A Brief Look at the Future Value of Safex (Cash & Tokens)

Astralite
Astralite
Nov 1 · 13 min read

Foreword

My reason for researching and writing this article is to attempt to compare the underlying value of Safex Tokens with that of Safex Cash. I embark on this journey without any assumption of what I may find and invite the reader to follow along with me.


Safex Token (sft)

To me the value of safex tokens has always been clear cut.

First of all we know that the Safex marketplace will distribute 5% of GMV (gross merchandise volume) to sft holders. So we can say with certainty that for any given GMV and with some percentage of locked in tokens (L) a token holder will receive an amount of dividends (D) for each of his locked tokens. As an equation we can represent it like this:

Now if we know the values for GMV, L, and SFT(total) we can easily use this equation to calculate our annual RoI (return on investment) for sft tokens purchased at some price (P) by dividing D by P:

For now and for the remainder of this article I will stick with the assumption that the Safex marketplace will generate a GMV of $500M in the first year of operation, however I would encourage everyone to play around with this figure and really get a feel for how it relates to RoI!

So to give an example of these formulas in action let’s say that after the cut-off date for migrating safex tokens to the new blockchain 70% of the original 2.15 billion tokens have been migrated, this brings our total supply to 1.5 billion; and of these 1.5 billion tokens 90% of them get locked in for dividends. We get:

Which equates to 0.0185
In this example each safex token generated $0.0185 per year for those that had them locked in.

Now let’s find out how that could equate to safex token price P using our second equation.

If we assume that investors will buy safex tokens if they generate a return of 5% per year (it could be less assuming that the GMV will grow each year but I won’t account for that here) then we can rearrange the equation to get:

Here we find that a reasonable price for sft is $0.37 USD each if the marketplace hits the target $500M USD GMV.


Safex Cash (sfx)

The current market value of 1 sfx is 0.00000133 BTC, that’s $0.0123 USD, but what will it be tomorrow? It turns out this is a much more difficult figure to estimate than the figure for sft was, but let’s try anyway ;)

To help us determine the future value of sfx we need to know a few things:
1. What is the function of sfx (why do people need sfx)
2. Does the function create a price pressure, and if so in which direction
3. What other factors could impact the price

What are the functions of sfx?

To quote the most recent edition of the Safex blue paper (Jan 2018) sfx has two functions:

1. “[sfx] is … the principal payment method when fulfilling the purchase of products and services of the marketplace”
2. “Every action that takes place on the Blockchain network requires the payment of some network fee” paid in sfx

In other words you will use sfx to transact on the marketplace, and you will use it to pay for network fees.

Do these functions capture value?

Firstly let’s look at the way purchases and sales will be made on the Safex marketplace. When an item is placed for sale on the marketplace the seller “pegs” their item price to a specified alternative (presumably fiat) currency and when a buyer comes along to buy that item the buyer’s interface shows them their local (or specified) fiat value equivalent for the item.

For example, let’s say someone usually sells handmade trinkets for $10 USD each. Now they also choose to list those trinkets on the Safex marketplace but since it’s convenient for them to deal in USD and they have no interest in exposing themselves to the volatility of cryptocurrency they peg their trinkets at $10 USD each. A buyer comes along and takes a liking to one of these trinkets and sees that the equivalent price in their local currency is 9€. So the buyer makes the purchase and behind the scenes 9€ worth of sfx is bought from an exchange at the going rate, that sfx gets sent to the seller and after paying the 5% sales fee (and taking into account exchange fees) the remainder is sold at the going rate for $9.4 USD.

Neither the seller nor the buyer actually cared about owning the sfx used to make the transaction, they only required it for the purpose of transacting.

Since buyers and sellers don’t have an interest in “hodling” sfx we can assume that directly after some amount of sfx is purchased that same amount will be put back into circulation through a combination of selling on an exchange and fees. Therefore we can say this function is neutral in terms of pressure on the price of sfx.

A small amount of sfx is also required to perform any action on the blockchain. This means that before anyone can post a sale, lock or unlock sft (safex tokens, not to be confused with sfx), or perform any other action, they will need to have some amount of sfx in their possession. The important point here is that for the purpose of practicality users of the blockchain/marketplace will need to “hodl” at least a little bit of sfx.

Safex blockchain transaction fees are denominated in sfx and the fee amount is based on the total data included and the priority level set by the sender. This means the amount of sfx used to pay for transactions remains relatively stable and unpegged to any external currency. For example a typical transaction currently costs between 0.05 and 1 sfx.
In terms of the fiat equivalent — if sfx price increases then transactions will cost more, if it decreases then transactions will cost less.

Because users are incentivised (through increased usability) to keep sfx in their wallet this will theoretically add upward price pressure that scales linearly with the number of Safex users by virtue of removing currency from circulation. Due to the very small amounts of currency being dealt with however, the overall impact of this function likely won’t have a significant bearing on price in the larger scheme of things.

For example if we assume that on average each user stores 20 sfx in their wallet then 500 new users could sign up every day and the daily decrease in circulating supply due to “hodling” by these new users would still be outweighed by the increase in supply from mining rewards by nearly 10:1 — That is, the circulating supply would remain inflationary.
Note that next year this ratio would be double (~20:1) due to the mining reward increase.

So for the purpose of assessing value I will consider the affect of using sfx for fees to be negligible.

What other factors could impact the price?

While there are theories for valuing mineable cryptocurrencies based on the cost of mining I don’t place much weight on these since it becomes a chicken & egg situation. Regardless of whether an investor obtains a cryptocurrency through mining or via an exchange, they still seek to obtain that currency at (or below) a fair market value which must be determined somehow prior to their decision to buy. In other words (and generally speaking), miners mine because it produces actual or perceived value, not for the sake of mining.

Mining is fantastic for distributing cryptocurrency fairly, but it should not be depended on for price support. So what else can we look at?

According to Chris Burniske coauthor of Cryptoassets: The Innovative Investors Guide to Bitcoin and Beyond

“within its native protocol a cryptoasset serves as a means of exchange, store of value, and unit of account. By definition, then, each cryptoasset serves as a currency in the protocol economy it supports. Since the equation of exchange is used to understand the flow of money needed to support an economy, it becomes a cornerstone to cryptoasset valuations.”
Chris Burniske, Cryptoasset Valuations

The equation of exchange used in economics states that MV = PQ where:

P = The price level of goods
Q = The quantity of goods sold
M = The money supply in circulation
V = The velocity of money (or the average frequency with which each unit of money is spent)

Let’s visualize this with an example. Say we have an economy with a money supply of $100 USD and this year that economy produces 30 pizzas which sell for the price of $10 USD each. Remembering that MV=PQ we can substitute in our values and write it as such:

Using this example we can determine the velocity of money in our economy by solving for V:

So in our example we can see that the average dollar was used in 3 transactions.

In standard economic theory PQ equates to the total amount paid for all the goods produced in an economy, that is, PQ = GDP (gross domestic product).
In the case of Safex we substitute GMV (gross merchandise volume) here since it is an equivalent metric. GMV here is the total amount of money used to buy products and services on the marketplace.
So now we have the equation MV = GMV but this assumes that M (the money supply) is denominated in the same currency as our GMV. It doesn’t matter which currency we choose but since we know the Safex team has a target of $500 million USD of GMV in the first year we’ll use USD which means our example M will also be denominated in USD.

So to find the value of sfx in our equation we will separate M into two components, Ms (sfx supply) and E (exchange rate of sfx to USD, that is, dollars per sfx).

What this equation now lets us do is calculate E (the exchange rate of sfx to USD) if we first know the values of the other parameters — Ms, V, and GMV.

Ms is the simplest parameter since this is just the average number of sfx in circulation for the given time frame (one year for annual GMV) which can be calculated easily enough.

We can make a bit of an informed guess about what GMV may be by comparing Safex to presently available products, etc. such as has been done by the team already when determining their initial $500M GMV figure.

But how should we determine V?
One way to estimate V could be to look at the velocities of other currencies then insert a similar value.
> USD (Q2 2019) — 5.6
> USD (Q2 1999) — 8.6
> BTC (Q3 2019) — 4.3
> BTC (Q2 2019) — 5.6
> ETH (Q3 2019) — 5.4
> ETH (Q2 2019) — 8.3

If we take these figures at face value we could say that the velocities of bitcoin and ether are in the vicinity of USD velocities. But as Chris Burniske points out in his article Cryptoasset Valuations bitcoin’s velocity is a hybrid of velocities. This is because bitcoin is not only used to transact (as is the case for US dollars), but also as a store of value. According to a survey conducted by Coinbase in 2016, 56% of users viewed bitcoin “strictly as an investment”.

Burniske suggests then that we implement the equation:
Hybrid Velocity = (% Token for Use 1) x (V1) + (% Token for Use 2) x (V2)
So assuming V1 is 0 to account for those using bitcoin to store value we can rearrange the formula to find V2 (the velocity of those bitcoins which are being used like M1 money as in the case of our US Dollars).

Using the velocity of bitcoin in Q2 this year we get:
V2 = 5.6 / (0.56 x 0 + 0.44)
V2 = 12.7

I would also go one step further than Burniske here and account for the number of lost bitcoins which is estimated to be about 30%. This pushes our final value for V2 out to 18.1

Since some users of ether would also consider it to be a store of value we could make the same point for it and we would likely end up with a similar value but I won’t bother to do it right now since this article is long enough already.

So without digressing too much further let’s return to our original equation and substitute in some approximated values. Just like Burniske I’m also going to choose 20 for the velocity of our cryptocurrency but in this case I’m using sfx.

Therefore for these parameters each sfx is worth $0.57 USD.


A Unified Theory of Everything

Since we now have ways to estimate both the price of sft and sfx in relation to the GMV of the marketplace we can combine them to come up with a ratio for the value of sfx to sft.

Substituting in our values for everything except GMV we can do some math to figure out that GMV here actually cancels itself out.

Therefore we can say that for whatever GMV we use the price ratio of sft to sfx remains the same assuming none of the other variables change either.
We can assume that SFT(total), L and RoI(annual) will not change, however the supply of sfx is constantly increasing so as time goes on either the velocity of sfx must decrease to compensate or sft will become more valuable in relation to sfx.
Since the goal of the marketplace is to increase GMV year on year, this indicates that more sfx must change hands and V in fact may not decrease alongside the increase in sfx supply. So my personal thoughts here are that the price ratio at minimum stays the same but likely increases with time (i.e. sft price increases in comparison to sfx).


Concluding Thoughts

After spending two days doing research for this article I came across three distinct methods for determining the value of a utility token.
1. Using Cost of Production
2. Using Velocity of Money
3. Applying some version Metcalfe’s law

I believe method 1 is circular and thus flawed.
Methods 2 and 3 provide some practical framework for us to work with but are also open to large variances in parameters used.

It is quite possible that metcalfe’s law could indicate an increase in value of sfx as it becomes used by more people (known as the network effect). This principle appears to apply to bitcoin and other large utility tokens but it is also undetermined how much of this affect can be attributed to these cryptocurrencies being viewed as stores of value. My thoughts are that if these coins lost their status as stores of value, the price increase from network effect would also be lost since the tokens would become a purely transactional medium. That is, people would purchase the coins to make a transaction and sell them at their first possible convenience.

One key theme that kept repeating itself in my research is this..

“velocity acts as a confounding variable for [utility] token economies that decouples the network value from any individual token’s utility value. As transactional costs and friction decrease, especially as the purchase and sale of these tokens becomes basically instantaneous or concurrent, velocity increases significantly and collapses the utility value of the token.”
Wilson Lau, On the Velocity Problem for Cryptoasset Value

This means that for utility tokens such as sfx, instead of appreciating in value due to becoming more popular, the velocity is liable to appreciate (increase) instead since there is no underlying or intrinsic value causing people to want to keep sfx in their possession.

Below I offer some more relevant comments and further reading:

“The uniting argument […] is that tokens that are not store-of-value assets will generally suffer from high velocity at scale as users avoid holding the asset for meaningful periods of time, suppressing ultimate value.”
 — Alex Evans, On Value, Velocity and Monetary Theory

“Most utility tokens, then, will go to zero, regardless of team quality and execution. You simply don’t need to hold them but for momentum and greater fool investing. When the market lacks “higher order” investors for speculators to flip to, assets will unwind. Viciously.”
Ryan Selkis, 95 Crypto Theses for 2018

“…the market cap of an appcoin depends crucially on the holding time H [which is inversely related to velocity]. If someone creates a very efficient exchange, which allows users to purchase an appcoin in real time and then immediately use it in the application, then allowing sellers to immediately cash out, then the market cap would drop precipitously… Protocol tokens using this model may well be sustained for some time due to irrationality and temporary equilibria where the implicit cost of holding the [coin] is zero, but it is the kind of model which always has an unavoidable risk of collapsing at any time.”
— Vitalik Buterin, On Medium-of-Exchange Token Valuations

After reading the explanations these people have for making these comments it seems that our value of 20 for velocity of sfx could potentially be orders of magnitude lower than it should be.

In our best-case scenario for sfx we can say each one may currently be worth about 2 sft however I can find no evidence that the ratio should increase above that. On the contrary there is reason to believe the ratio may drop significantly with time.

In summary — I set out not knowing where my research might take me; I also may be wrong, and everyone should do their own research, but I would personally feel much more comfortable holding sft than sfx.
There is potential for large price changes due to speculation and “whale” manipulation especially in the short-term when supply and trade volume is in it’s infancy but this will likely be less of a factor as time goes on.

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