Sustainability & Crypto Token Prices (Feb’21 Monthly Reads)

Welcome to the “Monthly Reads” article series, where I compile interesting articles I chanced upon in the previous month. Here, we cover the fields of impact, startups, venture capital, and general business. Key takeaways are summarized into sub-headings, followed by additional commentary for each article. Content for this series is adapted from my LinkedIn posts.

We have a short article for the short month of February.
Key Takeaways:

1. We need a new mindset toward economic growth
2. Token price in crypto is not completely arbitrary

Extras (published an article this month, feel free to check it out): “The Future of Ethereum (DeFi) vs Binance Smart Chain (CeDeFi)”

We need a new mindset toward economic growth

A great piece on Kate Raworth’s doughnut economic model and its increasing global adoption. In this framework, relentless GDP growth is no longer the gold standard for economic success. Rather, the goal is to be in a sweet spot of economic growth where we achieve ‘social foundations’ (education, food, equity etc.) without surpassing our ‘ecological ceiling’.

Some thoughts:

1. Frameworks are great to get people thinking/ caring, but formulating and executing effective actions to achieve this new economic goal is not easy. Kudos to the cities taking proactive steps on this front
2. Fundamentally, the success of this model depends on social/ cultural factors. Convincing well-off people to consume less (which may translate to slightly lower but acceptable standards of living) would be hard. Check out hedonic treadmill/ adaptation under behavioral economics

Amsterdam Is Embracing a New Economic Theory to Help Save the Environment. Could It Replace…

Token price in crypto is not completely arbitrary

It is tempting to view crypto token prices as 100% arbitrary. 2 great pieces that are useful to understand valuation + value flow of protocol tokens (eg. MKR, SNX, COMP):

Learnings

1. The transparency of Ethereum-based DeFi protocols provide access to live financial data which could be used to apply relative valuation methods (P/E, P/Rev) on protocol-based tokens
2. Protocols can be seen as companies with revenue used to burn token supply equivalent to ‘share buy-backs’ and rewards to token holders seen as ‘dividends’
3. Different protocols have different (and sometimes changing) revenue distribution structures and methods. A varying percentage of revenue goes to different players (liquidity providers, token owners, miners etc.)

My thoughts

1. Different revenue distribution structures & methods reduce the relevance of Price/Revenue comparisons for protocol token value. Rather, Price/(Distributions to token holders) or some other similar ratio could be a more useful metric
2. Investing based on comparables is only effective where markets are efficient which is not true for most of the crypto world. These metrics are more useful for tokens with a large market cap (reduced chance of market manipulation) and high (avg daily volume)/(market cap) ratio (more liquid and better price discovery)
3. This approach is only relevant for revenue-generating protocol tokens. It is not useful for crypto assets like BTC which is fundamentally not revenue-driven and where other factors like store-of-value premium may be at play (think valuing gold vs shares)
4. In comparing P/E, P/Rev, and other ratios of protocol tokens, comparisons are more effective if made between related ‘verticals’. Eg. Lending (Aave, Compound), decentralized exchanges (Uniswap, Kyber Network), derivatives trading (Perpetual, Synthetix)

How to value crypto capital assets

A framework for token value flows