"How to value DeFi tokens" by @BanklessHQ a summary for @scribeDAO
TL:DR; You can apply the standard methodology of forecasting asset performance and assuming the asset will trade on a multiple of revenue or EBITDA
Read the full thing here: newsletter.banklesshq.com/p/how-to-value…
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TL:DR; You can apply the standard methodology of forecasting asset performance and assuming the asset will trade on a multiple of revenue or EBITDA
Read the full thing here: newsletter.banklesshq.com/p/how-to-value…
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How do you value DeFi protocols? How can I tell if I'm making a good investment? (NOT FINANCIAL ADVICE)
Well, you can value DeFi the way you'd typically value a growth-stage startup. Just use growth projections of a tokens value flow to develop a valuation framework.
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Well, you can value DeFi the way you'd typically value a growth-stage startup. Just use growth projections of a tokens value flow to develop a valuation framework.
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Let's look at MKR as an example.
1⃣ MKR is a platform for taking collateralized loans on crypto
2⃣ The value comes from not losing exposure to price appreciation in assets (i.e. selling or staking ETH) while gaining liquidity for leverage or daily use
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1⃣ MKR is a platform for taking collateralized loans on crypto
2⃣ The value comes from not losing exposure to price appreciation in assets (i.e. selling or staking ETH) while gaining liquidity for leverage or daily use
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3⃣ Taking a loan from MKR gives you DAI which you can used to exchange for fiat or buy other tokens
4⃣ After reclaiming crypto stored in MKR the borrower must burn the $ equivalent in MKR tokens. This is deflationary and should increase the price of MKR all else equal.
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4⃣ After reclaiming crypto stored in MKR the borrower must burn the $ equivalent in MKR tokens. This is deflationary and should increase the price of MKR all else equal.
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These token burns are equivalent to stability fees or a "Cash payout" thus we can value MKR based on their expected future cashflow (token burns)
We can do this because typically business recognize revenue through period of service rather than receipt of payment.
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We can do this because typically business recognize revenue through period of service rather than receipt of payment.
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So how do we forecast the stability fees? Well we look at drivers of growth which I've highlighted below for MKR.
1⃣ Quantity
Let's assume that new DAI will be created due to increased crypto adoption, appreciation of the asset, and increased demand for DAI across DeFi
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1⃣ Quantity
Let's assume that new DAI will be created due to increased crypto adoption, appreciation of the asset, and increased demand for DAI across DeFi
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2⃣ Price (stability fees)
If MKR becomes the risk-free rate for ETH deposits would remain in low single-digits
3⃣ COGS
Costs would probably reach economies of scale and deposits expand (e.g. imagine Wells Fargo)
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If MKR becomes the risk-free rate for ETH deposits would remain in low single-digits
3⃣ COGS
Costs would probably reach economies of scale and deposits expand (e.g. imagine Wells Fargo)
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4⃣ OpEx
Comparing to trad FinTech MKR should achieve economies of scale for engineering, growth, and content.
Now that key driver growth has been forecast we can construct a financial model and create an exit multiple for MKR's MCap after 5 years.
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Comparing to trad FinTech MKR should achieve economies of scale for engineering, growth, and content.
Now that key driver growth has been forecast we can construct a financial model and create an exit multiple for MKR's MCap after 5 years.
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The model, attached below, has some assumptions we can expand upon as to how we got to a $40B Mcap valuation for MKR
1⃣ DAI outstanding:
This increases to $20B on exit. If you assume no growth in money supply DAI currently has .3% market share which could grow to ~1%
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1⃣ DAI outstanding:
This increases to $20B on exit. If you assume no growth in money supply DAI currently has .3% market share which could grow to ~1%
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2⃣ Peg Stability module (PSM):
DAI is pegged to other stablecoins (e.g. USDC, USDT)
and to maintain the peg DAI must be generated. There are no stability fees from these DAI, and assumption is that it remains 50% of ending Mcap
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DAI is pegged to other stablecoins (e.g. USDC, USDT)
and to maintain the peg DAI must be generated. There are no stability fees from these DAI, and assumption is that it remains 50% of ending Mcap
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3⃣ Stability fees:
Rates are assumed constant at 4%.
In the future MKRs time in market could lead to consumer willing to pay a security premium (rate) on DAI or consumers would prefer undercollateralized loans
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Rates are assumed constant at 4%.
In the future MKRs time in market could lead to consumer willing to pay a security premium (rate) on DAI or consumers would prefer undercollateralized loans
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4⃣ COGS & OpEx:
These should scale as a % of fees and DAI outstanding. Also DSR, voted to be 0% in 2020 by MKRDAO, is assumed to not increase due to strong demand in DeFi.
TL:DR; MKR operates at a 90% profit margin!
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These should scale as a % of fees and DAI outstanding. Also DSR, voted to be 0% in 2020 by MKRDAO, is assumed to not increase due to strong demand in DeFi.
TL:DR; MKR operates at a 90% profit margin!
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5⃣ Exit Multiple:
Public valuations look at NTM multiples for valuations.
VCs assume a multiple based on this.
Similar to VCs, we can value MKR based of net-profit and assume it's EBITDA multiple trades in line with high-growth FinTech businesses (e.g. PayPal, Visa etc.)
Public valuations look at NTM multiples for valuations.
VCs assume a multiple based on this.
Similar to VCs, we can value MKR based of net-profit and assume it's EBITDA multiple trades in line with high-growth FinTech businesses (e.g. PayPal, Visa etc.)
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