Layer-1 Value Thesis: Quantifying Demand for Security

Key Insights

• Using the previously proposed Expected Demand for Security Model, this report establishes that the demand for security is dependent on its largest application, user, asset, infrastructure, or network.
• In the case of most blockchain networks, the largest asset and driver for security of demand is the native asset itself. However, because it is endogenous, its demand for security is perfectly reflexive with the network’s supply of security.
• To seek alternate proxies for security demand, we use the largest application and the cumulative value of centralized stablecoins to create two valuation multiples that represent exogenous demand for security.
• Based on the Largest Application Multiple, Ethereum is priced relatively cheaper than younger ecosystems Avalanche and Solana, which are priced more aggressively for ecosystem growth. Similarly, based on the Centralized Stablecoin Multiple, TRON and Ethereum trade at cheaper valuations than other blockchains.
• Finally, we analyze several widely used blockchain metrics from the lens of the Expected Demand for Security Model to understand their effect on network value.

A blockchain’s native token performs a few key roles for the network, namely, enabling transaction fees, settling value between users, and incentivizing the security of the network. However, the first two roles are value-independent: even if the price falls, users can still pay transaction fees and settle value with more tokens. It is the third role, incentivizing the security of the network, that is wholly dependent on the value of the network.