We May Have Been Valuing Ethereum at the Wrong Layer

By Scott Shields – Contributing Writer – Capitol Times Media - From Conversations and Material of Zhu Weisha. Learn more about Zhu Weisha here at Capitol Times Media's July Magazine Issue

What Really Matters Is Not Fees or Transaction Volume, but Economic Dependency, Trust, and Non-Substitutability

For years, people have tried to explain ETH’s value using fees, TVL, transaction count, staking, token burn, monetary premium and Layer 2 activity. These metrics are useful, but they do not answer the more fundamental question: why does Ethereum as a system have value?

Fees measure usage. TVL measures capital committed to protocols. Staking measures security capital. Burn affects supply. Monetary premium reflects willingness to hold ETH. These are different layers of the system. Mixing them together does not produce a coherent valuation model.

The missing question is how much real economic value has formed a critical dependency on Ethereum. Weisha calls this VUD, Value Under Dependency.

**The value that matters is the value that cannot leave cheaply**

An ecosystem can generate enormous economic activity without all of that value belonging to the base layer. Applications can earn revenue. Stablecoin issuers can earn revenue. Exchanges and Layer 2s can build their own business models. None of that automatically belongs in ETH’s valuation.

What genuinely belongs to Ethereum is the portion of external economic value for which leaving Ethereum would impose materially higher security, verification, trust, migration or reconstruction costs.

That is why VUD should not count every “Ethereum-related asset.” It should count external economic value that has formed a dependency that is not easily substitutable.

If an asset can migrate to another chain at almost no cost, with no material decline in security, credible neutrality, verification capability or final settlement, the quality of that dependency is low. If migration means accepting substantial new trust costs, the dependency is high quality.

This also makes VUD falsifiable. Non-substitutability is not a permanent moat. If ZK technology, cross-chain verification or competing chains materially reduce those costs, the corresponding VUD weight should fall. VUD measures not what once depended on Ethereum, but what remains difficult to replace today.

**Layer 2 does not automatically drain Ethereum’s value**

The most common Ethereum valuation mistake is to confuse execution with trust.

As Layer 2s expand, transactions, users, applications and fees can move away from L1. That leads to the obvious question: if users rarely touch Ethereum directly, what is left for ETH to capture?

The answer depends on where the system’s critical trust still sits.

If an L2 still depends on Ethereum for proofs, data availability, dispute resolution, exit mechanisms or final settlement, then the L2 itself remains a system-level user of Ethereum even if its end users never hold ETH.

That distinction matters. End-user visibility can decline while system-level dependency remains strong. Infrastructure often becomes more valuable precisely as it becomes less visible.

But the argument also works in reverse. If final verification, settlement, data availability, dispute resolution and exit rights migrate away from Ethereum, the corresponding economic value should no longer be counted in Ethereum’s VUD.

The question is not “where did the transactions go?” It is “where does final trust still reside?”

**Ethereum is competing to become a trust root**

Ethereum’s long-term advantage cannot be reduced to speed or cost. Its deeper competition is over who becomes the more trusted, more verifiable and harder-to-replace public financial trust root.

Four forms of accumulated advantage matter.

First is ecosystem history: developers, tools, liquidity and infrastructure.

Second is standards. ERC-20, the EVM and related conventions have created compatibility across large parts of crypto. Once standards generate network effects, migration means moving relationships, not just code.

Third is operating history. Code can be copied; a decade of surviving bull markets, bear markets, attacks, upgrades, forks and extreme market conditions cannot.

Fourth is governance credibility. Are rules stable? Are major changes transparent? Can one actor arbitrarily rewrite the system? Do participants retain a credible right to exit?

These are not permanent advantages, but they are costly to reproduce. Technical performance can be caught up with. A long record of credible operation cannot be manufactured on demand.

**PoS changed how Ethereum system value can reach ETH**

Even if Ethereum as a system has value, a harder question remains: why should that value be transmitted to ETH?

ETH is not equity. It does not represent legal ownership of Ethereum, and the Ethereum Foundation does not own the network. There is no corporate equity layer sitting above the protocol to absorb the system’s value.

Under the current architecture, ETH is the most direct native capitalization asset of the system.

Originally, ETH’s value was easy to explain through transaction demand: users needed ETH to pay Gas. But that creates a tension. Users want lower fees; investors want a more valuable asset.

PoS changed the bridge. ETH is not only a fee token. It is also Ethereum’s native, slashable security capital.

That creates a different transmission mechanism:

External economic dependency expands → Ethereum assumes greater economic responsibility → demand for security and credible settlement rises → ETH becomes more important as native slashable security capital → staking and long-term holding demand rise → effective supply and structural demand jointly influence long-term value.

This mechanism is absent from gold and Bitcoin: the native asset itself is not serving as slashable in-protocol security capital.

The condition is important. VUD does not imply that ETH must rise mechanically. The bridge exists because Ethereum’s current PoS mechanism requires native security capital in the form of ETH. If equivalent security can one day be achieved without relying on ETH, this bridge weakens.

**Low fees are not necessarily low value**

Lower fees can make applications easier to scale. But lower Gas is not automatically bullish.

From a VUD perspective, lower execution costs create value only if they help expand external economic dependency. If Gas revenue falls while VUD does not grow, that is simply lower revenue.

This is why fees and VUD belong to different layers.

Gas measures the cost of using the system. VUD measures how much economic value is willing to depend on the system’s trust structure.

A public blockchain may create value not by charging the highest tolls, but by becoming the infrastructure that more economic activity is willing to trust.

**Facts set the anchor; expectations set the multiple**

If VUD is a fundamental variable, does ETH have to wait for VUD to rise before its price can rise? Of course not. Markets price the future.

We therefore need to separate Realized VUD from Expected VUD.

Realized VUD is dependency that already exists and can be verified. Expected VUD is the market’s expectation of future dependency growth.

Expected VUD should not be added to the fundamental denominator. It belongs to the price system. Realized VUD provides the factual anchor; Expected VUD affects how much investors are willing to pay in advance. That prevents the same future growth from being counted twice.

The empirical test comes later. ETH market capitalization divided by VUD may eventually form recurring historical valuation bands, but that must be demonstrated with data rather than assumed. VUD should therefore be treated as a candidate fundamental anchor until the historical relationship is reconstructed and tested.

For accounting purposes, VUD is a stock measure: the amount of external economic value that forms a critical dependency at a given point in time, not annual profits, interest income or transaction fees. Direct dependencies should be measured as precisely as possible. Indirect dependencies, such as Layer 2 assets, can be adjusted using transparent factors based on observable variables such as final-settlement dependency, data reconstructability, independent exit capability and migration cost.

The point is not to make the first VUD estimate perfect. The point is to make the data, classifications, adjustment factors and reasoning public enough to be challenged and improved.

**What Ethereum may ultimately be selling is trust**

Ethereum’s long-term value may depend neither on being the fastest chain nor on charging the highest fees.

The more important question is how much economic value is willing to entrust the question of “what is true” to Ethereum.

That question becomes even more important in an AI economy. Autonomous agents that own assets, sign contracts, make payments and execute financial transactions cannot safely depend on vague reputation or human relationships. They need verifiable answers: Who is the principal? Was authorization valid? Is the asset state real? Was the contract executed? Can the result be verified?

The most important infrastructure of that world may not be the system that executes the most transactions. It may be the public trust root that other systems are most willing to rely on.

If Ethereum achieves that position, its value will no longer be adequately described as that of a smart-contract platform collecting Gas. Ethereum would become a deeper layer of financial trust infrastructure, while ETH would remain its native security capital and most direct capitalization asset.

So perhaps the most important question in Ethereum valuation is not: “How much did it collect in fees today?”

It is: “If more and more of the real economy depends on Ethereum to determine what is true, how much is that trust worth?”