Summary
- By implementing a base fee with Espresso hard fork, we are creating a valuation methodology for CELO.
- This is not necessarily good or bad (although I’m inclined to think it’s good), but something to be aware of.
Background
Hi folks, this past week, Ryan Allis came out with a valuation method for Eth which is based on the fact that a portion of gas fees on Ethereum are now being burned. [spreadsheet here]
This “buyback” is effectively a dividend to Eth owners and allows for a discounted cash-flow or Price to Earnings valuation of Eth.
If you check out watchtheburn.com, you can see (at today’s Eth price), about $1.1B of Eth was burned over the past month. Annualised this is about 13B worth of Eth.
Eth’s market cap is about $350B today, so this puts the “Price to Earnings” ratio of Eth at about 27. (I’m neglecting staking rewards because nearly everyone will stake so it ends up pretty neutral.)
If you compare this to the P to E ratio of high growth tech stocks (which might be 40-100), this maybe seems low. Anyway, that’s besides my point, which is that there is now a valuation methodology for Eth.
What does this mean for Celo
With Espresso hard fork, there will be a base fee in Celo. I can’t find documentation on whether this will go to the community fund or to the Celo reserve. Broadly speaking, it would be wise for us to send it to the reserve for now to build further collateralisation of our stablecoins.
One might argue that “burning” the Celo would be a more direct return to CELO owners, but I don’t think this is needed. The fact that we always have the “option” to start burning the CELO is enough to justify a valuation framework. It’s better to bolster the reserve.
There is a lot more to consider than just this way of looking at CELO, but now that this valuation method is out there, it’s something to be aware of.
By having this base fee approach, the network (whether Ethereum or CELO) is basically taking a platform fee on every transaction that happens (kind of in the same way Visa takes 0.05% and Mastercard takes 0.1% of stuff on their networks + they set the much higher fees that the banks and processors make).
Lastly, yes, we want to keep fees low, but CELO as a thing is offering services and taking on risk by having cStables as liabilities on the DAO’s balance sheet, so there does need to be a way for that to be funded, and this base fee is one way to think about that.
EDIT: As I understand, the Celo Reserve also accrues income from Mento exchange fees - also important to keep in mind. It would be good if someone could post info on that here.