Just what is the value of Ethereum?



The value of Ethereum has steadily increased out of fundamental value, out of growing interest, out of speculative opportunity out of – well you can imagine what you will as value drivers.


But what might be the true underlying value? Are we able to speculate based upon comparables that exist today?


At the end of the day, Ethereum is a processing network that is paid for securely facilitating transactions and maintaining a reliable transaction record. Sure it has the additional benefit of being a decentralized, trustless-based system but the need for such a system remains debatable for general transactions such as small value purchases and sales. Of course, the Ethereum network provides the ability to record many other things based upon whatever smart contract you want to layer over it so payments are but one form of transaction – but to me, this is purely a growth avenue.

It's all about the money......

When you start to dig into the payment systems, you find that they are a source of massive revenue for the incumbents. And then you start to realize why the FAANG group (not certain how to fit Meta in yet), Alipay, Paypal are actively interested in the space. The space has been hugely profitable.


So let’s look at the incumbent payment systems. We have previously explored this avenue in prior works and will reference our 2018 work with updates for 2021.


The major payment providers around the world are all recognizable names. UnionPay, VISA, and MasterCard.


UnionPay is privately held so data is a little less available but in 2018 they reported transaction volume of approximately 98 billion – slightly more that MasterCard at 90.2 billion Tx and less than VISA which reported 165 billion Tx.


From the September 26, 2021 VISA Inc 10-k we find the following:


Table 1: Card Processing Volume

Visa

Mastercard

American Express

JCB

Diners Club

Payments Volumes ($B)

8,911

4,743

1,005

308

166

Total Volumes ($B)

11,383

6,337

1,011

317

178

Total Transactions (B)

205

126

9

5

3

Cards (M)

3,586

2,334

112

141

65

So the transactions processed by the two dominant providers VISA and MasterCard comprise over 90% of the total volume with an average transaction size of approximately 50-55 USD (slightly higher for the smaller card networks).

Following from the VISA 10-k we find the following revenue breakdown:


Table 2: VISA inc 2021 10-k Reported Revenues

Service Revenues ($B)

11,475

Data Processing Reveneus ($B)

12,792

International Transaction Revenues ($B)

6,530

Other Revenues ($B)

1,675

Client Incentives ($B)

-8,367

Net Revenues ($B)

24,105

So all in VISA earned 24.1 B$ to process 205 billion transactions – approximately 8.5 cents/Tx. Incidentally, 205 billion transactions constitutes approximately 6,500 tps on average. Remember these numbers. We note that the revenue per transaction seems to be falling for VISA as in our prior report we noted they averaged almost 16.5 cents /Tx in their 2018 reporting. In other words, this is the beginning of the “price wars” of incumbents versus the up and comers…..


So as a floor we can see a revenue stream of 8.5 US cents/Tx. But is that all there is?


Well not quite.


The revenues earned by the card networks are only part of the story.


Again from the Global Payments Inc. 2020 10-k filing we find the following:


Figure 1: Non-Cash Transaction Flow of Proceeds (the Money Trail…)

So we can see that there is an average 2% fee earned by the network participants. This is further broken down in the following 2015 Heartland Payment Systems 10-k filing (Heartland was acquired by Global Payments that year).


Figure 2: Non-Cash Transaction Flow of Proceeds 2 (the Money Trail part 2…)

From these breakdowns we can see that the card networks on average approximately 6-10% of the revenue while banks (Card Issuers) and Acquirers earn the majority.


So if the Ethereum network can cut out the middlemen, they have the potential to earn up to 2 $/Tx for every transaction of 100$ of value. Sure that’s optimistic – see price wars commentary earlier.


Ok, so our homework is complete. We have the bookends 8.5 cents/Tx to 2 $/Tx. If the Ethereum network can’t get close to the low end, it will not compete. And if you are a bank or an acquirer, you should be very concerned about the price of your product/service.

Now let's look at where Ethereum is today and where it aspires to go

The Ethereum Network continues to juggle its move away from POW (Eth1.0) to POS (Eth 2.0). They still need the mining community to support the network but life would be so much simpler if they could just cut the old network loose. Not there yet but getting there. High transaction fees are the result and they will continue until POW is no longer required.


What then will the Network fees consist of? There is a cost to operating the computational equipment that will backstop the network, and depending upon the development path, perhaps a lot data storage capacity. But these costs will be minimal compared to the cost of POW miners redundantly chasing the same fees.


So what will be the primary cost? In a competitive POW network, the cost of the mining infrastructure ensures the network. The infrastructure and the ability to convince a utility that you will pay them for the copious amounts of electricity you will be buying is the collateral backstopping the system.


In the POS network, your stake is your collateral to be a good actor.


From Beaconcha.in, as of December 7, 2021, there are 266,680 validators on the network with 8,533,684 Ether staked.


With a December 7, 2021 price of 4,283 US$/Eth, that constitutes a staking network with a value of 36.55 B US$. So the network is sufficiently collateralized. How do we know this? Well the enterprise value of VISA and MasterCard combined is approximately 760 B USD$. This value reflects not only their income (current and potential) but also their reliability and trustworthiness (for which they are paid quite handsomely!).


On average, VISA and MasterCard processed approximately 10,500 tps in 2020.