A new asset class
Initial Coin Offering, Token Sale or Token Generation Event are different formulas representing the same phenomenon: Tokenization of the economy. The practices are still trivial since we are in the early days of the Blockchain Revolution. If lawyers and regulators are already working on building a healthy legal framework for the Blockchain, it is not the case for Finance and Economics.
A Token is a digital asset that uses a peer-to-peer system called Blockchain and whose ownership is attached to PPK public keys.
Blockchain allows to cryptographically represent any kind of asset. A token can represent:
- Right to access to a good or service
- Financial security (Equity, Bonds, Derivatives)
- Real Estate
-Non conventional assets:
- Voting right
- Right to participate in a decentralized network
- Hybrid right (access to a service linked to a participation)
Token, also known as cryptocurrency, is a medium of exchange inside an ecosystem, each Token owns the following characteristics:
- A use case
- A price
- A market capitalization
A Token is a polymorphic asset backed by a Blockchain, hence it represents a lot of realities and opportunities. A Token is the link between all the stakeholders of a Blockchain ecosystem:
- Suppliers of good and services
- Investors (Token Holders)
Token is the asset at the core of the new distributed economy.
Tokenization of the Economy
Tokens allow to build decentralized business models in the new economy thanks to an amount of money raised to finance the project.
Tokenomics: a new science is born
Tokenomics is the adaptation of the economic tools to decentralized ecosystems. Token Capital Market is a consulting firm whose goal is to reconcile the speculative value of each Token listed on exchanges with its fundamental value resulting from the value creation inside its decentralized market. To do so, we internally developed our Tokenomics approach.
To understand the fundamental value of a Token, we need to understand the decentralized ecosystem in which the Token acts like a currency. To illustrate our approach, we will work on a virtual sector. Concrete applications will come in the next publications.
We will perform our study case on a sector representing $6 Billion in annual market turnover. We call this $6 Billion the Total Addressable Market (TAM), it represents the money spent in the sector in one year.
To get the Tokenizable TAM we need to divide the Total Addressable Market by the velocity of the Token. The Quantity Theory of Money gives us the following equilibrium:
- M = size of the asset base
- V = velocity of the asset (the number of times an asset is exchanged in a time period)
- P = price of the digital resource being provisioned
- Q = quantity of the digital resource being provisioned
M * V = P * Q or M = P * Q / V with:
In this equation, the M is the Tokenizable TAM and and P * Q is the Total Addressable Market, so the equation becomes:
Tokenizable TAM * Velocity of the Token = Total Addressable Market
Tokenizable TAM = Total Addressable Market / Velocity of the Token
Since we are working with annual turnover for the TAM, we need to use an annual velocity. With a Velocity of 2 in our virtual sector (each Token is exchanged 2 times a year), we have:
Tokenizable TAM = $6 Billion / 2 = $3 Billion
This $3 Billion represents the amount of Token needed if the entire market is decentralized and tokenized. The tokenization of the sector depends on the ability of Start-Ups to use Blockchain technology in this specific sector.
The Blockchain can penetrate the market, in this case Tokens replace fiat currency on the market, or disrupt the market in this case Tokens create new market shares. Hence, we must distinguish 2 kinds of market tokenization: market penetration & market disruption. The addition of the 2 tokenization processes gives the Tokenized TAM.
In our case, we assume that the Bockchain penetrates 25% of the Tokenizable TAM and disrupts the market for 15% of the Tokenizable TAM. Of course, these rates must be discussed with Economists and Blockchain Experts to be as relevant as possible.
We obtain the following metrics:
- Blockchain penetration = 25% * $3 Billion = $750 Million
- Blockchain disruption = 15% * $3 Billion = $450 Million
Tokenized TAM = Blockchain penetration + Blockchain disruption
Tokenized TAM = $750 Million + $450 Million = $1,2 Billion
Once we have defined the size of the market available for Tokens for each sector (Tokenized TAM), we need to estimate a market sharing among the Blockchain Start-Ups operating on this specific market.
We make the assumption that 5 Start-Ups have developed Platforms to operate on our virtual sector; once the market participants are identified we have to make assumptions on their market share. A good estimation of the market share will focus on the competitive advantages of each platform, once again, experts are needed to obtain estimation making sense.
We made the following hypothesizes on the market shares:
- Platform #1 should represent 50% of the Tokenized TAM
- Platform #2 should represent 30% of the Tokenized TAM
- Platform #3 should represent 10% of the Tokenized TAM
- Platform #4 should represent 5% of the Tokenized TAM
- Platform #5 should represent 5% of the Tokenized TAM
Our approach allows us to give a Theoretical Market Value for each Token used in the sector: Platform #1’s Theoretical Market Value is $600 Million.
At the equilibrium, the Theoretical Market Value for each Token must match its Actual Market Value. If it is not the case, it means the Token price is speculative.
Actual Market Value = Token Price * Number of Token outstanding
Our model assumes that the Blockchain Start-Ups operating on an economic sector are sharing the Tokenized TAM. We call Global Token Value the sum of the Theoretical Market Value of the Tokens used in the sector, since this amount equals the Tokenized TAM we can summarize our approach in a Balance Sheet.
The M * V = P * Q equation becomes Tokenized TAM = Global Token Value when switching from Economics to Tokenomics.