What exactly is driving the value of Layer 1?

Author: Marc Arjoon, CFA (@marcarjoon)

Compiled by: TechFlow

TechFlow Summary:The crypto industry has long debated the valuation anchor for public chains. Can protocol fee revenue (REV), active addresses, DEX trading volume, or network effects explain the market capitalization performance of public chains? Chartered Financial Analyst (CFA) Marc Arjoon provides detailed empirical testing through multi-year time-series regression analysis of major Layer 1 assets.

Empirical research indicates that in the short term, price fluctuations across all major Layer 1s remain dominated by Bitcoin's beta coefficient. In the long-term valuation dimension, Ethereum has become completely decoupled from its own protocol revenue. On-chain valuations exhibit strong correlations with Total Value Locked (TVL) and stablecoin supply, reflecting that the market currently prefers to view public chain tokens as monetary assets competing for liquidity rather than traditional cash-flow-discounted enterprises.

Short-Term Pricing Mechanism: Layer 1 Tokens Are Ultimately Governed by Bitcoin's Beta Coefficient

The short answer is: across any investment horizon relevant to traders, the trading performance of Layer 1 tokens fundamentally depends on Bitcoin's beta coefficient.

I conducted a regression analysis on the monthly log changes of each Layer 1's market cap against Bitcoin, subsequently incorporating four on-chain time series: real protocol revenue denominated in native tokens (REV), active addresses, DEX trading volume, and stablecoin supply.

Figure: Regression analysis of L1 market cap changes against Bitcoin and on-chain metrics

The Illusion of USD-Denominated Metrics: Disconnect Between Native Token and Real Protocol Revenue

Delving deeper, USD-denominated metrics often paint a flattering picture of fundamentals. This occurs because when token prices rise, fees paid in native tokens appear larger in USD terms, and Total Value Locked (TVL) is largely just a derivative of native tokens calculated at market value.

Figure: Comparison of real protocol revenue in native token vs. USD terms

Ethereum's Revenue Decoupling: Policy Design Rather Than Demand Collapse

Ethereum is the most prominent example of real protocol revenue (REV) decoupling from network market cap.

During the week of the Dencun upgrade, Ethereum's trailing twelve-month cumulative real protocol revenue was $ billion, falling to $ billion by August 2025, a decline of 60%.

Yet simultaneously, its market cap rose counter-trend, climbing from $ billion to $ billion. This reflects a deliberate policy design choice, not a collapse in genuine demand. The introduction of blob fees and higher gas limit caps were inherently aimed at reducing Layer 1 block space pricing.

Ethereum's price rebound in 2025 was primarily driven by allocation demand from spot ETFs and corporate treasuries.

Figure: Divergence trend between Ethereum's trailing 12-month protocol revenue and market cap

Solana's Synchronization Phenomenon: Protocol Revenue and Market Cap Moving in Sync

Solana, conversely, serves as a typical case where protocol revenue and network market cap curves fluctuate in sync.

Since January 2023, Solana's trailing twelve-month protocol revenue and market cap both grew approximately 15x, peaking in the same week at $ billion and $ billion respectively.

Subsequently, both metrics experienced a synchronized pullback, currently resting at $ billion and $ billion respectively.

Figure: Solana's syncing trend of trailing 12-month protocol revenue and market cap

Active Addresses and Trading Volume: Weak Correlation and Cyclical Divergence

I then examined active addresses versus decentralized exchange (DEX) trading volume. Over a complete cycle, active addresses and market cap tend to drift in tandem, a phenomenon most clearly visible on Solana and TRON.

However, at the weekly level, this correlation weakens significantly, displaying massive divergences.

Since January 2022, Ethereum's active address count grew by 26%, while its market cap fell by 34%; meanwhile, Solana's active address count surged 17x, yet its market cap only increased by 17%.

Figure: Comparative cyclical trends of active addresses and market cap

DEX trading volume tracks market cap more closely than address counts, especially on Solana, where both metrics started from their 2023 lows and peaked concurrently.

Notably, however, DEX trading volume is USD-denominated, so part of the statistical fit is contributed by the token's own price volatility. As tokenized assets gain share in trading volume, we can further test whether this relationship still holds.

Figure: Tracking trend of DEX trading volume against market cap

Empirical Test of Metcalfe's Law: Network Value Approaches the Square Root of Address Count

Metcalfe’s law provides a classic model for evaluating these Layer 1s. It posits that network value scales with the square of the number of users (exponent of 2).

Figure: Network value fitting under Metcalfe's law

Fitting market cap against active address counts yields elasticity exponents of 0.56 for Ethereum, and 0.62 for Solana and BNB. Therefore, actual value expansion aligns more closely with the square root of address growth rather than the square.

Figure: Elasticity coefficient fitting of market cap to active addresses

The core issue lies in the fact that the growth rate of active addresses gradually slows as networks mature, extending beyond merely the magnitude of the exponent.

Since January 2016, Bitcoin's active address count has grown only 1.3x, while its market cap expanded 252x. Ethereum follows no exception: since February 2018, its active addresses grew 2.6x and market cap 4.5x, with active address changes explaining 84% of market cap movement. Solana's current cycle is shorter, but overall adheres to a similar trajectory.

Figure: Long-term comparison of active address growth rate vs. market cap multiplier

Public Chain Valuation Multiple Testing: Mean Reversion Failure and Revenue Predictive Power

I then tested six valuation multiples across these chains: Metcalfe multiple, Odlyzko multiple (users multiplied by natural logarithm), NVT based on stablecoin transfer volume, market cap to DEX volume, market cap to protocol revenue (Mcap/REV), and market cap to total stablecoin supply.

A practically viable valuation model requires its multiples to reliably mean-revert and effectively predict future returns when positioned in undervalued territory.

However, testing reveals no multiple consistently exhibits mean-reverting characteristics. Mcap/REV stands alone as the only indicator capable of predicting positive 13-week returns across multiple public chains (Ethereum and TRON) when situated in low valuation percentiles.

Figure: Comparative predictive performance of six common public chain valuation multiples

Holder Structure Differences: Settled Capital and Long-Term Holding Base

Judging holder behavior, no Layer 1 possesses a long-term holding base as deep as Bitcoin's.

Even accounting for native staking, only 4% of Solana's supply and 10% of Ethereum's supply have remained dormant for over three years, compared to Bitcoin's long-term dormant proportion reaching 42%.

Figure: Comparison of token supply held for over 3 years

Meanwhile, the top 100 non-staked Solana addresses control 49% of circulating SOL, whereas Ethereum's top 100 hold 27%, and Bitcoin's 17%.

In terms of address count holding $ million or more, Solana has only ~66k addresses, compared to Ethereum's 538k and Bitcoin's 3.67M (which may predominantly reflect differences in each asset's total market cap scale).

Figure: Concentration of non-staked liquid tokens and distribution of high-balance addresses

Ethereum's True Pricing Anchor: Peer Capital Scale Rather Than On-Chain Interactions

Focusing on Ethereum, an interesting phenomenon emerges: its pricing mechanism operates relative to competitors' capital scale, rather than being based purely on on-chain activity.

Among the main public chain comparables, Ethereum commands 59% of total market cap share, 53% of stablecoin supply, 60% of stablecoin transfer volume, 70% of DeFi TVL, 75% of tokenized real-world assets (RWA), and 76% of lending protocol TVL.

By contrast, Ethereum's share in active addresses and on-chain transaction volumes is considerably smaller, accounting for only 5% and roughly 1% respectively.

Figure: Comparison of Ethereum's capital settlement share vs. activity share among public chain peers

Cross-Chain Correlation Test: TVL and Stablecoins Drive Market Cap Rankings

This pattern holds universally across different public chains. When ranked by market cap, each chain's position highly correlates with its ranking in Total Value Locked (TVL) (Spearman rank correlation coefficient reaches 0.87), and also shows strong correlation with stablecoin supply ranking (0.63).

However, the correlation coefficient between market cap ranking and on-chain transaction volume is merely 0.17, and with active addresses is only 0.45, indicating extremely weak association.

Figure: Rank correlation analysis of market cap against TVL, stablecoin supply, and trading activity

Notably, within the current composition of TVL on Ethereum, ETH itself no longer dominates the majority of the ratio, which significantly reduces the metric's autocorrelation and enhances its reference value.

Figure: Evolution of asset composition in Ethereum's on-chain TVL

Although this represents a cross-sectional ranking rather than a complete causal model, it aligns highly with time-series regression results (even when run across 40+ public chain samples).

Another notable difference lies in the structural composition of holders. Spot ETFs and publicly traded corporate treasuries currently hold 11.9% of Ethereum's total supply, essentially matching Bitcoin's 12.2% and significantly exceeding Solana's 7.9%.

Figure: Holding share of total supply by spot ETFs and corporate treasuries across tokens

Final Thoughts on Public Chain Valuation: The Monetary Asset Attribute Competing for Capital Settlement

Ultimately, the core takeaway is that Layer 1 valuation drivers depend less on how many on-chain interactions a network processes, and more on how much financial capital it attracts and settles.

Bitcoin remains the dominant force driving short-term price volatility. At least for now, when pricing Layer 1 assets, the market views them less as enterprises profiting from fee cash flows and more as monetary assets competing for capital settlement and liquidity shares.