Definition. The Block Subsidy model considers the cumulative cost of production for all units in the supply (the Thermocap) as a reference rate for monetary premium. The chart plots Ethereum's Market Cap (grey) against the Thermocap (green) and a ladder of Thermocap multiples from x2 up to x64.

Technical. Under the assumption that miners are rational, profit-motivated actors, miners should be willing to expense up to the maximum fiat-denominated reward offered by the protocol. By taking a cumulative sum of all block rewards through history (subsidy and fees), we can estimate this maximum rational investment made to mine the circulating supply:

• Thermocap = cumsum(Block Subsidy + Fees, in USD)
• Bands are plotted at Thermocap x 2, x4, x8, x16, x32, x64

Note that for Ethereum, the Thermocap accumulates the rewards paid out during the network's proof-of-work era; since the Merge, block production is no longer miner-based, so the measure primarily reflects historical production cost.

Interpretation. The Block Subsidy Model identifies that multiples of the Thermocap tend to reflect a monetary premium that an asset has reached above its cost of production. Where the market cap trades at low multiples of Thermocap, the market carries little premium over the aggregate capital expended to produce the supply — conditions characteristic of deep bear markets — while high multiples reflect a large embedded monetary premium, characteristic of late-cycle euphoria.

Notes. Coined by Permabull Niño, 2019 — see A Look at Block Subsidies: A Network-Based Approach to Valuing Cryptocurrencies. Built from Thermocap and Market Cap. The Bitcoin version of this model is available here.