@prism_protocol intro
S01E02 - DCF valuation method
Let's start it with a poll - which one would you prefer:
1) Get $100 now
2) Get $100 in a month
/1
S01E02 - DCF valuation method
Let's start it with a poll - which one would you prefer:
1) Get $100 now
2) Get $100 in a month
/1
Somehow we feel that a particular amount of money is 'more valuable' now than the same amount sometime in the future.
Money in our pocket now can make more money in the future.
/2
Money in our pocket now can make more money in the future.
/2
To put it into numbers, we could invest into a risk-free investment vehicle (if there is one at all, ha ha) that would guarantee APR d%, then:
Now => In a year
$100 => $100 * (1 + d%)
/3
Now => In a year
$100 => $100 * (1 + d%)
/3
Risk-free rate such as d% above is used in TradFi to calculate value of money across time and referred to as "discounting rate".
For USD, interest rate on 3-month treasury bills is often used as a discounting rate.
/4
For USD, interest rate on 3-month treasury bills is often used as a discounting rate.
/4
To understand the present value (PV) of certain amount A at a time T years into the future, assuming yearly discouting rate d, we can calculate as in the picture below.
"But what is the point of all of this, ser?" you ask?
/5
"But what is the point of all of this, ser?" you ask?
/5
Well, let's try valuating something, shall we? A rental apartment, perhaps?
Let's imagine:
- Yearly rent: $12,000
- Yearly maintenance expenses: $1,200
- Discounting rate: 0.05% (current interest rate of 3M T-bills)
- The building will collapse in: 50 years
/6
Let's imagine:
- Yearly rent: $12,000
- Yearly maintenance expenses: $1,200
- Discounting rate: 0.05% (current interest rate of 3M T-bills)
- The building will collapse in: 50 years
/6
A little bit of calculations later (see pic below) we arrive at a present value of $533,440.86.
This is the value of the apartment, if we look at it only as a money-making machine.
/7
This is the value of the apartment, if we look at it only as a money-making machine.
/7
In general, we can put a $-value on any sequence of future yields/cashflows using the formula below.
Egg-head name for this method is: Discounted Cash Flow (DCF).
/8
Egg-head name for this method is: Discounted Cash Flow (DCF).
/8
@prism_protocol will let us split any yield-bearing asset into yield token (YT) and principal token (PT).
YT is simply a series of yields/cashflows happening at certain points in the future. DCF will come in handy to put a price on it - practical example in the next episode.
/9
YT is simply a series of yields/cashflows happening at certain points in the future. DCF will come in handy to put a price on it - practical example in the next episode.
/9
S01E03 - "yLUNA-perp pricing" will be published on 18 Oct 2021 @ ~1600 UTC
Full list of episodes here:
/10-end
Full list of episodes here:
https://twitter.com/AgilePatryk/status/1448951059402137611
/10-end
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