What is the fair value of the Synthetix Token (SNX)?
Due to the latest drop in market prices we have decided to do a valuation of the Synthetix project and its SNX token. The price of the SNX token dropped from a peak of $1.52 to around $0.43 (-72%). Over the last couple of months Synthetix has managed to onboard a strong and loyal community and managed to achieve a high trading volume with its early adopters.
Current Adoption
The Synthetix dashboard (https://dashboard.synthetix.io) shows a total volume of $1.5 billion. This volume has been achieved in a timeframe beginning in December 2018 (Mainnet release) until today. This resulted in a total of $8.5 million USD in fees, which translates to an average trading fee of 0.57% and an average daily trading volume of ~$3.3 million.
When we had a detailed look into the exchange volume, we saw some pretty huge spikes instead of a steady growth.
Those spikes were responsible for the high average exchange volume of the last months (~$4 million daily), but were caused by front-running on-chain oracle price feeds (https://medium.com/@galvanek.m/synthetix-the-battlefield-a15a7104587c). Since mid February 2020 this issue has been resolved, but led to a drastic decrease in the daily trading volume.
A calculation over the daily trading volume since the fix results in an average of ~$600k, which is quite good given the age of the project and the current market conditions, still not as great as in 2019.
Additionally most of the trading volume comes from a few wallets, mainly from a single one. If we also deduct this trading volume from the average, we get an average daily trading volume of ~$300k.
The amount of locked SNX steadily increases (https://defipulse.com/synthetix), even during the latest downturn, and currently sits at ~141 million SNX. The current circulating supply is at ~174 million SNX which means a staking ratio of 81%.
What does the future look like?
In 2020 the primary goal is to increase adoption and to drastically increase the exchange volume. Therefore Synthetix has announced an updated roadmap on March 10th. The following picture shows the ambitious feature list. Next to additional crypto synths, new asset classes, new order types, leveraged and derivative products will be introduced. Terrific!
A detailed blog post about the updated roadmap can be found here: https://blog.synthetix.io/product-roadmap-update/
Valuation
As an investor in the SNX token, one can earn in two different ways:
- Trading Fees
- Staking Rewards
Trading Fees
As described above the current daily trading volume is ~$300k. We have based our valuation on this number. For the annual growth rate we assume that Synthetix reaches 300% YOY (year-over-year).
Additionally we assume a slow decrease in the average trading fee when adoption further grows. Therefore we estimate a steady reduction to 0.3% as outlined in the litepaper.
Given the current high staking ratio, we estimate that the staking ratio will also decrease over the next couple of years, especially when the staking rewards reduce.
Token Inflation
Synthetix’s high token inflation in the first years (especially in year 2020) is an additional incentive and a great way to bootstrap the network, although it could be a red flag for some investors. If you believe in the team and the high expectations, it is a nice way to earn additional tokens as an early adopter. Therefore we also add the token rewards in our valuation.
As mentioned already above the current % of staked tokens (>80%) is very high and clearly above the crypto average. On the one hand this is a good sign of a satisfied and strong investor base, but on the other hand it takes away market liquidity. This can lead to a sharp changes in price.
When calculating the potential staking return, we also have to take into consideration, that only token holders with a collateralization ratio of roughly 800% are eligible to receive those rewards — we assume a ratio of 80%.
PE Valuation
Given the earning possibilities for investors, we have decided to calculate a price-to-earnings ratio (P/E ratio). This valuation method indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. It is also referred to as the price multiple.
Assuming a PE ratio of 30 and only include the trading fees, we currently end up at a price of $0.06.
We use this price as the lowest price and as a reference point to calculate the $ return of the staking returns which we will receive in SNX tokens. When summing up the two sources of earnings, we get our final PE valuation.
Given our above stated assumptions we estimate the fair token value of
1 SNX is at $0.57. Given a current market price of $0.57, we think SNX is fair valued at the moment.
Conclusion
It is important to mention, the valuation is based on many assumptions made by ourselves. If you would like to see the full valuation or want to discuss our assumptions, feel free to contact us. We are always happy talking to other blockchain enthusiasts and investors.
Synthetix has set high expectations for 2020. We will periodically update our estimations based on results made by the team. If you like our work, feel free to clap for this article! 👏👏👏
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Disclaimer: block42 is not a registered investment advisor, broker/dealer, financial analyst, financial bank, securities broker or financial planner. The information is provided for information purposes only. The information is not intended to be and does not constitute financial advice or any other advice, is general in nature and not specific to you.
We are not paid or mandated to do any of our reviews/valuations. This is just our own opinion. Please always do your own research before making any investment decisions.
