Thread by @fubuloubu

Let's say you have a protocol token that earns dividends.

It earns $20m in fees per year (on average). Those fees are split evenly among it's holders.

Let's say there are 20k tokens. That means each token earns $1k per year (this is called earnings)

What should the price be?

Well, if you're naive about it, then the price could be $1k per token. That means if you held it for a year, it would effectively pay for itself. Almost no asset trades at a price to earnings ratio (P/E) of 1:1. No one is that conservative!

Typical P/E ratio is more like 5-30

Why is that? Well, the asset has underlying value above and beyond it's earnings potential, such as it's *potential* to keep increasing it's earnings potential, which makes it trade at a premium to the simple considerations of earnings.

So our example should trade at $15k or so!

What happens if those earnings increase 10x?

Well, if we assume a P/E of 15 is "reasonable", and there is no new issuance, then the price should be in the range of $150k per token

100x? Somewhere in the range of $1.5m per token

There are many reasons why the trading price *wouldn't* align with a "reasonable" P/E ratio. These might include:
- inflated expectations
- novelty or memetics
- lack of demonstrated progress
- unclear path to future success

And that's fine! The market prices that in.

However, and this is just an observation, no reliable, dividends-producing asset trades at a ratio of 1, because that is the bare minimum expectations that one should have (assumes no future success possible)

If you're bearish, look for ~5 P/E
If you're bullish, look for ~30 P/E

Note: of course this example bears some resemblance to YFI, but I hope this example demonstrates why abandoning earnings for Yearn Governance staking is a mistake if you want to align success with upside to YFI.

h/t @iamDCinvestor

https://twitter.com/iamDCinvestor/status/1321803608665542657?s=19