Market Valuation vs Fundamental Analysis — Which Protocols are Overvalued?
Authors: Lavi & Squidbit
Disclaimer: Prime Rating is a Rate-to-Earn framework to evaluate DeFi protocols, promoting transparency in the open finance Web3 ecosystem, by applying a permissionless and open-source approach. None of this is financial advice and all information used to assess the protocols are publicly available.
Introduction
In the past five weeks, the second Prime Rating Season took place and with overwhelming support from the community. It was the most successful of all rating contests so far. In total, 12 participants wrote over 34 reports, evaluating 29 unique DeFi protocols using Prime Rating’s one-of-a-kind fundamental analysis template. For the first time, the community was actively rating not just blue-chip DeFi protocols, but also small-cap and from time to time even abandoned or dead projects.
In this article, we look at the protocols that were rated and compare it with their current market valuation. The approach is simple, we list all projects by their fundamental score and compare it with their fully diluted market capitalization (i.e. token price * total token supply). We prefer to use the fully diluted valuation (FDV), as the normal market cap is purely dependent on the number of tokens in circulation, which is different for each token and hence not an ideal metric to compare between protocols.
With this approach, we can explore which projects rated during Season 2 are comparatively over or undervalued. Let’s dig in!
Season 2 Overview
As a reminder, PrimeRating utilises a holistic and transparent methodology, applied by independent community members that ultimately result in letter ratings, which adhere to the scale below. Both fundamental and technical ratings factor into the ultimate scores. However, for this article we only look at the fundamental score.
As mentioned before, Season 2 saw participation from 12 raters digging deep into each protocol. Their fundamental analysis focused on each project’s value proposition (i.e. novelty, market size, competitiveness), tokenomics, team, and governance. Additionally, raters also evaluated each project’s regulatory exposure. The combined results from Season 2 were wide ranging with the best protocol receiving a 90% fundamental score (A+ combined rating) and the worst project receiving a 5% fundamental score (D combined rating).
Below is an overview of all protocols that were rated, sorted by the fundamental score they received this Season.
The red line marks the point at which a rating turns from low-medium grade (a C+ rating) to a low-grade (a C) , as defined in the Prime Rating methodology.
Comparative Over and Undervaluation
Methodology
With the work conducted by Prime raters, we can now see which projects may be over- or undervalued by the market. To do this, we ranked each of the 29 protocols evaluated during Season 2 by their fundamental rating and by each project’s fully diluted market capitalization (FDV). Since FDV ranges widely for each project, we ranked each protocol’s valuation relative to each other on a 100% scale. Using this methodology, the protocol with the highest FDV would rank as 100% while the project with the lowest FDV would rank as 1%. Plotting these rankings against each other can illustrate which projects may be underappreciated (protocols shown below the diagonal line) and which may be overhyped (protocols shown above the diagonal line). For some projects, we calculated the implied over or undervaluation based on this trendline and walk through our observations for these protocols below.
Outcome
First of all, we can clearly see that there is a correlation between a protocol’s rating and the market valuation. At the high-quality end of the range, projects like Curve, 0x and Bancor appear to be fairly valued relative to other projects rated in Season 2. On the other end, dead or abandoned projects such as Spaghetti Money, SakeSwap or Dracula are also valued accordingly.
In contrast, Enzyme, PlotX and Pickle Finance — all projects with medium to good grades — appear to be undervalued compared to other strong peers. In the low-quality segment of this analysis, Hex, ShibaSwap, and PeakDeFi are in the danger zone and appear highly overvalued, relative to other projects that received low fundamental ratings by Prime raters.
Seeing that several low-rated projects have accrued significant FDV supports the view that we are still early in crypto and the market is still figuring out how to value certain projects. Separating value from hype is one of the primary reasons we think independent analysis of protocols is essential for DAOs, investors, and retail users. Moreover, it is a core part of PrimeDAOs mission, to build tools for DAOs that enhance and encourage decentralised control and coordination, and improve collaboration between DAOs.
Is a Ponzi the Most Overvalued Project?
Let’s take a closer look at which protocol’s market valuation is not in line with the score it received in Season 2. We can do this by looking at the distance between the protocol and the trend line. It’s clear at first sight that something seems to be off with HEX.
The HEX project was independently labelled as a ponzi scheme, if not a scam, by two raters during Season 2. The lowest rating came in at a mere 14% and the higher rating at 22%. Hence, the project’s average score is a terrible 18% (D).
While Coingecko does not display a market cap for HEX, for reasons laid out in the report, (i.e. it’s not clear what the total supply is), Coinmarketcap reports a staggering FDV of $76 billion. To put this in perspective, the FDV of Bitcoin at the time of writing is $825B and the market cap of ETH is $325B.
Hence, we can fairly state that the market does not value HEX as a ponzi, as detected by our two raters — which is rather surprising given the red flags on the project’s website and founder’s YouTube channel. Based on our estimates, HEX could be as much as 82% overvalued. Buyers beware.
An Expensive Dog Meme
Another likely overvalued project to look at more closely is ShibaSwap. Their DEX is just one of many products built to capitalise on the hype around ShibaInu (SHIB) token. Our rater who looked into this ecosystem came to the conclusion that the protocol offers very little fundamental value, with a score of only 25% (D). Notably the DEX has low trading volume, steeply declining TVL, a fully anonymous team, and no proper governance in place.
Basically, the only positive sentiment pointed out by the rater, is the still strong stream of monthly visitors to the website. Nonetheless, the protocol has a proud FDV of over $180M, which — compared to its peers with a similar rating — puts the dog exchange into the highly overrated range. In conclusion, ShibaSwap is a good example showing the strength memetic hype can generate, leaving our analysts baffled by the impact a dog meme can have. In our view, ShibaSwap could be as much as 47% overvalued by the market.
The Newest ETH Staking Protocol
Finally, let’s take a look at a protocol in the mid-range score. RocketPool has scored a decent 53% (C+) in their first fundamental evaluation. The protocol’s main offering is decentralised ETH staking for the ETH 2.0 PoS chain. The project seems to be doing mediocre to well in most sections analysed by our rater.
First mover and market leader Lido, however, has a total TVL of over $14.6B and their stETH token is currently #22 on Coingecko, with a total supply of over 2.5M. In comparison, Rocketpool has a little over $520M in TVL and the supply of their rETH is 71k, that’s 36x less than Lido and a 28x lower TVL.
Although RocketPool has some catching up to do in terms of TVL, the protocol’s $RPL token is valued at an FDV of over $535M. That’s only 5x less than their competitor Lido (FDV of ~$2.8B) and 5x more than another competitor Stakewise (FDV of ~$100M). We can conclude that raw metrics such as TVL or number of product holders is clearly not the only metric the market values. Based on our analysis, RocketPool could be 33% overvalued.
Potentially Undervalued Honourable Mentions
Enzyme Finance (previously named Melon), is a DeFi pioneer in the asset management sector. The project allows anyone to become an asset manager by creating their own vault. Investors can deploy their assets into any vault they want and follow a predefined strategy or create new strategies of their own. According to our analyst, Enzyme has strong user growth and is competitive within its market niche. Although their tokenomics seems to be rather complicated and does not score very highly, they have a very strong team and a robust governance process in place.
Overall the protocol achieved a good fundamental rating of 67% (B+) and even received an overall grade of A, when combined with their very good technical rating. Thus, an FDV of $120M is placing Enzyme in the undervalued area (by as much as 18%), when compared to other protocols with similar rating scores.
Pickle Finance is a yield aggregator similar to Yearn, Harvest or Idle Finance. Pickle brings an element of whimsy to the yield optimization market with their focus on “making finance green”. The protocol was rated at a decent score of 63% by the first rater, and later in the Season scored a little lower at 58% by the second rater. On average, this puts Pickle into the mediocre range of 62% (B).
At an FDV of $7.5M, however, Pickle Finance is almost 100x less valuable than its older brother Yearn (FDV of $720M) and is second furthest away from the trend line in Season 2, placing the sour vegetable in the strongly undervalued section. By our estimates, Pickle Finance could be as much as 33% underappreciated by the market.
PlotX is a prediction market for crypto assets and labels itself as a “predict to earn” platform. Users can speculate on future price movements for major cryptocurrencies and collect rewards for correct predictions.
According to our rater, the protocol has very high usage and is one of the top 5 prediction market protocols. Their main competitors being Augur, Polymarket and Omen. The FDV of just $17.8M is definitely lower compared to Augur’s $95M (Polymarket or Omen don’t seem to have a token). At the very least, PlotX can be labelled as something to keep an eye on and may be up to 30% undervalued.
Conclusion
It doesn’t take a long look at the data from Season 2 to recognize there is a lot of value embedded in the work Prime raters do. Aside from the in-depth fundamental reports raters put together, seeing their work aggregated together provides another view into the wisdom of the PrimeRating community.
If you want to find out more about the individual projects, visit our website and read the reports to get a better understanding of how they received the scores.
In future articles, we plan to explore the data further and look forward to sharing exciting insights with the broader crypto ecosystem. For those interested in exploring ratings data on their own, PrimeDAO contributors are hard at work building an API to access rating scores. The API is currently being tested. If you are interested in trying it out, please use our registration form here.
To stay updated on our progress, or get involved at PrimeDAO, follow us on Twitter and join our Discord. Better yet, if you’d like to become a rater yourself, keep an eye out for the launch of PrimeRatings Season 3 sometime in April on our Twitter.
Until then, stay Prime!
