Ethereum $380 Billion Bubble? Top Venture Capitalists Debate Intensely: L1 Valuations at Risk of Being Overestimated

Inversion founder Santiago Santos and Dragonfly managing partner Haseeb Qureshi engaged in a heated debate over L1 valuations. Santiago claimed that L1s are overvalued, saying Ethereum’s $380 billion market cap is far less justified than Amazon’s during the dot-com bubble of the 1990s. Haseeb countered that Ethereum is not a company, but a nation-scale infrastructure.

The 380x PS Valuation Bubble: Santiago’s Rationalist Critique

(Source: CounterParty TV)

Santiago Santos cut straight to the point: “Over the past decade, more than $10 billion has been invested into infrastructure, but the current industry structure clearly shows that demand falls far short of supply.” In his view, today’s L1s are no different from tech companies in terms of valuation logic. Ethereum’s $380 billion market cap, with annual revenue of just about $1 billion, translates to a price-to-sales (PS) ratio of over 380.

He emphasized that even at the height of the 1990s dot-com bubble, Amazon peaked at a 26x PS ratio. This comparison is striking, as Amazon’s bubble-era valuation was later proven to be excessive—its stock price crashed over 90% from its 2000 peak and only recovered years later. Santiago implied that Ethereum could face a similar fate.

“In classic Silicon Valley memes, companies know to ‘never reveal your revenue’ because once the market finds out, it brings you back to reality. I think this is exactly what’s happening in crypto now.” This sarcasm points to the disconnect between crypto project valuations and their fundamentals. Many L1 projects boast market caps in the billions or even tens of billions, but actual revenue is slim. These valuations are more based on future expectations and speculation than on current business performance.

Santiago admitted that currently, most on-chain revenue comes from short-term speculative activities and doesn’t constitute sustainable long-term usage. Once liquidity tightens, macro conditions weaken, and trading and clearing volumes shrink, L1 revenues will collapse as well. This argument hits at the core of the L1 valuation issue: current revenues are mainly from DeFi trading, NFT minting, and meme coin speculation—all highly dependent on bull market sentiment and abundant liquidity.

Santiago’s Three Pillars of the L1 Valuation Bubble

Severely Imbalanced PS Ratio: 380x PS far exceeds reasonable levels for any traditional tech company

Unsustainable Revenue: Most revenue comes from speculative activity, lacking real commercial applications

Supply Far Exceeds Demand: Billions invested in infrastructure, but actual usage demand is severely lacking

Santiago believes Ethereum will end up like Cisco, never returning to its all-time high (ATH). This analogy is highly controversial. Cisco’s market cap peaked at $550 billion during the dot-com bubble in 2000, making it the world’s most valuable company at the time. But after the bubble burst, Cisco’s stock price fell over 80% and, 25 years later, still hasn’t recovered that peak. Santiago implied Ethereum might face the same fate, with its current high valuation never justified by future fundamentals.

Haseeb’s Nation-Scale Infrastructure Argument: L1s Are Not Companies, They Are Regions

Facing Santiago’s barrage, Haseeb Qureshi pointed out that Santiago’s logic is built on treating L1s as tech startups, but that comparison is fundamentally flawed. In his view, Ethereum isn’t a business—it’s more like a geographic region (such as a continent or country): “It has stable rules, a mature financial environment, deep capital pools, and continues to attract external companies and capital.”

This analogy shifts L1 valuation logic from corporate financial analysis to national economic assessment. A nation’s value can’t simply be measured by dividing tax revenue (equivalent to L1’s income) by GDP; instead, it depends on resource endowment, institutional advantages, human capital, and long-term development potential. From this perspective, Ethereum boasts the largest developer community, deepest liquidity, most mature DeFi ecosystem, and broadest institutional recognition—these “soft powers” can’t be captured by a simple PS ratio.

Haseeb explained that “tax revenue” (i.e., income) for cities or nations is often purposely kept low in the early stages to spur economic growth. This mirrors Ethereum’s strategy of maintaining low gas fees and offloading costs to L2s: “But when a city needs to, they can raise taxes and collect the necessary funds—they can always do this.”

He cited Tron as an example: “Built on a stable USDT network, Tron can maintain strong usage even as transaction fees rise significantly.” For him, this proves that once a chain develops a real moat, it can easily raise fees or taxes. Therefore, using current income to measure a chain’s true value ignores the exponential adoption curve of the technology.

The core of this argument is “optionality value.” Ethereum currently chooses to keep fees low to foster ecosystem growth but can choose to increase fees and revenue at any time. This flexibility has value in itself; just because Ethereum isn’t maximizing revenue now doesn’t mean it lacks earning potential. In the corporate world, Amazon posted losses for years to gain market share, and the market still gave it a high valuation, believing it could generate massive cash flow once it chose to pursue profits.

The Core Disagreement on Value Capture: Application Layer vs Base Layer

As the debate progressed, Santiago argued that if L1s are “cities,” then wallets and other applications are the “companies.” If L1s can’t capture value, it will flow to the application layer: “Users trade via L2s, swap in wallets or on DEXs, arbitrage and get liquidated on exchanges—the real value capture all happens at the application layer, and most L1s are not that investable.”

This argument strikes at the core contradiction in the Ethereum ecosystem. L2 scaling solutions like Arbitrum and Optimism have indeed siphoned off massive trading and fee revenues, reducing Ethereum mainnet’s direct income. If Ethereum forever keeps fees low and lets most activity shift to L2s, then ETH’s ability to capture value is in question. From an investment perspective, it may make more sense to invest in application-layer projects that provide real services and capture value, rather than in base layers with slim revenues.

Haseeb cited his earlier argument, explaining that L1s just haven’t “flipped the value capture switch” yet, and that doesn’t mean more L1s aren’t needed: “A city can’t handle all financial activities alone. Five years ago, everyone was debating why we’d need a second chain, or who would be the next Ethereum killer. The answer is, there will be many chains, each fulfilling different needs and connecting to form a larger universe.”

This multichain future challenges the “winner-takes-all” assumption. If multiple L1s coexist and interconnect, each L1’s market cap may never reach today’s levels, as the overall value must be distributed across chains. However, Haseeb’s counter is that multichain coexistence expands the total crypto economy—so even if a single chain’s share drops, absolute value could still rise.

Two Interpretations of ETH Not Hitting New Highs: Awakening vs. Transformation

A question from Threadguy sparked a second round of debate: “Why hasn’t Ethereum hit a new high this cycle?” This question hits on the market’s current puzzle. Bitcoin hit a new high at $126,000, Solana broke its previous peak, but Ethereum stalled around $4,100—still 15% below its $4,800 all-time high from 2021.

Santiago said ETH hasn’t hit a new high because the market has “finally woken up.” He argued that L2s have taken too much revenue, ETH’s PS is too high, activity is dominated by speculation, and there’s a lack of real demand—so the current price reflects the earlier overvaluation. This interpretation blames ETH’s weakness on a valuation bubble bursting, with the market now rationally assessing Ethereum’s true value instead of blindly chasing it.

Haseeb, however, sees it as a governance shift and repositioning: “ETH holders are the ones driving ETH’s price, and they’re using price to force developers to ‘refocus on L1.’” He emphasized that Ethereum’s moves—from L1 scaling, to blob pricing, to sequencer adjustments—are all steering back to a “value flows to L1” strategy. This marks Ethereum’s transition from a utopia to a “mature nation,” with price volatility just part of the process.

These two interpretations represent completely different investment logics. If you accept Santiago’s view, investors should reduce their Ethereum holdings and shift to application-layer projects or other L1s with stronger value capture. If you accept Haseeb’s view, the current price weakness is just a strategic adjustment period, and Ethereum will resume its rise once it addresses value capture.

The Santiago vs. Haseeb debate ended without a clear winner, instead highlighting the clash between value rationalists and growth optimists. No one knows where the crypto industry is headed, but the market will only get more mature.