Why I am shorting $COMP now (and how to short it)
This is my attempt at figuring out the intrinsic value of the $COMP token. Please note that this is my personal opinion; Opium.team never provides trading advice in any way.
TL;DR; COMP is heavily (10–20x) overvalued by any metric. There is no perfect way to short it; however, there are some opportunities.
Valuation
Let me start with this statement: The valuation of a financial asset should be based on the future cash flows it stands to bring to its owner. The valuation can be calculated through the sum of all future cash flows discounted with the cost of money and risks. If you don’t agree with this statement, you may stop reading this article now.
Again, you only pay for the financial instrument if you expect to receive more money back. It is straightforward, and you learn it before you even start to learn finance, but many people still don’t understand it. Of course, you can buy something to re-sell it to somebody, but the next owner will need to realise its value at some point.
The valuation of a financial asset should be based on the future cash flows it stands to bring to its owner.
At time of writing, $COMP token is traded at around 300 USD:
Discounted cash flow valuation
Let’s consider the cash flows that the $COMP token will bring to its proud holder.
First off, the token currently does not grant dividend rights besides governance. This might change in the future as the decentralized governance could vote to add fees. For now, let’s assume that the Compound DAO will indeed vote in fees and all revenue will be distributed to $COMP holders.
Just before COMP listing, it was about $150m USD locked in the Compound protocol with a total of about couple billions USD in the whole DeFi stack. For simplicity, let’s be optimistic and assume that value locked in Compound will increase twentyfold to a stable amount of $3b USD. Based on a (very optimistic!) 1% commission, this would amount to $30m USD annual revenue and a $300m USD valuation of the Compound platform.
This highly optimistic scenario would account for a $COMP token price of $30 USD based on fundamentals.
Some notes on this ballpark estimation of the Compound valuation: Some people might argue that commissions on a DeFi protocol should not exceed 0.5%, which would heavily impact our estimation. Also, we should keep in mind that growing liquidity on a DeFi platform requires attracting both lenders and borrowers to the platform. In a low-interest-rate environment it is relatively easy to attract new borrowers, but attracting new lenders who are bullish on crypto and are willing to take a risk might prove to be difficult.
Interesting that Compound raised 25 mio USD in the last round, that hints to the level of their valuation to be around 25 mio/10%=250 mio USD (if we optimistically assume that they sold 10%). If they sell more equity, the valuation that they got is several times less. Though let’s try to look at the estimate from that angle…
Venture capital
Compound raised 33 mio USD (8+25) in two investment rounds. Those shareholders of Compound Labs will receive 2,396,307 COMP (about 24%) out of 10,000,000 COMP to be issued. If shareholders receive only the tokens for their investment, we can very roughly estimate the valuation of Compound Labs = 32mio/24%=133 mio. Taking into account other rewards, we may come to a range of 130–300 mio USD. That gives an estimation of 13–30 USD per token.
System sustainability
At the moment, the interest you pay for borrowing money at Compound is less than the income that you receive in the form of COMP token. It is not a sustainable situation sponsored by buyers-at-any-price. So we can try to estimate the token price, assuming that system becomes stable and your $COMP inflow is not able to offset your borrowing costs, but can only provide you with a nice discount — cashback on loans.
If the intrinsic value of COMP is indeed 10–20 times lower, it entirely fits an idea of 5–20% cashback, that feels healthy and sustainable mechanism.
By the way: At the moment, buyers-at-any-price are actively sponsoring this so-called “farming” situation. They take risks and allow farmers to receive up to 100% APY on their investments. We all need to be grateful for those buyers, who take all the risk; however, they may be disappointed very soon.
On systemic risk
I have not discussed the risks of something going wrong in order to get the most attractive valuation, which still implies ten times lower value for the governance token. In fact, I think that Compound protocol is a quite complex financial system that is not free of risks, and many things can potentially go wrong.
Going short
There are not so many ways to go short in the current market.
Opium Team already listed a ZEPO contract that allows both to go short and long until the maturity date. The contract is DAI -settled, has several maturities and various margin collaterals. You can not execute a contract before the maturity but can resell it on the open market.
With low liquidity, you can drop an order to buy or sell with the desired price, and it usually can be executed during the day.
An easy explanation of Opium ZEPO contract:
UMA protocol, according to their community, is playing with such instruments, and we hope to see it soon. Comparing to Opium, it probably will have mechanisms for margin maintenance, that may make things more convenient in terms of upside, but also much more complicated.
Several centralised exchanges offer long and short trades on the $COMP. I am not sure how secure they are and about trading fees, but it is effortless to find them in DeFi chats.
Going long with a discount
If one still does not agree with my views, he can place a buy order and get a synthetic COMP on Opium Exchange with a discount to current market value. Be sure you understand the terms of the contract, including DAI -settlement, exercise on maturity and capped gain. Read specification
Trade it on Opium Exchange
About Opium
Opium is a platform that you can hedge yourself on DeFi. We always stay on top of things and list “hot” derivatives.
Opium Team is a small team of professional traders, mathematicians, and programmers with a ton of experience in their field. Big parts of economies are in the hands of centralized agents that exploit their positions. We are convinced that they are not necessary any longer. We designed the Opium Protocol to ensure transparent, fair, and open financial markets.
Feel free to drop us any questions or your feedback in Opium Telegram group. Chat us also if you need help with building derivatives on top of Opium Protocol.
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