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Hello readers,
We’ve been quite vocal about real onchain yield of late.
In the fullness of time, we believe this could (should?) be the most important KPI for Layer 1 blockchains.
But we haven’t shared why. Or packaged our views into a framework so that you can better understand our thinking as it pertains to fundamental analysis and relative valuation.
It’s time we did just that.
This week, we’re laying out our framework for relative L1 valuation through the lens of nation states, currencies, and FX.
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.
Let’s go.
Acknowledging that analogies can lead to the wrong conclusion, we believe the best way to think about L1 valuations is through the lens of countries and the relative pricing of their native currencies.
In this context, layer 1 blockchains can be thought of as “non-sovereign nation states.”
The native token is the currency
The token is required to access onchain services
The “nation state” (L1) collects taxes from users accessing onchain services
Now. Before we lay out the valuation framework for L1s, let’s first anchor to how this works for sovereign countries through the lens of FX and global capital flows.
Foreign exchange (FX) markets determine the value of national currencies through global trading ($7.5 trillion per day) and relative capital flows.
But what drives capital flows?
In FX, “flows-based valuation” means if more capital is flowing into a country (via exports or investments) than out, its currency appreciates (and vice versa).
Strong economic growth, low inflation, and trade surpluses tend to strengthen a currency. For example, a country running a current account surplus (more exports than imports) sees higher demand for its currency from buyers of its exports. On the other hand, a country running a trade deficit (more imports than exports) creates an excess supply of its currency abroad, putting pressure on its value (as we see with the US today).
In FX, seignorage (the profit a government makes from issuing currency since it costs $0 to do so) can benefit the issuer (and its political agenda) in the short run, but debases the currency for everyone else in the long run. Markets closely watch metrics like M2 growth and government spending deficits for signs of excessive seignorage.
If a country prints money aggressively (increasing the circulating supply), its currency typically depreciates, all else equal. On the other hand, low-inflation countries tend to maintain purchasing power, attracting investors into those currencies.
As such, large public deficits (or money printing) can weaken a currency (and capital flows to that country) by raising inflation expectations.
One of the most important drivers of a currency's value is the relative interest rate. All else equal, capital flows toward currencies with higher real interest rates (interest minus inflation).
In many ways, the fundamentals of a country are expressed through the market pricing of its real interest rate.
Investors profit from interest rate differentials by engaging in carry trades, moving funds into countries/currencies with higher yields.
Therefore, a higher interest rate attracts foreign capital seeking higher returns.
For example, if Country A is offering significantly higher rates than Country B, investors will demand Country A’s currency to invest there, boosting its value.
Beyond fundamental drivers of capital flows and relative currency valuation, FX markets are also driven by speculative trading. Traders anticipate central bank moves, geopolitical events, and trend momentum. This can lead to overshooting or undershooting the fair value.
For example, even if a country’s fundamentals do not change, speculative capital flows can strengthen a currency simply due to bullish sentiment (e.g., “American Exceptionalism” at the beginning of Trump’s term).
Similarly, rapid reversals happen when sentiment shifts (Tariffs).
The relative value of a country (expressed via its currency) is driven by a combination of fundamentals (economic growth, low inflation, monetary policy, rule of law, etc.) and speculation, which is ultimately expressed through the market price of the country’s real interest rate (nominal yield minus inflation).
Therefore, real interest rates (driven by fundamentals) drive global capital flows.
We believe that these key drivers relating to currency valuations could ultimately drive the valuations of Layer 1 blockchains (and their native tokens), which we cover in the next section.
The DeFi Report
It all comes down to capital flows.
What drives capital flows for L1s?
In the early years for an L1, the key driver of valuation is purely speculative capital flows. Speculative capital tends to look for the following:
New, cutting-edge technology
Well-known founding team and/or investors
Narratives around specific use cases for the chain
Early developer activity and VC activity supporting the chain
Innovative Token Economics
Growth in active users and total value locked
Examples include Sui, Celestia, Berrachain, Monad, etc.
Maturing L1s (such as Ethereum and Solana) rely more on fundamentals.
Onchain fees. MEV. Buybacks. The GDP of the economy “on top” of the L1. Assets secured. Capital Flows (via staking, native token issuance, RWA issuance, bridging), DeFi velocity, user growth, token economics, etc.
A blockchain that can consistently showcase its fundamentals should ultimately attract long-term investors.
But what is the most important metric that tells an investor just how “healthy” a layer 1 blockchain is, relative to its peers?
Data: The DeFi Report
We believe the real onchain yield is the most important KPI for mature L1s.
Why?
It’s telling you how good the network is at returning real value from users (via onchain services and MEV) to the network’s tokenholders (via staking).
Every important KPI that you can think of (active addresses, fees, assets secured, staked assets, native token issuance, MEV/state contention, velocity, etc) is expressed through the real onchain yield.
This is similar to how a country’s real interest rates are an expression of its economic health, rule of law, governance, capital account, and monetary policy.
[The real onchain yield is simply measuring user payments + MEV that accrue to stakers, we covered it here]
As noted, the real onchain yield tells you how good the network is at creating value for its users (via onchain services) while returning some of that value to the tokenholders of the network (via staking).
It answers a very simple question that we believe any prudent investor should ask:
“If I buy the token and stake it, what real value do I have a claim on?”
Of course, investors are free to use any preferred KPI for relative comparison. For example, some investors may prefer Assets Secured, Assets Staked, Assets in DeFi, Active Users, DEX volumes, etc., to compare Ethereum to Solana.
But how does that translate into real yield to tokenholders?
Therein lies the key question.
In the long run, we believe the chains with the highest real onchain yield should attract more capital flows (via staking, native token issuance, RWA issuance, bridging, DeFi services, new products, and speculation), driving the relative pricing of the native token in the process.
This is how it works for countries/currencies via FX.
In the fullness of time, we think it could play out similarly for L1s.
Now. When compared to Solana, Ethereum has:
Superior decentralization & lindy
More developers
Greater economic security
More assets secured onchain
More stablecoin supply
More value locked in DeFi
More RWAs onchain
A more mature DeFi ecosystem
A growing network of L2s
Yet, Solana has a higher real onchain yield than Ethereum.
Why?
We think it comes down to native token issuance + onchain velocity. In particular, DeFi Velocity measures the turnover rate of each dollar in DeFi.
Data: The DeFi Report
Solana turns over each $ of TVL in DeFi at a 15.7x clip when compared to Ethereum L1. This is why it’s creating more real onchain yield for tokenholders than Ethereum is.
The data is telling us that velocity + native token issuance drives more value to tokenholders than assets secured or total value locked.
[Solana has an 85% market share in terms of new token issuance, mostly memecoins]
Of course, Ethereum L1 has outsourced its velocity to the L2s, which have much higher throughput than the L1.
For example, Base has a YTD DeFi Velocity of .47 (close to Solana).
But again. An investor needs to ask how that translates to real onchain yield for ETH holders.
The answer?
Data: The DeFi Report
$2.4m YTD.
From the investor underwriting perspective, we would label this as a governance issue. Essentially, Ethereum leadership gave too much value away to the L2s.
That’s what it looks like right now, anyway. That doesn’t mean it can’t claw it back. But it would be easier for an investor to underwrite ETH if it were clear how much value Ethereum L1 (and ETH holders) could receive by monetizing its L2 ecosystem as it scales blob fees (while keeping the L2s happy as customers).
We believe ETH’s market price has suffered in this cycle due to this key governance issue, which ultimately is expressed via the dropping real onchain yield (despite the growth of L2s).
Data: The DeFi Report
We think this ultimately drove capital flows to Solana — via native issuance (pump.fun), velocity (DEX volumes), and speculation (traders chasing momentum).
Data: The DeFi Report
We can now quantify the real onchain yield being paid out to tokenholders via staking on each network.
That means we can calculate the real onchain p/e ratio.
How it works:
SOL is returning 1.63% (in SOL) on an annualized basis to tokenholders via staking.
The current price of SOL is $141.
Therefore, in dollar terms, SOL holders are receiving $2.30 per SOL on an annualized basis, at the current SOL price.
$141/$2.30 = 61.
Translation: Solana investors are effectively willing to pay $61 for every $1 of real value they receive via staking, on an annual basis.
Ethereum investors are effectively willing to pay $227 for every $1 of real value they receive via staking, on an annual basis.
For reference, the 10-year Treasury Bond has a real yield of 2%, and a real p/e of 50.
Translation: investors in US 10-Year Bonds are effectively willing to pay $50 for every $1 of real income earned, albeit with minimal risk compared to ETH or SOL.
Data: The DeFi Report
When we add in the issuance/inflation (which is paid to stakers and non-dilutive), we get a total p/e of 11.3 for SOL, and 30.6 for ETH.
Data: Glassnode, The DeFi Report
Beyond the yield, historically, we see asset prices collapse below their “average cost” during bear markets.
One way to analyze this is via the MVRV Ratio.
In this way, the “cost basis” of the network (via the Realized Price) can serve as a pseudo “book value.”
For those wondering, both ETH and SOL currently have an MVRV of 1.1.
Another way to think about “book value” could be through the lens of Ecosystem TVL. In the chart below, we can see that the Market Value of ETH tends to bottom when it meets the value of all assets locked in DeFi.
Data: The DeFi Report
As noted, we can observe some relative pricing being driven by real onchain yields today. But it’s mostly on the margin (e.g., ETH/SOL).
The reality is that valuations are primarily driven by monetary premiums and relative valuation to BTC today (which is priced relative to Gold).
We have a hard time believing this will persist forever.
Why?
We view BTC as different from everything else in crypto due to its decentralization, inception story (zero insiders), proof of work consensus mechanism, integration with global energy markets, fixed supply, etc.
BTC does not have a yield. As such, its value is driven by supply/demand, cost of production, and global liquidity conditions.
ETH & SOL (and other L1s) are different. They pay a yield to tokenholders via staking + have an economy of applications built “on top” of the L1.
That’s why we think the real onchain yield could ultimately be the key metric for alternative L1s. To be clear, we are NOT suggesting that this should be used in the context of DCF. Instead, we think the real onchain yield will serve more as a capital magnet, driving speculation and reflexivity during risk-on markets (while setting a base for DeFi rates).
Of course, that doesn’t mean monetary premiums go away.
We like to think of the monetary premium as the “brand,” which is comprised of:
Community & values (what the L1 stands for)
Trust & reputation (lindy, decentralization)
Governance (leadership)
Ecosystem of developers & investors
Evangelists (influencers)
Cult-like brands tend to attract premium pricing, loyalty, and market leadership.
Ethereum has the most significant monetary premium and intangible moat today.
In the closing section, we want to touch upon a few additional important topics.
There is a view out there that any analysis involving yield is a non-starter. The stated reason for this is that the yield is paid in the native token; therefore, the reference is “circular” and irrelevant.
For example, if the price of SOL goes up in USD terms, technically, the yield goes up (in $ terms).
This view assumes that Solana users will pay more in $ terms for onchain services as the SOL price rises, which we think is false (we think users think in $ terms).
Furthermore, Solana stakers can withdraw their SOL earnings and convert them to USD in a highly liquid market. We think they ultimately view their yield in $ terms, not in SOL.
This concept is not dissimilar to an American investor buying stocks in a foreign country, exposing themselves to currency risk. Of course, this doesn’t prevent an investor from making such investments.
Why?
They can underwrite the currency risk and hedge it.
For example, if an investor wanted to eliminate downside pricing risk of the native token yield, they could short SOL in the perpetual futures market to hedge against price risk, capturing the yield (in $) only.
You could also sell call options as a hedge, depending on your outlook.
Finally, if an investor wanted to better understand the pricing risk of the native returns, they could run a Sharpe Ratio on the onchain yield, adjusted for annual volatility of the native token. This could help you understand the yield per unit of price risk.
The analysis we’ve presented primarily focuses on the real onchain yield. It’s designed to answer a simple question we think investors should be asking:
“If I buy the token and stake it, what real value do I have a claim on?”
Of course, real onchain yield does not contemplate network inflation/issuance.
Why?
Inflation/issuance is non-dilutive to stakers. Said another way, it’s paid directly to them.
This differs from inflation (seignorage) for a country since the inflation is the new money supply that is simply added to the economy (rather than being paid directly to bondholders).
Therefore, the real yield for a country’s bonds = the nominal yield minus the inflation rate.
Issuance Yield = the total new issuance of the native token that is paid to stakers. Again, this is non-dilutive since it does not impact the stakers’ proportionate share of the network. However, it is dilutive to passive token holders (non-stakers).
Data: The DeFi Report
The total YTD staking yield (real + issuance) for Solana = 8.84% and 3.27% for Ethereum.
Data: The DeFi Report
Net Dilution Rate measures the increase/decrease in circulating supply driven by token issuance vs burned tokens.
It’s designed to allow an investor to easily understand the monetary policy of the network.
When the Net Dilution Rate is negative, it’s telling you that issuance is exceeding burned tokens. This is dilutive to non-stakers.
When the Net Dilution Rate is positive, it’s telling you that issuance is lower than the burned tokens. This is accretive to both stakers and non-stakers.
Just as an investor in a country would factor in fiscal/monetary policy when investing in a country's bonds, an investor in an L1 should analyze the Net Dilution Rate to understand the monetary policy of the network.
A positive Net Dilution Rate means the network can pay for its security without diluting passive token holders. A negative Net Dilution Rate indicates that the network must dilute its passive holders to secure the network.
Solana is currently diluting its passive tokenholders at an annual rate of 5%. Ethereum is in much better shape at just .68% — which means passive ETH holders have very low dilution when compared to passive SOL holders.
Real Onchain Yield is telling you how good a crypto network is at returning user value to its tokenholders.
It is an expression of all the important KPIs, which funnel into the real onchain yield.
We’re not suggesting that real onchain yield should be used for DCF valuation. Rather, we believe it can attract capital on a relative basis—driving reflexivity in risk-on environments, much like yield differentials in FX.
Real onchain yield is a useful starting point, but likely incomplete. As protocols mature, we expect staking economics to evolve—striking better balance across validators, active stakers, and passive tokenholders.
If real yield cannot be sustained, capital will chase other signals — growth, usage, or pure narrative.
We're still early in establishing consensus around relative valuation. That’s why this work matters—it gives us a chance to influence leadership behavior from the bottom up.
If enough tokenholders demand that user fees accrue to them—rather than to validators or being burned—it can influence protocol decision-making, much like a CEO responding to shareholder demands.
As always, we invite feedback and constructive criticism from the community.
Finally, a quick shout-out to the investors and analysts sharing their views and sparking debate on these topics in the public domain.
Thanks for reading.
Please note that we are off next week for the 4th of July holiday.
Take a Report.
And Stay Curious.
Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.