Stop using fee income to value ETH. The "Vault Logic" is the future?

Original author: Tom Dunleavy, Venture Partner at Varys Capital

Translation: Yuliya, PANews

Editor's note: The current market generally views Ethereum as a traditional enterprise, calculating its P/E ratio based on the fees it generates and concluding that it is overvalued. However, Tom Dunleavy proposes a completely different framework: fees are not revenue, but network friction; Ethereum is not a company, but a "vault" protecting hundreds of billions of dollars in assets, and ETH itself is the lock. The following is a translation of the original text:

TLDR

• Stop valuing Ethereum based on fees. Fees are actually a stumbling block; a successful network will inevitably try to reduce them to zero. Today, ETH fees have dropped from a peak of over $50 in 2021 to around $0.20, yet transaction volumes have more than tripled. The plummeting fees indicate the network's huge success, not its decline.
• After switching to Proof-of-Stake (PoS), ETH became the lock protecting the asset vault. To attack Ethereum, you need to control the staked ETH. Controlling a third can stall the network; controlling two-thirds can rewrite history. Either way, the cost of attacking is denominated in ETH, and any malicious action results in the ETH being burnt by the system. This inextricably ties ETH's value to the network's security. No network operated this way before staking.
• Currently, Ethereum's on-chain assets are around $250 billion (including stablecoins, tokenized assets, L2 cross-chain funds, etc.). But the total value of staked ETH protecting these assets is only about $72 billion. This is like using a cheap, flimsy lock to protect a safe full of gold bars. Logically, the fair price of ETH should be around $6,900 (currently $2,070). If on-chain assets grow to trillions in the future, ETH's price needs to rise to tens of thousands of dollars to justify its security responsibilities.
• Saying "Ethereum is like a free Linux system" or "like DTCC" is wrong. The security of Linux and DTCC is external (e.g., community goodwill for open source, or legal guarantees from governments and banks). But Ethereum's security is bought and paid for using its own token, ETH. Therefore, ETH must be valuable, while Linux doesn't need to be.
• If ETH fails, Crypto will likely fail too.

Fees Are Not Revenue, They Are Friction

Last week, Bankless founder David Hoffman caused an uproar in the crypto community by announcing he had sold all his ETH. While I respect David's decision, I believe the way most people value ETH and other PoS blockchains is outdated. I've discussed my new framework with many people on shows before, but it seems it hasn't fully resonated (maybe due to my explanation). So today, I'll lay it all out clearly in one go.

New things require new perspectives. Allow me to introduce a brand new ETH valuation model.

Many people treat Ethereum as a company and the fees it collects as its revenue. When they see fees declining, they think the "company" is failing and the token is overvalued. This is completely backward. Once you grasp this, you'll never see it the same way again.

In reality, fees are like taxes. The higher the fees, the less people want to use the network. Lower fees encourage more participation, leading to more on-chain applications and capital. The data doesn't lie: individual transaction fees have dropped from over $50 in 2021 to around $0.20 today, yet transaction volumes have hit all-time highs, more than triple those of 2021. Today, L2s handle about 85% of transactions. Cheaper usage attracts more users. A successful settlement network should naturally strive to reduce tolls to zero.

Ethereum's fees have plummeted while transaction volumes have hit new highs. It has become cheaper and attracted more users. L2s now handle approximately 85% of the throughput.

So, if fees are the wrong metric, what is the right one?

Ethereum is a Giant Vault, ETH is the Lock

Stop treating Ethereum as a company. Think of it as a massive vault. This vault holds approximately $160 billion in stablecoins, $20 billion in RWAs (like US Treasuries, money market funds, and private credit), $35 billion in L2 cross-chain assets (L2 networks inherently inherit Ethereum's consensus), about $12 billion in wrapped Bitcoin, and roughly $20 billion distributed across DeFi positions, NFTs, and on-chain treasuries. Total on-chain assets amount to about $250 billion and are growing every quarter.

The vault's security depends entirely on its lock. But everyone is miscalculating the lock's value. On Ethereum, this lock is made of ETH.

Under the old Proof-of-Work (PoW) system, you protected the network with mining hardware. The lock was bought externally, and its cost had nothing to do with the token's price. Now with Proof-of-Stake (PoS), everything has changed. To attack Ethereum now, you must acquire and control staked ETH. The lock is made of the token itself. This means the security level of the vault and the market price of the token are one and the same. You cannot separate them.

The Current Reality: The Lock is Cheaper Than the Safe

This is the problem the market is overlooking. Today, the total value of all staked ETH securing Ethereum is only about $72 billion. But it protects assets worth $250 billion. The safe contains more than twice the value of the lock protecting it.

This is dangerously inadequate. If the value you're protecting exceeds the cost of attacking it, your vault is poorly constructed. For Ethereum to securely guard this $250 billion, the staked capital used for defense must be greater than $250 billion, not less than a third.

Currently, only about 30% of ETH is staked. So, just to make the staked value equal to on-chain assets, ETH's total market cap would need to be more than three times (1 divided by 0.30) the value of on-chain assets. Currently, ETH's market cap is roughly equal to the assets it protects (about 1x). But according to my logic, it should be over 3x. Based on the current $250 billion, the fair price for ETH would be around $6,900, not the current $2,070. This means, even without any new capital inflow, simply based on the assets it currently protects, ETH's price should more than triple. This is close to the directional model of BitMine Chairman Tom Lee.

"But Circle can freeze USDC, so it doesn't need ETH's protection."

This rebuttal always comes up, but it is fundamentally wrong. Here's why:

Some argue that if Ethereum is attacked, Circle, the issuer of USDC, can simply freeze the attacker's addresses and reissue the tokens. Therefore, those hundreds of billions shouldn't count towards Ethereum's security responsibility.

But consider this: Circle's freezing mechanism operates via smart contracts, executes on Ethereum, and relies on Ethereum's ledger. If Ethereum's consensus is broken, there is no single honest chain everyone agrees on, and the freezing mechanism cannot function.

Furthermore, Circle could have chosen not to use Ethereum and built their own private database instead. They chose Ethereum precisely because of its neutrality, deep liquidity, and composability with other projects. The trade-off for these benefits is that USDC's fate is now tied to Ethereum's security. You can't have the benefits without accepting the dependency risk.

Moreover, people assume attackers want to steal USDC. That's not the point. If Ethereum collapses, this $150+ billion isn't stolen; it's trapped on a chain without consensus, unable to be redeemed, throwing all loans and transactions based on it into chaos. The value of these assets is not taken by the attacker; it is destroyed. And destroyed value is precisely what security models must account for.

An attacker doesn't even need to steal to profit. They could short ETH, short the entire ecosystem, or simply be a hostile entity that benefits from crippling the network. The more value on-chain, the greater their incentive to attack. Therefore, our security budget must grow in tandem with total on-chain assets, not just protect against the small fraction an attacker might directly steal.

If you place your money on Ethereum, you are consuming its security, regardless of whether you or your token issuer has a "freeze" button. All value must be counted.

"Ethereum is just Linux" or "Ethereum is DTCC."

These are other common arguments from smart people.

• The first analogy: Ethereum is like the Linux operating system. It's the underlying infrastructure driving the internet, but the asset itself is worthless. Open-source infrastructure is a free public good; value is captured by applications running on top, not the base protocol. By this logic, ETH will also be critically important but ultimately worthless.
• The second analogy: Ethereum is like the DTCC (Depository Trust & Clearing Corporation), the infrastructure behind almost all US securities transactions. The DTCC processed $3,700 quadrillion in transactions in 2024, generated ~$2.5 billion in revenue, but profit was less than $500 million. It's vital and regulated, but its value is a tiny fraction of the transaction volume. Infrastructure is cheap; even if indispensable, it captures only a thin slice of utility profit, no matter how much value flows through it.

Both analogies fail for the same reason.

Linux and the DTCC borrow their security externally. Linux relies on the open-source community, reputation, and decades of code review. The DTCC relies on US law, federal regulators, and the backing of big banks using dollars and treasuries as collateral. Their security guarantees are outside the system. This is exactly why the DTCC can settle immense wealth while capturing almost no value. It is a member-owned utility designed to run at cost. It doesn't need a valuable token because trust is provided by governments and banks.

Ethereum has no such external umbrella. No government enforces it. No member banks back it. No law can reverse a stolen settlement. The only barrier between Ethereum and an attacker is the market value of the staked ETH protecting it. Ethereum must buy security, block by block, using its own asset, on the open market.

This is the fundamental difference. Linux is software; no one is required to own a scarce asset to run it. The DTCC provides collateral, but it's external to itself. Ethereum's collateral is ETH, internal to itself. You cannot commoditize it to zero because security isn't just code; it's an amount of value that must be locked and placed at risk. Strip away ETH's value, and you don't get a leaner Linux. You get a chain without collateral, one that no one would trust with a single dollar.

So, stop comparing Ethereum to Linux or the DTCC. Compare it to the dollars and treasuries backing the DTCC. No one values the US dollar based on the fees collected by the DTCC. You would separately value the clearinghouse's fees and assess the dollars and treasuries acting as the system's collateral—valued in the trillions. ETH is not the clearinghouse. ETH is the collateral building the clearinghouse. That's the asset you are buying.

Linux never needed a treasury. Ethereum's security budget is a treasury, and it is denominated in ETH.

Looking Ahead and Market Dynamics

Let's follow this line of thinking. This model ignores fees or market hype. It focuses on one core question: How much value will settle on Ethereum in the future? And to protect that value, how valuable must ETH be?

Stablecoins are on track to surpass $1 trillion soon. RWA tokenization could reach several trillion by 2030. Combined with various on-chain applications, the assets Ethereum needs to protect will skyrocket from today's $250 billion to trillions. Maintaining that ">3x" security multiplier, you can calculate how high ETH's price must rise as more capital flows in.

Even if you're more pessimistic and lower the security multiplier, it doesn't change the outcome much. On-chain capital is growing (the variable), and the security multiplier (the leverage). However you calculate it, the long-term direction is clearly upward.

"This is blind optimism. The market will never price this in."

This is the most pertinent rebuttal. I'm describing what ETH *should* be worth, not what the market will *immediately* price it at. There isn't a direct arbitrage mechanism to close the gap. Also, my thesis that "ETH should go up" has been wrong for the past few years in terms of price action. Let's address these points.

• On what closes the gap: It's not arbitrage; it's demand for the system's reserve asset. As value settles on Ethereum, ETH is used as collateral, a paired trading asset, and is staked to earn the network's base yield. This demand grows with the activity it supports. Reserve assets aren't priced by income; they're priced by how desperately the surrounding system needs to hold them. Gold is worth over $18 trillion and generates no cash flow. ETH is the reserve asset for on-chain finance, and this framework simply measures how large that reserve must be.
• On the staking multiplier: My mental model treats the staking multiplier as a range, not a fixed target. At current staking rates, parity (staked ETH = protected value) is around 3.3x. A reasonable range might be from a lenient 1.7x to a strict 5x, where the cost of an attack via a two-thirds staking share must equal the total protected value. Price will track protected value at some multiplier within this range. Fixing it to a single number destroys nuance; it's where reasonable people can disagree without breaking the model.
• On reflexivity: The model does have multiple equilibrium points, and nothing decisively selects the highest one. Today, Ethereum is secure enough even below the lower bound because acquiring a third of the stake is illiquid, slashing is brutally punitive, and the social layer can fork an attacker out. These defenses are real, but they determine whether an attack succeeds, not whether coverage is adequate as risk grows. Thin coverage is tolerable for protecting $250 billion. When dealing with $2 trillion or $5 trillion in regulated institutional capital, coverage is no longer an academic question. As adoption increases, the gradient to close the gap monotonically increases.

Finally, the most damning counter is ETH's price performance over the last 5 years. Logically it should rise, but in practice it has fallen. I believe the main reason is: there wasn't enough money on-chain yet for security to be a primary concern. No one worried when it was $50 billion; they started feeling uneasy when it hit $175 billion; when it reaches $1 trillion, the first question large institutions will ask is: "Is this chain secure?" And the answer to that question is entirely sustained by ETH's price. My model can't predict the exact day of the price increase, but it tells you that as on-chain capital grows, the upward pressure becomes more intense. And the fact that "on-chain capital is growing" is something even the bears can't deny.

Some counter with Bitcoin, saying its security budget is trivial compared to its market cap. But Bitcoin mainly protects itself. Ethereum protects other people's dollars and assets, which is a much heavier responsibility! And the trends are already evident: more ETH is being staked, compliance-focused products are continuously buying ETH, and the burn mechanism destroys ETH based on on-chain activity. These all confirm the demand growth I'm describing.

Those who only stare at fees and cash flows will continue to claim ETH is overvalued. They have completely reversed cause and effect. First comes on-chain activity, then the need for security. ETH must be valuable to safeguard the ecosystem's security. Fees are a stumbling block you should strive to eliminate, not the benchmark you use to value ETH.

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