years ago. Um I probably was my best read in besides the Sam Bankman-Fried

cover. And but definitely my most controversial. It was 20 billion dollar crypto zombies. I published it in 2023 in the spring time. >> I remember that article. And and I did something similar to to to what you what you had. I mean I looked tried to come up with a a few valuation metrics frameworks to put out the eliminate the noise. Like we didn't count number of active wallets cuz that can be so easily gamed. Uh, we didn't look at like transfer volume cuz frankly that had a lot to do with just moving assets between exchanges and platforms. We looked at like active developers. We looked at TVL which I know is something that you pay attention to. And then we basically created a metric I mean sort of like a like a price to sales equivalent almost like what you did market cap to fees. And like looked at

ones like like XRP. I mean some of these numbers were I mean the numbers in an abstract don't mean much. But some of the numbers are just like astronomical especially in relation to some of the other even like a tech equity like Nvidia or or something like that that might have like a price to fee ratio at the time of 36 and XRP was 61,000. Um but it but like but like Ethereum I mean 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. Uh, so it's I get the relative value aspect of it and trying to figure out like where they are in these cycles because because of the momentum. But I'm curious like how you also just account for the fact that these are momentum plays like like and

if you had to just like sort of put into buckets like 90% momentum, 10% value or or like like how would you fit with that? And I wonder too like at some point like when do we have to assume that some of these tokens are mature enough that they really like it should really be almost like 90% value and 10% momentum. I mean there's blockchains out there. I mean some of the ones I called down in the 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. Um and when I heard back from some of those teams they would say, oh we're 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 like how do you how do you respond when you get questions like that? Yeah. So so I just quickly and this is the the the biggest issue with the crypto market is like protocols don't die. They're always just kind of like floating around forever even if no one uses them. But um That's literally why I called them zombies in the story. Cuz >> Yeah. And and and so the what I think about is beyond so right if you're thinking about fundamental investing, you want a valuation where you want a way way to empirically compare these things. And you brought up a point that you know, some of these price to sale metrics or market cap to GDPs, right? They're super high and you would really if there was a stock you would never consider something

like, oh this trades in a range like that. But that's relative value cuz if you think of stocks there can be a stock that trades, you know, it's a good stock. It's you know, maybe a garpy growth company that trades between 20 and 40 times earnings. And it's a great company. And then you might compare that to another stock that trades at 10 to 20 earnings because it's maybe a little slower growth. It's been around a long time. You know, but you wouldn't say like, oh my oh my this company trading at 20 to 40 times is so expensive because it's at 20 times. Right? It's that's the low end of its range. And so I think like even when you do this with cryptocurrencies, even if you get large numbers which for some of them like were were quite large. Again, it's a way of kind of anchoring your

perspective uh about where it is today versus where it's been throughout history. And that's the important thing so because the other thing you have to consider and you you went there was like what is the fundamental debate about this asset. And that's huge in every other asset, right? If you're a fixed income investor, you're debating with other investors about you know, what you think growth rates are going to be or inflation rates going to be. If you're an equity investor, you're you know, like what's the earnings going to be? What are margins going to be? Are they launching a new product? And so you have that. And XRP was a great one because it was originally launched at in 2012 as a competitor. It was supposed to be like a

commercial Bitcoin, you know, where you could transfer money quickly. It was a store value. It was decentralized even though it's not all that decentralized. And right? And now they're changing to this, oh we're you know, we're a stablecoin or smart contract platform. And A in equities investors hate that. You get these deep value guys that come in and they want to like do turnaround and have a an active stake in it. But generally people like clear cut like this is what's happening. And so that's one of the things that's that's starting to impact. And one of the assets that the debate has actually had a really big impact on has been ether.

Um yeah, for for several years now there's been the debate about whether it can scale. Um layer twos were introduced to kind of address that. There's been network upgrades to address that. But then Solana came along as a competitor that can do fast transactions. It's very scalable. And so if you look at the price action during the latest crypto bull market ether lagged everything else. And it wasn't until last summer when you had ether treasury companies starting to form that the price actually started really reacting. And so again like you can look at at valuation as a tool. But valuation is not predictive and it shouldn't be predictive. It's only part of the picture. And so I think ether's actually

a great case where fundamentals are starting to matter more. Again, it needed a new narrative to make it to kind of breathe some life into it. And I think you know, I personally I I think ether is or Ethereum rather is very well positioned to kind of take the smart contract network I mean market share. They're already the largest in terms of total value locked. They're the industry standard. They were the first ever. If you're launching an application or you're tokenizing assets or you want to accept tokenized assets, you want to always have the biggest network. I mean that's like launching an app. You want to be on the the iPhone, right? Or you want to be on the if you're launching a

software, you want to be on the biggest cloud network providers. And so there's no reason why it shouldn't be the same for cryptocurrencies. Um but that that's specifically one where fundamentals are clearly starting to have more of an impact. It's it the investor debates are having more of an impact on it. And so I I think that's important. Um the market though it is it's it's all momentum driven, right? So even if you like you you you do a deep dive into like the fundamentals for Ethereum or Solana or any smart contract platform, once the rest of the crypto market cap goes down, those things go down, too.

And And ultimately, I think the issue there is historically and really still today, all the usage is still tied to where the crypto market cap is, right? As the market cap, the broader market cap is going up, you typically get more money put into stable coins, right? Because that's usually seen as the primary, you know, you you convert your fiat to stables and then at some point you convert that to a volatile cryptocurrency. Um if you look at Ethereum specifically, uh it's like 50% of the the fees generated last year were gen- were from stablecoin usage.

And then about 20% was from liquid staking and 20% lending. And again, those are products that's use cases tied to the crypto market cap. The larger the market cap is, the more likely you are to want to, you know, stake your ETH and be able to then uh use liquid staking so you have kind of access to it. Um but then again, you're the higher the market cap, the more likely you are to want to lend on it instead of selling. And then, the final chunk of that is trading. And so again, it's a speculative market. Things are going well, you want to be in there trading different uh cryptocurrencies. And And so it hasn't like it's just in- it's inexplicably tied to wherever the crypto market cap is right now. But tokenization is the interesting

thing cuz it changes that. It's any uh financial institution can asset can tokenize assets. They can put it on, you know, a smart contract platform. And that shouldn't matter about, you know, what the rest of the crypto market's doing. And so I think we're at an interesting point where as tokenization grows and every single financial institution on the planet right now is figuring it out how they can tokenize some sort of their business um either because they think there's ability to maybe uh reduce friction or they just want to be able to accept those assets, right? These the the crypto market cap's growing, you want to meet your customers where they are. If you have customers that are transacting on these things, your goal

is to capture assets so you have exposure to them. And so as that grows, it's actually interesting because now there's a a different narrative. There are different fundamentals that are not just tied to the broader crypto market cap. And so it's a really, I think, interesting time for uh smart contract platforms.