DeFi is fast but immature, and valuing it is an art, not a science

特邀专栏作者

2020-07-02 08:30 (UTC+8)

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Many DeFi tokens generate income through some kind of value capture mechanism at the protocol level, so they can be described as capital assets. As capital assets, we can use traditional valuation methods to discuss the value of these assets.

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Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from

Chain News ChainNews (ID: chainnewscom)

, by Ryan Watkins, Research Analyst, Messari, translated by Perry Wang, published with permission.
Many DeFi tokens generate income through some kind of value capture mechanism at the protocol level, so they can be described as capital assets. As capital assets, we can use traditional valuation methods to discuss the value of these assets.
The three most common methods used to assess the value of these cryptoassets are discounted cash flow (DCF), comparable company analysis (Comps), and comparable transactions (precedents):

Comparable Companies Comps: In the crypto space, means to use market benchmarks to value assets for a given week of crypto tokens at a given point in time against similar, publicly traded tokens.

Comparable Transactions (Precedence): Similar to comparable company analysis, it also provides a market benchmark, but against previous transactions of similar assets. In the crypto space, this means benchmarking a crypto token at a price similar to a token fundraising.

Most investors in the crypto space are very familiar with the concept of DeFi tokens as capital assets, and there are now public resources dedicated to evaluating these assets. Less well known is how to apply these methods to actually provide analytics. Estimates of how these assets could potentially accrue value can be well modeled using traditional valuation methods. However, using these methods to assess any value beyond simple value accumulation can quickly lead to ridiculous results.

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Valuation is both an art and a science. Every asset can be valued through a combination of scientific and artistic elements. This combination of art and science presents spectrum-like coordinates, and a valuation for a given asset may lie at either end of the spectrum.

To illustrate this, let's think about it from the perspective of a company.

Valuations can be more scientific when a company is operating in a stable environment. As a good example, consider a half-century-old utility company that has generated $1 billion in annual cash flow for the past decade. Given the company's long operating history and the stability of the industry, it is reasonable to expect such utilities to produce more of the same in the foreseeable future. This means that models that make accurate forecasts of the utility's future cash flows are very reliable because those cash flows are based on realistic and reliable assumptions about the future. Certainty makes the valuation of these assets more precise and therefore scientific.

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Conversely, when a company is operating in an volatile environment, valuation can be more of an art.

Uncertainty is the enemy of scientific valuation, which is why early-stage startup valuation is more art than science.

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The graph shows the cash flow forecast of "the 18-month-old tech start-up", which is not a reliable valuation given its operating history and the volatility of the industry Base

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The most common approach to valuing DeFi tokens is the Comparable Companies (Comps) analysis, a relative valuation method that values a given crypto token against similar, publicly traded tokens as a benchmark. This method is to divide the market value of the reference token by its revenue to obtain the revenue multiple. Comparing earnings multiples of different projects is one way of measuring value.

Relative valuation is the main method of determining the value of DeFi tokens, as previous examples of tech startups have highlighted this problem very clearly. Fundamental valuations are very unreliable due to uncertainty about future cash flows in early-stage startups. Since DeFi projects are like early-stage startups (think of a seed or A-round valuation) that are looking for product-market fit and have little if any cash flow, many projects consider relative valuation methods to measure DeFi generation the value of the coin.

Relative valuations can be used at this stage, and DeFi is a uniquely viable space because some DeFi tokens are publicly traded from the beginning - this situation can be analogized like this: In the parallel world of traditional finance, imagine if Facebook stock Go public with an IPO in 2004 when it was first established, rather than in 2012 when the company was more mature. However, the unique opportunity of trying to evaluate DeFi tokens from the very beginning of the project also brings challenges.

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Source: Julien Thevenard
The above table is a good example of the earnings of various tokens, and we can use it to highlight the problems that valuations can pose when comparing earnings multiples.
These questions include:
Earnings multiples are looking backwards, or maximizing inferences based on the current situation, but the uncertain future is the most important factor in valuation

Evolving Token Economic Models Can Significantly Change Yield Potential, Making Past And Present Irrelevant In Determining Value

Different target markets mean different prospects and earning potential, reducing comparability between tokens

This is not shocking, it can be expected as early as the early days of DeFi projects. The vast majority of value that these projects will create can only exist in the distant future, which is inherently very uncertain. But it shows how useless relative valuation methods can be at this stage.

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Valuation Spectrum: DeFi projects are at a very young stage, and given their high degree of uncertainty, their valuations are found to be on the far end of the "art" side of the spectrum

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art, not science

Valuing DeFi tokens is an art that depends on one’s subjective assessment of the discount rate at which a token’s current relative future value is discounted.

To help determine potential future value, a combination of qualitative and quantitative analysis can be considered. Examples of qualitative analysis include product-market fit, teams, communities, and token economics. The quantitative aspect includes profitability, size, users and various use case specific KPIs.

Compound is a good example.

Compound only gets a fraction of the millions of dollars in net interest that the Compound protocol currently generates annually, but that doesn't matter because this figure shows the profitability potential of the COMP token, thus giving the COMP token Valuation multiple of more than 810 times.

On the qualitative side, it has solid product market fit, a team of quality talent building protocols, a passionate community controlling the future of the project, and a path to value capture.

There are many ways you can compare, you can look at lending and borrowing institutions, consider many different economic models that COMP can adopt, and are not limited to relying on transaction fees. In addition, it can also be considered that the transaction income obtained by COMP holders will be pure profit, because there is no need to pay any related operating expenses. Users of the COMP protocol pay transaction fees on the Ethereum blockchain, while Ethereum infrastructure operators who run Ethereum clients, and ETH holders who pay miners to secure the Ethereum blockchain, host COMP’s All operating expenses.