Jan 10, 2020
Network Value as a Multiple of Miners’ Daily Revenue: NV / DR Ratio
With algorithms like Bitcoin’s proof of work, miners get coins in return for their activity. While their activity is a capital expenditure (equipment), energy (electricity to run the equipment) and general expenses; their main income is the block rewards and network fees (to facilitate transactions).
For cryptocurrencies with a POW algorithm, it is possible to calculate the mining return in USD terms as a function of rewards and fees in the native cryptocurrency denominated in USD terms as a function of the price of that cryptocurrency in USD terms at the time of the return calculation.
For practical purposes, I will use the Mining Profitability as provided by bitinfocharts.com -https://bitinfocharts.com/comparison/bitcoin-mining_profitability.html#1y for this article. I will use profitability, mining profitability and mining returns synonymously within the article. I have a definition concern as profit refers to revenue minus cost but the way bitinfocharts.com uses it Mining Profits better corresponds to a revenue metric rather than a profitability one.
The methodology I will use is as follows:
1. Reference the per hash Mining Profitability as reported by bitinfochart.com.
2. Convert that figure into the network’s overall returns by using the network’s total hashrate.
3. Where possible add the network transaction fees to (2).
4. (2) and (3) together will make the daily revenue for miners (operators) of that cryptocurrency.
5. Calculate the network value / daily revenue ratio (NV / DR).
6. For cryptocurrencies that do not have mining profitability — network fees and other relevant figures will be used as per the availability.
7. Compare the NV / DR ratio of the cryptocurrencies examined in this article.
As for NV / DR ratio, the lower the is the better. However, a network with high future growth potential could have a higher NV / DR ratio in expectation of future activity. This is in line with the PEG ratio in stocks where Price / Earnings is adjusted by the expected earnings growth.
More importantly, NV / DR should not present an absolute reference, i.e. there is no neutral or correct base figure. However, it presents a valuable comparative ratio among different cryptocurrencies. It should also be investigated to see if it has any historical significance.
Finally, for a cryptocurrency like Ripple where there are no mining rewards, I will use network fees as a reference. While this does not essentially reflect returns for network validators, it mimics the current state of the network as if it was operated for a profit with given metrics. In essence, I would assume Ripple and other non POW cryptocurrencies will most likely have very high NV / DR ratios that would underline a different economic model than the POW cryptocurrencies. Consequently, such a miner free cryptocurrency (unless a valid economic model of incentives is in place) relies on the support and/or viability of the parent company running it.
The results table is as follows:
While not listed above, XRP has around 1 million transactions per day with 0.003 XRP burn per transaction. This would translate into 600 USD per day. However as there are no block rewards (note that XRP is a pre-mined consensus network), I find it hard to ascertain the benefit of running the network without the systemic benefit and support of the parent company. Naturally, NV / DR Ratios of such limited fee-generating, non-reward systems will be a lot higher than those above.
Observations:
· Bitcoin’s hashrate is more than 30x of the nearest competitor. By itself, Bitcoin has become a standard given its history and network dynamics.
· Other than BTC and ETH, daily transaction fee generation is not a meaningful return.
· Given BTC’s NV / DR ratio of 9.2x (which is calculated by dividing NV / DR in the table above by 1000), BCH appears slightly expensive and ETH appears slightly inexpensive. However, the variance around this metric is not significant enough.
· I highly recommend using this approach to calculate the historical data for each cryptocurrency.
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