An Unbiased Review: VeChain
“If you derive the value of VeChain from their partnerships, team and market momentum; you are likely to assume an embellished market value.”
Introduction
Counterfeit goods harm the prestige of a brand, reduce company profits and influence consumer purchases.
Vechain, using blockchain technology, aims to tackle the growing issue of fake products by revolutionizing the supply chain. The digital identification of assets on the blockchain will enable transparent production lines, symmetrical databases, asset traceability and authenticity of goods.
This report aims to accurately and critically discuss the value of the cryptocurrency, Vechain, by considering multiple factors in an impartial manner to empower investors and businesses to make informed financial decisions.
Disclosure: I do not hold any VEN. It is my personal policy that I will not hold any positions in coins I choose to review.
The information of this document is valid as at 7 January 2018.
Core Functionality
The following statement from Vechain nicely summarises their vision and function:
VeChain’s ambition is to develop a decentralised business ecosystem, which enables the flow of information securely and privately, building trust and transparency across borders and companies.
VeChain leverages Blockchain to solve the problem of counterfeits and product traceability across supply chains and logistics namely in: Luxury Goods, Wines, Agriculture, Automobile, Transportation, Pharmaceuticals, Logistics and Audit Services. [Source]
This is a highly ambitious vision, which if achieved, would see VeChain used within many product-based verticals.
Based on various videos, fan-made whitepapers and market reports — we can presume that VeChain will use RFID tags, QR Codes and NFC chipsets to digitize assets which can then be managed through a cloud platform. By using blockchain the data gathered from digital assets becomes trustless and tamperproof, enabling valuable information to be shared between manufacturers, suppliers, transporters and customers.
However, the methodology of this is unclear because VeChain have failed to release a whitepaper. This leaves the general public in the dark regarding how blockchain is actually utilised. There are many issues faced when creating a blockchain-based supply chain which need to be discussed:
1) Interoperability
Blockchain may allow the safe exchange of data, but it does not solve the issue of interoperability. How the different systems spread across parties can translate information effectively between eachother is easier said than done. The software being used by manufacturers, suppliers, transportation services & consumers is guaranteed to be different. If all these programs can’t speak to eachother there is little value to VeChain.
2) Transaction Costs
It is still unclear what the price of using the protocol shall be. VeChain in a recent announcement stated “The VeChain Foundation… will closely monitor the usage and status of the VeChain Thor blockchain and to balance the VeChain ecosystem.”[Source]
This is beneficial for businesses using VeChain as the cost of using the protocol should be relatively stable. As an investor this is a huge red flag. This effectively gives them the ability to manipulate the price of their own currency by adjusting the rate of THOR production, the same power as the federal reserve.
3) Offline Solutions
Many blockchains can only work while connected to the internet. For the supply chain to be constantly connected it would require an international mobile data connection. Who will pay for this between the multiple parties has not yet been disclosed or explained.
4) Scalability
This is one of the key problems all blockchains are facing at the moment. In a recent AMA Sunny explained;
“The capabilities of our blockchain can achieve up to 10,000 tps. However, when we launch it, we will keep the speed at 50 tps and this will eventually be upgraded when our ecosystem grows with more users and there is more demand from applications.”[Source]
With no description of how they intend on reaching 10,000tps or any reasoning for limiting the chain speeds to 50tps, this seems to be a case of just taking the companies word for it.
VeChain 3.0, is currently running on a private testnet, with their website claiming the public chain will launch in Q2 2018 followed by the client mainnet launch in Q4 2018[6]. This means there is no way for users to test the platform, for hackers to audit the blockchain or for businesses to accurately budget the costs of digitising the supply chain.
Considering the current marketcap, the age of the project and the obvious issues which could arise it is inexcusable to not have a detailed whitepaper explaining the technical details or methodology to meet their bold claims.
The lack of functionality seems to be completely understated by the investment community. There are imperative issues of a blockchain-based supply chain which have not been addressed by VeChain. This is not to say they have not thought of solutions to these issues, but rather, the investor must be aware they are putting their faith and money into a product which is still in the alpha stage of development.
Coin Analysis (VEN / VET)
VeChain currently has one token on the market — VEN. This token is to be transitioned from an ERC-20 token to VET on VeChain’s platform sometime in Q2 2018 at a ratio of 1:1. [Source]
The core token, VET, has two usecases according to VeChain.
1) Store of value or medium of exchange to be used as a smart payment currency. [Source]
2) Produce THOR in a dividend-esque system. [Source]
Medium of Exchange
Using a platform specific currency for the ecosystem has become the standard model for many ICO’s, including Ethereum, Sia and Golem. By increasing the velocity of circulation and demand for the coin, the price naturally rises. However, one should always question whether a native cryptocurrency is truly practical.
Quite often in crypto, people use real world revenue figures to approximate the amount of demand the token should see. Vechain themselves do this on their website; pointing out the fact the liquor market spent “60 billion USD in 2016”. However, I highly doubt there will be any market penetration or demand for the coin in the liquor market and here is why:
Reasons for:
1) Supply chains are often spread across countries, meaning a borderless currency is indeed useful for cutting transaction costs and time (however, any other crypto can be used for the same purpose).
2) If this is implemented alongside other supply chain software using VeChain, this could help with product inquiries, billing and automated price calculators.
Reasons against:
1) Vechain is a legal entity, Shanghai Weilian Information Technology Co. Ltd [Source], and is therefore able to receive payments in fiat.
2) Ethereum is the industry standard form of payment. According to their latest Financial Executive Report, VeChain themselves use Ethereum to pay expenses [Source]. If the core company is not using their own currency, why would anyone else.
3) The volatility of the VEN makes it a poor store of value.
4) Exceptionally unbalanced distribution of wealth makes the currency easily manipulated.
5) VET has not been tested or proven as cryptographically secure.
6) No fiat exchanges (VeChain are working with an ATM company, Bitocean [Source]).
7) Tax & regulation issues
With the stronger reasoning leaning towards against, we can conclude that VEN, in it’s current state, is not a valid medium of exchange or store of value.
Produce THOR Power
THOR Power is used to pay transaction fees when the mainnet is launched [Source]. It can be earned passively by holding VET in a wallet. The ability to produce THOR, is a strong driver to hold VeChain for institutions looking to control their operating costs and individual investors hoping to make a profit off the “dividends”.
VeChain have also announced a tier based system meaning that for those who own a significant sum of VET will be granted the ability to earn THOR at a faster rate[Source]. This goes against the traditional egalitarian spirit of cryptocurrency — and shifts it more towards today’s focus; valuation and the commoditization of digital currencies. We are yet to see if this is a sustainable model.
THOR Power
The introduction of THOR Power was created to decouple the value of VET and the cost of using the network [Source].
A similar two-coin system is also used by NEO, which when held in a wallet produces Gas. Despite VeChain’s claims that they have introduced Thor to decouple valuation of the two assets — we have seen through NEO that the assets are still highly correlated.
VeChain have proposed that they will adjust the rate of THOR to try to stabilize the price. This will reduce correlation and allow for those highly invested to facilitate the cost of using the network. However, this also allows for the ability manipulate the price of THOR and therefore, VET.
Valuation of THOR Power
Based on what we know, we can use financial models which exist today to estimate the valuation of THOR.
According to Etherscan there is currently 873M VEN (1,000M-127M) which is held in wallets able to earn THOR[9].
Every VET produces “0.00042 THOR Power per VET per Day”[Source].
For simplicity we will exclude the circulating THOR (30% of transaction fees), which will inherently understate the supply (and overvalue the price of THOR).
∴ Supply > 366,819 THOR per day
If we put this into a graph and compare the cost of daily transactions with Ethereum (a currency which is likely to have similar computation requirements) we can then estimate the price of THOR.
Adjusted capacity of Ethereum 15tps to 50tps (based on founder statement that the network can handle 50tps) i.e. 4,320,000 transactions daily.
Assumes the total cost of the Ethereum network is equal to that of VeChain ($3.9M per day).
∴ We find that each transaction costs $0.895 (3.9/4.32).
Here are the results:
We can now conclude that if the network faces the same transaction demand as Ethereum, the average transaction fee would be $0.895 and the price of THOR would be $3.03.
Note: This likely an exaggerated market value of THOR because:
1) VET is unlikely to have the transaction demand of Ethereum.
2) Ethereum costs are currently inflated due to congestion and a high base price.
3) This assumes max capacity of the VeChain Protocol — 4.3M transactions per day.
Valuation of VEN/VET
From here we can use the dividend discount model to calculate the price of VEN.
Assume that $3.03 is a fair price for THOR
Assume max capacity of the network (Overstate price)
The minimum THOR will be produced indefinitely (Overstate price)
We will disregard the unburned THOR of each transaction (Overstate price)
We assume all THOR available is on the market.
We will assume that the market will act rationally and the laws of supply and demand will stand.
For this model we have to assume that VeChain is NOT a medium of exchange and it’s primary usecase is to produce THOR Power.
Considering a strong company yield to return in today’s market is around 30%, a rational company would not consider purchase VET to earn THOR unless the price was $1.50. We can further conclude that despite being exceptionally generous across multiple variables the price of VeChain is overvalued by approximately 70%.
For today’s price to be justified one or a combination of the following must be true:
1) Thor’s blockchain will consume more than $3.9M of transaction fees per day
2) Investors must be content with a cryptocurrency return less than 10%.
3) VET must be a medium of exchange which is of high demand.
I have set my price target to $0.90 — $1.40.
Closing Remarks
If you derive the value of VeChain from their partnerships, team and market momentum; you are likely to assume an embellished market value.
[You can read reports on their impressive team and partnerships here.]
However, if you critically analyze the merit and return of the token itself, then you will discover the fair value.
This is not a decentralized cryptocurrency. This is a coin which goes against the philosophy that cryptocurrencies and blockchain has attempted to build.
- Centralized THOR supply.
- Company ownership of the blockchain.
- Constant shilling and pumping of the coin by founders.
- Tier based systems to reward large investors causing low distribution of assets.
VeChain as a company may be a great investment, but the token seems to have been created as an excuse to raise an extravagant amount of money and use that to build an empire.
I have no doubt the company will continue to operate and make good use of its partnerships with PwC and DNV GL. However, I do doubt the ability for this to materialize into value for investors.
