In this episode of Tascha Labs podcast I talk about:
- A valuation framework to assess blockchain platforms.
- Impact of token supply on price.
Episode notes
1. A valuation framework to assess blockchain platforms
00:57 – What will determine the price of a blockchain native token?
Three main factors:
- Adoption & usage of the blockchain.
- Platform moat: How secure is it & whether it has been around for a long time? ⇒ Affect investors’ perception. Example: Bitcoin = digital gold, since it has been around since 2008.
- Crypto market condition: a proxy for adoption level of the digital market. More adoption ⇒ more liquidity, potential buyers in the market, and easier for the platform to be discovered.
Put these factors together ⇒ construct an empirical model on how these things affect the valuation and market cap of different blockchains. Data was used mostly from Artemis.
07:40 – How is this useful for investment?
- Have a model to predict the market cap of that platform.
- Can compare the predicted market cap with current ⇒ undervalued or overvalued relative to its peers.
- Current model: only for 12 blockchains.
- Future: Simple valuation tool to plug in the number of any platform. Estimate release date: around New Year.
09:30 – Results of the analysis
- Overvalued platform: Polygon, Ethereum, BSC, Flow.
- Undervalued platform: Near, Ripple/XRP, Avalanche, Bitcoin.
- The rest (Optimism, Aptos, Algorand, Solana): difference ≤ 10% ⇒ Current values align with the prediction.
11:05 – On “overvaluation”, “undervaluation” and “predicted value” terminology
- Overvaluation: The current market cap is above the predicted value.
- Undervaluation: The current market cap is under the predicted value.
- Predicted value: How much investors would have been willing to pay for a token given historical patterns.
14:15 – How this model can be used for any tokenized platforms
- As long as the native token is involved in the user activity of that platform ⇒ positive relationship between:
- The number of users,
- The platform’s activity,
- Value of the token.
- More participants on a blockchain ⇒ more demand for the native token (Similar to why fiat money has value).
18:13 – Why do I only run the model with 12 blockchains?
- Data is available.
- This model can be used for other blockchains. Required data: Adoption level, active users, and transaction level of that blockchain.
19:51 – How is this model different from the cash flow-based model?
- Cannot apply cash flow-based model (such as discounted cash flow model) for web3 platforms because:
- token holders are not shareholders.
- A blockchain token ≠ equity for most cases. Staking in Proof-of-Stake has some characteristics of equity.
- Fundamental demands are driven by network effects: people actively use the chain and need to hold some amount of that token.
23:43 – Regarding undervalued tokens – Is it because of high inflation?
- This model is predicting the market cap, not the price.
- Market cap = Price x Token supply.
24:51 – Do Solana’s transactions include voting transactions?
- Already excluded voting transactions in this model.
25:26 – Regarding XRP result
- This model is an empirical estimate based on historical patterns, not personal opinion.
- Some people think XRP, or Near, or Avalanche is not undervalued.
- Is it possible that they are right? Yes.
- Is it statistically likely according to the model? No.
- One may argue that price reflects the survival risk of the platform. But that should be already captured in platform-specific markup of the model.
- If the current value is over the predicted market cap ⇒ The token is likely to underperform relative to the total crypto market and vice versa.
31:44 – What does higher markup mean?
- Suppose chain A & chain B both have 500000 users.
- If chain A has a higher moat (more Lindy) and investors think it’s safer ⇒ higher valuation given the same usage and adoption level as chain B.
- Example:
- High markup: BTC & Eth – safest so far.
- Low markup: Aptos & Optimism – newer chains without a long track record.
33:40 – Regarding people having different opinions
- Different opinions make the market.
- If everyone has the same opinions ⇒ Price will go to infinity or zero immediately.
2. Impact of token supply on price
34:47 – How was it done?
- Look at the top 1000 market cap tokens.
- Range: 2020-2022.
- Study the change in supply & price on an annual basis.
35:33 – Result of the analysis
- Negative correlation: If the token’s supply increases ⇒ downward pressure on price.
- The impact on price is not 1 to 1: 10% token supply change ⇒ 5% price change on average.
- Token supply increase ⇒ could increase its market cap (Similar to stock splits in the stock market).
- Supply reduction has a stronger impact on price compared to supply expansion.
- Supply has more impact on price in the bear market because:
- Lower liquidity.
- investors are more risk-averse.
- Lower demand compared to the bull market.
- The effect is the same whether the token has a max supply cap or not.
- Having a fixed supply cap may not be a good idea except for digital gold.
- Will write more about this.
44:12 – Is token supply a good metric when losing private key cases are not included?
- Unless you think this has an ongoing impact on the token supply, otherwise it won’t have a systemic effect on the model.
45:15 – Do NFTs have the same price mechanisms regarding the token supply versus price?
- Not surprised if they have similar mechanisms.
- Similar phenomena in stock ⇒ could see similar things in other assets if they are relatively liquid.
- NFT is harder to measure due to less liquid.
46:15 – Is crypto over? Will policy change affect how assets are priced?
- Is crypto over? No, not at all.
- Policy change could affect the crypto price in the short term since cheap liquidity is gone but not forever.
- We are only at the beginning of the tokenization revolution, decades-long cycle, which will change:
- Business models.
- How businesses and people make money.
- Shareholders and company relationship.
- Value distribution in society.
49:38 – Does this model take into account veTokenomics?
- Yes. veTokenomics is just a way that projects encourage people to hold their tokens like staking in proof-of-stake blockchains.
- Projects can strategically increase token supply to attract new users through incentives and avoid hurting long-term holders (ex: ve token model or stakers in POS) by giving part of the emission to them.
52:53 – Can we split it into subcategories?
- Yes, but this analysis only has around more than 700 tokens ⇒ limited data.
53:30 – How supply shrinkage affects price in the bull versus the bear market?
- Didn’t look at it.
- Tascha’s guess: Less effect in the bear market. Reason: Harder to assess due to the smaller sample size.