Summary of Jose Maria Macedo’s taxonomy of token models and valuation methodologies

This is a summary of A taxonomy of token models and valuation methodologies by Jose Maria Macedo published on 28 May 2018.

The following taxonomy is applied

The main categories

• Cryptocapital is different from cryptocommodities in that the former provides access to a value flow, for instance, via staking. Within the cryptocapital branch, security tokens differ from work tokens in that they pass the Howey Test, which implies that the value flows originate as a result of the effort of others. In the case of the work tokens, participation by the holder is required. Applicable valuation methods are DCF, venture capital method, comparable and precedent transaction analyses for both categories
• Currency tokens are those that seek to fulfil one of the money characteristics: a unit of account, medium of exchange, store of value. The applicable valuation method is the equation of exchange or NVT ratio
• Collectibles lack fungibility hence can’t be used as a currency. One would need to calculate supply (often known) and demand estimates to value a collectible. Valuation methods do not differ from traditional collectible items

The security tokens are valued in the same way as the traditional securities and hence are not included in this summary.

Work tokens

• Comparative valuation could use a ratio comparing cash flows paid to the supply side (a proxy of earnings) to the network value (a proxy of price)
• Work tokens can be further subdivided into service tokens, discount tokens and governance tokens, based on the nature of the work being provided to the network

Service tokens

• Service tokens need to be staked for a user to provide a service. If the service is done correctly according to the consensus mechanism, the user will be rewarded in either the staked or an alternative token. Otherwise, the stake could be slashed
• Implementations of service tokens include (i) “skin-in-the-game” tokens, where the size of value flows is proportional to the value staked, (ii) access tokens where the size of the stake to access the network is fixed, (iii) token curated registries, where staking is required to produce a database, (iv) burn-and-mint equilibrium, where customers burn tokens in the name of service provider, who receives a share of inflation proportionate to the value of the burned tokens

Discount token

• These grant a holder a discount on transactions performed on the network. These are a work token because the holder’s benefit is contingent upon network participation. Discount tokens can be implemented as “Use” tokens, where a discount is provided for paying using the native token (e.g. BNB), and “Stake”, where users need to stake the token to receive a proportionate share of the discount (e.g. Sweetbridge’s SWC).
• “Stake” tokens possess a number of interesting features. (1) By interpreting the discount as a value flow, one could use DCF to value them. (2) Token’s value is directly linked to network adoption. (3) Despite equity-like qualities, they are utility tokens as the benefit only crystalises during usage of the network. (4) There is no requirement to transact in the token, improving the UX. (5) The token benefits users over speculators.
• Discount token possesses both resale value and discount value. Hence network users capture more value than passive holders
• For examples of discount token valuation models, see Phil Bonello’s work here or Michal Bacia’s SweetBridge valuation model.

Governance tokens

• Blockchains with on-chain governance offer its token holders ability to influence how the network is run via the protocol. Examples are 0x, Maker, Decred, Dfinity
• Approaches to valuing governance are the following. (1) Phil Bonello’s value = cost associated with a fork. (2) Jake Brukhman’s “decisiveness” model, where value = ability to influence decisions. (3) Fabric Ventures’s view that governance value is an exponential function of the underlying network value.

Burn & Mint Equilibrium

• A rare structure that can be found in Factom and Scriptarnica
• The only valuation model is Multicoin’s Factom valuation

Currency Tokens

• These aim to achieve the 3 qualities of money: medium of exchange, store of value and unit of account. However, most cryptocurrencies have focused on one of the aspects as their differentiating factor

Store of value

• Key qualities are: (1) scarcity, (2) security, (3) permissionless, (4) censorship resistance
• For instance, Bitcoin’s uncompromising approach to these qualities regardless of utility makes it similar to gold in its lack of utility, but at the same time offers significant improvements over the metal. This unique position as a global settlement currency is what determines the value
• Categories within store of value cryptocurrencies include (1) privacy coins that argue that privacy is essential for a store of value (2) stablecoins that argue that price stability is the key to a store of value, and (3) Non PoS smart contracting platforms that value programmability as the key quality (PoS is not included here as it qualifies as cryptocapital due to the yield generated by staking)
• All currency tokens can be fundamentally valued using some variation of the Equation of Exchange (MV=PQ), originally proposed in the INET model. Several alternative models have tried to improve on modelling the velocity (“V” in the equation). They include the VOLT model, using Baumol-Tobin cash inventories approach and the Rational Market Value approach, which allows modelling changing velocities over time
• Relative valuation methods include the (NVT) Ratio as a proxy of price over utility. Dmitry Kalachkin’s NVT Signal Ratio improves on the original ratio by using a 90-day moving average of daily transaction volume rather than taking a snapshot as in traditional NVT. The Wookalich Ratio, on the other hand, seeks to correct long-term inflation skewing the NVT ratio by normalizing it by a dilution factor. Murad Mahmudov and Dave Puell’s MVRV use Nic Carter’s Realized Value instead of the more traditional Network Value in order to properly account for the effect of lost coins and hodlers on Bitcoin’s price. However, these metrics do not take into account L2 scaling technologies. These and other metrics can be viewed on Woobull Charts and CoinMetrics

The medium of Exchange tokens (Payment tokens)

• The medium of Exchange tokens prioritize for scalability and usability over all other features
• Examples of pure medium of exchange tokens include Aventus, TicketChain, BlockTix, Bitstation, Bhired, Dentacoin, Celsius Network, and many other 2017 ICO tokens
• The same valuation metrics that apply to store of value tokens apply to medium of exchange ones. It is important to note that applying the MV=PQ equation mentioned earlier to a pure medium of exchange token with no store of value use case leads to a high velocity and hence implies a low valuation for the token. Such token would be purchased to make a transaction and sold immediately after receipt of value as it would be converted into something that is deemed to be a store of value

Collectibles

• Collectibles are unique and non-fungible. They include both digital-native collectibles, such as game assets, and asset-backed collectibles representing ownership of a real non-value-generating asset, such as an artwork. Collectibles are a subset of NFTs (non-fungible tokens)
• Examples include CryptoKitties, land tokens on Decentraland, collectibles on Axie Infinity and the tokenised Picasso painting
• In fundamental terms, they can only be valued by estimating supply and demand. Supply is usually known and predictable, while demand can be modelled using regression analysis. Examples can be found in various publications. In relative terms, collectibles can be compared by identifying relevant metadata about them (e.g. in the case of artwork, metadata like era, style or artist may be used)