Project evaluation. Return On Investment (ROI). The role of the token. The role of the investor. These topics do not mix.
In our previous article we explained why marketcap was an erroneous way to measure the value of a token, at the same time, we admit it is the best way to currently measure.
What is the evaluation of a project? It is suppose to be the value of the ecosystem. Bitcoin as of writing is at $104,470,319,794. Let’s consider we sell every bitcoin, every miner, and every node. Could we get to that evaluation? Probably not. So this point is already a bit invalid since there isn’t a real correlation between value and evaluation.
Then how are we currently evaluating projects? Money raised as a fully diluted value. This means if you raise $1m at 1% of total tokens, you are evaluated at $100m fully diluted. In our previous articles we explained how fully diluted was an erroneous measurement as well, but that aside.
Now let’s compare two cases, case 1 has 1% sold, and 99% owned by the public. case 2 has 1% sold, 99% owned by the seller. Both have a $100m fully diluted evaluation, but these two cases are not equivalent.
To proceed, let’s take a step back and do a very naive budget, we will be using round numbers for simplicity sake, we are also using high numbers for a worst case scenario.
We start from the core, development.
Core developers (x5 @ $100k)
Eco system developers (x3 @ $100k)
Web developers (x3 @ $100k)
Core testers (x5 @ $100k)
Technical Writers (x2 @ $100k)
Designers (x3 @ $100k)
$2m (2.1 technically, but keeping to round numbers)+ 25% buffer for support services. $2.25m
Marketing, we allocate as much budget as we do for development. $2m + 25% operational. $2.25m
Legal. $1m + 25% contingency.
$5.75m at this point. This is a strong budget already and a significant Round A.
The above can deliver fairly easily in terms of a product roadmap.
Next comes the Crypto Game.
An extra $11m just to play the game.
$16.75m. Of which $11m is solely focused on investor ROI, not the product.
The Role of the Token
Consider the traditional corporate structure. We are service provider p and you are consumer c. P incurs a base cost x. Adds a markup for services rendered (profit margin) x+y. C purchases at x+y. x was P’s cost, y is P’s profit.
Consider the service we were providing was hosting a blockchain. We incur costs x for server fees. We charge x+y.
We want to design a structure in which the corporate is not required. So instead we look towards decentralization.
Participant P hosts a node. Consumer C wishes to use the service. For services rendered P is rewarded with a monetary value. The token T.
There exists a strange duality to the token. P would prefer T as high as possible (highest profit), C would like T as low as possible (cheapest service). If C could be provided the service cheaper at another competitive provider, they would change services.
For the equilibrium to exist T must be greater than P’s minimum, but less than C’s maximum. Pm < T < Cm. T is volatile. If T exceeds Cm, C will stop participating. If C stops participating there is no longer reward for P. This is where block rewards come in. Block rewards are a mechanism to allow for reward even if C is absent. It is life support.
In theory then, a token should find a fixed equilibrium of Pm < T < Cm. In practice we see this is not the case. Instead we relish in the volatility of T at the expense of the system.
The Role of the Investor
Investors, Tokens, Adoption, and Decentralization solutions do not mix. The investor wants the token value to be as high as possible. Adoption requires the service to be as cheap as possible.
The investors traditional role is funding for future profit dividends. Decentralized solutions lack profit dividends.
How can these two interact with one another?
Options for funding available to a decentralized development team include
- Traditional Equity (no business plan for future profit, so this topic is a bit pointless)
- ICO (Originally to sell tokens discounted against what their calculated production value would be)
- Post ICO liquidation (Sell company owned tokens)
If we were to tell you right now, we are going to build Bitcoin, but we are going to premine 50% of the supply, but we will lock it up for 1 year. How would you respond?
Traditional equity has a continuous benefit. Similar to a hardware investment for mining. At point T you have paid off your original capex and the rest is operational costs and profit.
In the ICO, you do not have this option. You have a chance to sell once and make profits.
How then do you consolidate the need to raise funds, the need for ROI, and the need for a token to remain within Pm < T < Cm?