How does demand drive affect crypto asset valuation? Re-examining BTC, ETH, and TRON

Earlier this year, crypto KOL polynya listed various demand drivers for ETH and explained the importance of each driver. The author believes that the most important demand driver for crypto assets is "long-term reserve assets", that is, the belief that the asset is an alternative means of storing value. Combined with economic collateral and related "currency" aspects (which can be collectively referred to as "currency premium"), the author believes that it accounts for at least 90% of the value of a crypto asset. The value that many people think is more important refers to "on-chain transaction fee destruction", which is not so important in the author's opinion. This article uses 3 of the top 10 crypto assets (BTC, ETH, TRON) as examples to see why this is the case.

BTC remains the dominant asset in the crypto space and has been for 14 years. Definitely a long time for an emerging, rapidly developing blockchain technology. With a valuation of $572 billion, BTC is entering its maturity phase. Today, some would argue that BTC will be worth $1 trillion, or possibly more. But this is clearly not the case, and BTC's returns have been declining significantly since 2017. It can be seen that all hopium predictions like S2F have failed.

There is little activity on the Bitcoin network and the wider community, but there is little need for it. Bitcoin is valuable because people collectively believe it is the best "long-term reserve asset" or alternative store of value. Based on this, Bitcoin still dominates the industry and is the only demand driver, which is why the author believes that whether it is a "long-term reserve asset" has the highest impact on the value of an asset.

Today, BTC is worth 2.5 times more than ETH. For ETH to surpass BTC, it needs to convince the public that ETH is a better long-term reserve asset. However, no matter how active the Ethereum chain is, how many applications and innovations there are, and how high the user and adoption rate is, ETH will not be more valuable than BTC. The market just believes that ETH is a better cryptocurrency. Of course, ETH's monetary premium has been growing.

I recently wrote an article about Tron, telling how it has become one of the most economically active blockchains with USDT, and the Tron network collects and burns the second most in fees, second only to Ethereum L1. On average, the Tron network burns more than 25% of Ethereum in USD terms. However, relative to ETH, TRON's market cap is only 3% of ETH. TRON has not been favored by the crypto industry and has not been able to gain the highly respected status and associated premiums that SOL, ADA, DOGE, and XRP tokens have.

If the crypto market valued these tokens by burn volume and on-chain activity, TRON would be ~10x more valuable. But that is not the case, so TRON ends up with a 10x higher deflation rate than ETH. To put it another way, if ETH had TRON’s adoption rate, ETH would be worth ~$200, and what matters is ETH and the activity on its L2. Clearly, most of ETH’s value comes from other demand drivers. For Bitcoin, it’s almost entirely from alternative/speculative stores of value.

It is worth noting that while burns are not the most important demand driver, they are still an important factor. This is why, despite being unpopular and having a low market position, TRON is one of the best performing alt-L1 tokens in this bear market, outperforming only BTC and ETH and more than 10 times higher than some of its peers such as SOL, DOGE or ADA. For similar reasons, it can also be seen that ETH has performed better than BTC in the bear market.

Looking at BTC, ETH, and TRON at the same time, we can see how the crypto market views these assets and how they are valued:

1. Belief in long-term reserve assets as an alternative store of value remains a determining factor in cryptoasset valuations. This belief can come from a variety of different ways, no matter how irrational you think it is.

2. Protocol revenue and destruction will have a certain degree of impact, but the realized value of its impact is at least 10 times lower than the monetary value.

3. For assets where most of their value comes from a basket of currencies, the goal should be to keep protocol fees as low as possible. Subsidize them if they can be used to expand established demand drivers in the currency category. For example, for Ethereum, this means L2 fees are as close to zero as possible, and the same goes for L1 fees in the long run. A significant reduction in L2 fees can be achieved in the short term through EIP-4844, and in the medium term through danksharding; as well as L1 fees in the medium and long term, including technologies such as statelessness and zkEVM. Seeking to expand the use of ETH as a currency across the industry, then $5,000 ETH with an inflation rate of 1% may be more valuable than $2,000 ETH with an inflation rate of -0.2%.

4. However, if the protocol’s assets do not have a significant monetary premium, it will not be possible to subsidize the protocol’s usage and fee income, and economic sustainability should be the primary focus.

5. Crypto assets can have two broad demand drivers: currency and income. If the goal is a currency basket, then don't prioritize protocol income. On the contrary, if it does not target currency, then income is essential for sustainable development.

6. Crypto assets don’t have to be one or the other. It’s clear that tokens like BTC are heavily skewed towards monetary premium, tokens like TRON are heavily skewed towards income, and ETH is somewhere in between. Users can have L2 and dapp tokens that combine both, rather than being limited to L1 tokens. In fact, the WLD token is an example (just to give an example, WLD’s token economics are terrible) that is primarily focused on income while running primarily on its L2.

Note: The author obtained data from Token Terminal, Coinmetrics, and Tronscan. The author has double-checked and believes it is accurate. Most people are skeptical about Tron's amazing revenue, but it is real.