Investors Guide to Value DEX Projects in the Bear Market
The Purpose of this post is to provide a data driven method based on the ‘nearest neighbors method’, to estimate the value of blockchain projects, specifically projects that are developing a decentralized exchange.
Disclaimer: I am the CEO of the Ferrum Network — an interchain network with a decentralized exchange. However, I have put special effort into making sure that this post is unbiased, and data driven. At the beginning of the next section, I reference the methodology for collecting data, the source code and the raw data that generated the results. Therefore, you can make your own validations. Any edits or corrections please feel free to send to my Telegram @naiemk.
If you have ever been in the housing market to purchase a property, you have surely asked yourself this question: “How much is this apartment worth?”
The most common method for estimating the value of a property in the real estate market is known as the “nearest neighbor method”, which works as follows:
1.First, find all the apartments similar to the target property in the neighborhood.
2. Filter the properties to the ones that are about the same number of bedrooms / bathrooms, age, style, etc.
3. Then, create a table for each property with all the features such as: Has the interior been remodeled? Does the property have washer/dryer, elevator, doorman, etc? For each feature, modify the price with a constant value to normalize the result, i.e. making all the pricing as relevant as possible to the property you are looking to buy.
4. Sort the properties based on the normalized value from the previous step. This gives you a range that you can use to evaluate how much the property is worth.
The nearest neighbor method is also applicable to company valuations. Venture capitalists and investors often use this method to evaluate startups or businesses, especially if asset-based valuation and earning based valuation methods, such as discounted cash flow is not possible, which is usually the case for startups.
Matket valuations of 40 Decentralized Exchanges
Methodology
A nice person has compiled a list of decentralized exchange projects here. I used that list and cross checked with coinmarketcap.com to check their market cap and valuation. You can see the Jupyter notebook that I used to create these graphs and the raw data here: https://gist.github.com/naiemk/fca65c06941008917f32fc95eb8cc052
Market Cap = Token price * Tokens in circulation
Market Valuation = Token price * Total tokens
Figure 1 shows the market valuation of 40 decentralized network/exchange projects. Red items are the projects that have already launched and are running, while the blue projects have tokens in circulation but have not yet launched.
Some numbers are very large, making the lower parts of the graph unreadable. I have excluded 0x, as it is an outlier to the exchange valuations. The Bitshares platform, with a nearly $300M valuation, is the largest of all, but the majority of DEX projects, either launched or not, fall below the $100M valuation.
All valuations are based on Bitcoin at $5500 USD
Based on the above chart and BTC at $5500, a DEX valued at greater than $100M is unlikely. However, a project that has the potential to be in the top-10 of DEXs can easily be valued over $100M, assuming the bear market will end at some point in future.
By definition, not every DEX can be in the top 10. To get a better understanding of the valuations, let’s remove exceptionally performing projects from the list. With Bancor and Eidoo at the top of the list, we can see that an average performing DEX, such as Kyber Network, is valued at $65M.
Kyber Network with a volume of $177K / 24h (at the time of writing) is valued at around $65M. Note that $177K volume for 24h pales in comparison to larger exchanges, yet the project valuation is still considerable. Bancor, with about $1M / 24h volume is valued at about $85M.
Looking at lower performing DEXs, we can see an interesting trend. Here, the gap between projects that have launched and projects that are in still in development is most obvious.
Evidently, the bear market has hit the projects that have not yet launched harder. The market values of the launched low-performing DEXs are still around 6 times larger than those that have not launched.
Lesson for projects: Launch!
The most obvious lesson for projects from the above chart is to launch!
Overall, it seems as though DEX projects are performing decently even in the current elongated bear market. A low performing DEX that launches a product and attracts some daily volume can be valued up to $30M by the market. A unique DEX can be valued up to $100M, and the highest performing decentralized exchange projects, such as 0x, that attracts significant liquidity and market share, can be valued at more than $500M.
The future of DEXes is great
The technology underpinning most DEXs means they have the ability to become competitive with centralized exchanges. Advanced features, such as high frequency trading, are now available with some decentralized exchanges. Ferrum Network is one of the projects making a DEX that will be competitive with centralized exchanges in terms of performance, speed, and usability.
The pace of technology, better tools for private key management, and entrance of major players such as Binance, can flip the scale towards decentralized exchanges in the near future. It is conceivable that the market share of decentralized exchanges, in general, will grow significantly. Within the DEX space, I believe the majority of growth will be captured by cross-chain decentralized exchanges, because they appeal to the widest possible user base.
If you are interested in a new network with a DEX, please check out Ferrum Network. Ferrum Network is a cross chain interoperability network that will launch with a decentralized wallet, an advanced decentralized exchange, a mobile cold storage wallet, and fiat gateways.
Thank you for reading.
