Thread by @korpi87

1) During this market crash, all the prices dumped heavily. It didn't matter if it was a meme coin like $DOGE or $SHIB or capital asset like $SUSHI or $BNT. I hoped fundamentally strong projects would be more resilient to such violent movements. But maybe they still will be?

2) I've been very conservative during this bull market. I didn't buy any meme token and decided to stick to DeFi projects which generated revenues. I was ok with $DOGE, $SHIB and $SAFEMOON substantially outperforming my portfolio. I just wanted to play a safe long term game.

3) I focused on DeFi tokens because they are not "coins" like the majority of vapor projects from the previous cycle. They are more like capital assets - projects generate revenues and, therefore, tokens can be subject to traditional valuation metrics.

https://twitter.com/korpi87/status/1368228781912170503

4) Of course, price is the outcome of market forces and in a panic sell-off (like now) valuation metrics don't matter. But the biggest difference between meme coins and capital assets is that you can't say when a meme coin is cheap while it's possible for a capital asset.

5) A frequently used metric to compare DeFi protocols is Price to Sales ratio (P/S). It's a relation of a protocol's fully diluted market cap (FDV) to the revenue it generates. It indicates how the market values the asset relative to its revenue and expectation of future growth.

6) When FDV drops faster than revenues, P/S goes down - this is what we can see for $UNI, $SUSHI and $BNT in the recent week. Trading volume on dexes is still high, protocols generate a lot of revenues, yet prices are low. Fundamentally speaking, they are cheaper than ever.

7) Although widely reported, P/S is not the best valuation metric for the token. It divides FDV by total protocol revenue = revenue for liquidity providers (LPs) + revenue distributed to token holders.

8) LPs are just service providers to the protocol. They provide liquidity and are paid for that in trading fees. Their earnings don't directly accrue value to the token. Therefore, we should focus on Price to Earnings ratio (P/E) = FDV / revenue distributed to token holders.

9) Some projects, like $UNI, don't distribute any revenue to token holders yet. But market expects them to do so at some point and prices that in. For the purpose of P/E comparison, let's assume that $UNI will use the same distribution % as $SUSHI (16.66% of fees).

10) In terms of $BNT 50% of generated revenue goes to $BNT holders who provide liquidity to the protocol. This is because all the pools in @Bancor contain 50% of $BNT and 50% of other token.

https://twitter.com/korpi87/status/1370740690980892672

11) Let's use the most recent P/S ratios from @tokenterminal and re-calculate them to get P/E:
$UNI: 27.72
$SUSHI: 14.64
$BNT 8.06

The lower P/E, the more undervalued the token is. Of course, there is no floor for this metric. But it gives some sense of cheapness.

12) For example, I can compare these young DeFi start-ups at early stage of their development to technological giants like Microsoft or Apple with P/E of 32 and 27 respectively. $BNT and $SUSHI look like a steal.

13) In a raging bull market activity is very high, so are trading volumes. But even if we had to enter a depressing bear market (which I still don't believe in), we will still use DeFi and will be able to evaluate tokens by their P/E ratios.

https://twitter.com/Fiskantes/status/1396553216607891457

14) When the dust settles and people start thinking again what to buy, they will have metrics to decide what is under- or overvalued. That's why I still think that investing in fundamentally strong projects was a good decision. They suffered a lot but they will bounce quickly.