Research: Ethereum Undervalued by 27% According to Fundamental Value

According to a recent study based on Metcalfe’s Law, the market price of ETH is currently undervalued by 27% compared to its intrinsic value.

Research: Ethereum Undervalued by 27% According to Fundamental Value

Valuation and price predictions are always intriguing topics in the cryptocurrency market. Analysts from both traditional finance and crypto sectors are continuously striving to develop pricing models for major coins such as BTC, ETH, Layer-1, Layer-2, and more.

Most recently, a joint venture focusing on research between Republic Crypto and Re7 Capital known as RxR has introduced a valuation model for Ethereum (ETH) based on Metcalfe’s Law, garnering significant attention within the community.

According to Metcalfe’s Law (ML), the value of a network is proportional to the square of the number of its users. Thus, a network with more active and engaged users holds greater value. Initially used in telecommunications, the Metcalfe's Law has since been applied to social networks and technology, and now extends into the realm of crypto.

RxR's ETH valuation model applies Metcalfe’s Law by integrating the user base of the Ethereum main network and the rapidly growing user base of Layer-2 solutions. Particularly noteworthy are emerging Layer-2 networks like Base, which has attracted 1.37 million new users, according to aggregated data from TK Research on Dune Analytics.

Source: TK Research on Dune Analytics

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RxR analyst Lewis Harland affirmed:

"The updated ML index provides a more accurate valuation of ETH, as it incorporates the user bases of Ethereum's Layer-2 networks."

According to the new ML index, RxR values Ethereum at $275 billion USD, assuming no further growth in the current user base. This implies that ETH's market capitalization, which is currently under $200 billion USD at the time of writing, is undervalued by 27% based on its fundamental value.

ETH Market Cap (white line) vs. Valuation by New ML (red line). Source: RxR

This suggests ETH should ideally be trading around $2,237 USD.

1-hour chart of ETH/USDT pair on Binance at 03:30 PM on 18/09/2023

Layer-2 solutions are pivotal in applying Metcalfe’s Law. Notably, projects like Arbitrum, Optimism, and zkSync have made significant strides in attracting users, contributing to the undeniable value of the Ethereum ecosystem.

Harland commented:

"A significant milestone was reached in April 2021 when scaling solutions began contributing to Ethereum's block space. Curve, Sushiswap, Decentraland, and Aave launched on Polygon's Layer-2 during that period, pushing TVL to $10 billion USD."

Fast-forward to today, Ethereum hosts 250+ dApps with TVL exceeding $1 million USD. Specifically, Layer-2 networks boast over 30 major projects, contributing to a cumulative TVL of $10 billion USD."