Valuation of crypto projects is not an easy task as many aspects of traditional finance theory don’t apply here. The task is made more difficult by the lack of information available on Crypto projects from a financial perspective. In the end, we rely on abstract fundamental data (which cannot be quantified) & technical analysis (which is voodoo if you don’t get the hang of it) to make guesses.
I was intrigued then when Zignaly launched its DAO road map last month and revealed that they are targeting a $10bn Total Value Locked (TVL) & a profit target of 30% for users. Armed with this information, and the fact that Zignaly today takes a 5% cut of all profits in the marketplace, I decided to run a few calculations using aspects of traditional finance theory.
Please note that my aim is not to shill the coin but to share thoughts on how a valuation model may be academically deciphered. Please do your own research & assume your own risks. This is not financial advice.
Framework:
Before we get into calculations, let’s talk about the framework that we will employ.
Today, the platform's assets under management are just $120m. They intend to get to $10bn in TVL (if we were to substitute AUMs with them) and we have a timeline from the project which says they will achieve this by Q42023. Never say never in Crypto, but for the purposes of our academic analysis, the safe route to take is to value the project when they do indeed hit a $10bn TVL and work from there.
To do so, I have decided to treat the revenue stream (5% profit share) as a Perpetuity. Perpetuities are payments made out annually forever. They can be designated as costs or returns. Traditional finance theory aims to value perpetuities using a variation of the Gordon Growth Formula whereby:
Dividend / Required Return on Capital = Valuation
The reason I have chosen to go down the perpetuity route is the lack of information available on growth rates post the $10bn TVL target hit. So my simplistic assumption is that the project will stay at that level of TVL forever (unlikely but have to make do with what is available).
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The Math
For our purposes, we will consider:
- $500m as the revenue for the DAO treasury substituting for dividend in our Gordon Growth Model. This is 5% of TVL & about 16.67% of the target profit generation for service providers. This is in line with the current charge.
- 5% is the required return on capital since this is the programmed profit share that Zignaly as a platform is charging today and seems content with. \
Valuation on an undiluted basis:
[500,000,000/5%] / Circulating Supply where circulating supply = 413,000,000 $ZigCoins. The result is $24.21 per $Zig.
Wow!
However, this is too simple because it doesn’t account for an increase in circulating supply so a better metric is to look at the valuation on a fully diluted basis.
Valuation on a fully diluted basis:
[500,000,000/5%] / Total Supply where Total supply = 2,000,000,000 Zigcoins. The result is $5 per $Zig.
Still Wow!
Concluding Note
Whether these valuations are achieved or not is an open question and, as I said, this is not an attempt to shill the coin. However, critically speaking, I believe this gives us an insight that the valuation of crypto projects through traditional methods may be possible.
There are certain flaws in our analysis which I would put down to lack of information. These are:
- We took revenue to the DAO instead of the profit to the DAO as it will be the treasury surplus after accounting for expenses which will form the dividend stream attributable to Zig Coin holders;
- We are assuming that the DAO will distribute all surplus every year which is again unrealistic;
- We are assuming that the 5% profit share will stay the same when, in my opinion, this will rationalize as they aim to target more service providers to the platform.
What did you think of this? Let me know as I would love to engage with you and hear your feedback & maybe learn more on the topic.
Cheers!
Disclaimer: The views presented in the article are the personal opinion of the author & do not represent that of his employer nor are financial advice. Please do your own research before investing in or using any product mentioned in the article. The author may or may not be invested in any particular product.
