The Digital Reserve Network: Denarii Valuation

The Digital Reserve Network (DRN) token valuation model is based on the framework laid out by Chris Burniske . For a great overview of crypto-asset valuation, please refer to his blog.

However, a significant difference is that our goal of using this model isn’t to demonstrate the utility value of our token, but rather to create and challenge key assumptions about the metrics of our token economy and make forecasts based on those assumptions. This paper, like the original formulae, is not hard science, but a creative way of transforming models from stock valuation to be more applicable to the cryptocurrency market.

DRN Supply Schedule Inputs:

This section is pretty straight forward and requires little additional rationale outside of the original model produced by Chris Burniske. Figure 1 represents some of the basic inputs of the supply schedule of The Digital Reserve Network.

Figure 1: Inputs for the Digital Reserve Supply Schedule

DRN Economy Inputs:

The economy inputs are the metrics necessary for determining the Gross Domestic Product (GDP) as well as the price of Denarii given its utility. While all numbers are subjective, they are each built with information based on the current microlending market in mind. We will walk through each of these numbers below. Please refer to Figure 2 below.

Operating expenses of microlending have been calculated as the product of the average global size of a microloan ($250) and the average global percentage cost of operating expenses of microloans (33%) as of 2017. We also assume that there is a cost decline of operating expenses in the microlending space and base this percentage decline (20%) on the percentage change from 2010–2017.

Annual Microfinance Market Size is based on the value collected in 2016 and has been corroborated by multiple sources. The 16% expected growth of the microfinance market from 2016–2021 is based on the 15.6% currently reported through various International organizations.

Our 90% market availability is a very subjective number, but is based on the assumption that the only market we will have great trouble entering is the European market, which makes up 10% of the microfinance market (primarily in developing Eastern Europe).

Lastly the Velocity of our token is shown to be low under the assumption of the primary transactions being microloans, with an average of a four month repayment period. Unlike bitcoin or other coins that command high transactions as payment processing technologies, microlending alone does not command that level of velocity. It is important to note that the velocity may be substantially higher as adoption for other uses increases. It is also beneficial to evaluate velocity based on microlending because it is possible to more accurately assess the value created from the returns in microlending.

These metrics are important because the GDP of our network is a function of operating expenses, annual market size and the size of the market that The Digital Reserve captures. The expected operating expenses are a great example for the GDP when assessed given it presents a function for the price of lending. Therefore, the price and quantity produces a baseline for evaluating the GDP. The current utility value is also a function of velocity, the number of total Denarii in float and the GDP.

Figure 2: DRN Economy Inputs to derive GDP and Utility Value

Figure 3 below shows a forecast of the first 3 years of the network based on the metrics outlined above. Each variable is dynamic and is based on the projected percentage changes in operating cost, market growth, and Digital Reserve market penetration. Monetary Base necessary for DRN GDP is a function of the GDP and velocity:

Scenario 1 — Goal

Figure 3 shows an optimal scenario where adoption of the network is quick and it becomes a growing presence in the microfinance world. At a 1/10th of a percent penetration, the Denarii would be valued at 1 cent. At 3.94% by 2021, it would be at least 45 cents. This falls in line with the expected adoption of blockchain and cryptocurrency technology by the World Economic Forum and World Bank.

Figure 3: Target 3 year forecast of the Digital Reserve GDP and utility value

Scenario 2

Figure 4 adjusts the % of market penetration to a very low market penetration. Under this scenario you can see the market penetration reaching 8/100ths of a cent. This results in reaching 1 cent a denarii. While unexpected, it provides a good perspective for a rational basis of value under a low performing scenario.

Figure 4: Extremely Low 3 year forecast of the Digital Reserve GDP and utility value

Scenario 3

Figure 5 presents a forecast for price valuation where the market penetration is 1/10th of a percent and becomes 1.5% by 2021. This results in a market value based on utility of 18 cents for the Denarii. This is a strong scenario where growth shows significant jumps based on demonstrated success and viability in various areas. This is in alignment with the current growth of the cryptocurrency market.

Figure 5: Realistic Baseline 3 year forecast of the Digital Reserve GDP and utility value

Scenario 4

Figure 6 presents a conservative picture where market penetration is 1/10th of percent for two years where the market is testing the product. Then a slow initial adoption at .16%. This would result in a denarii value of 2 cents.

Figure 6: Realistic Conservative 3 year forecast of the Digital Reserve GDP and utility value

Additional Outputs and Forecasts:

This section is the first section that you probably have not experienced with Chris B’s model on his blog post. While not exactly similar, the below figure looks more like the Bitcoin Block Reward Halving Countdown found here. It is based on a decay curve.

The metrics of importance to many of our readers are likely the following: Total cost for staking per year, Approximate Reward/Block, Approximate probabilistic stake to Win at least 1 Block and Break-even stake. Several of the metrics appear twice in the figure below; this is due to differentiation of full staking and partial staking. Full staking is an assumption that all denarii is applied to staking. However, while important for understanding the potential parameters, partial staking is more in alignment with the expected approach. Total cost for staking per year is a function for the cost per block per denarii and the total supply of Denarii. Approximate reward block is the amount of Denarii awarded for each block won. Approximate probabilistic stake to win at least one block is the minimum amount of Denarii you should theoretically hold to have a quantifiable probability of winning a block in The DRN. The approximate stake required to win adjusts due to inflation of the currency in the network. This change is more akin to shareholder dilution in the stock market.

Conclusion:

This Crypto-asset valuation model is meant more as an introduction to the metrics in our blockchain network rather than the potential valuation of our currency and the final crypto-economic design. The majority of this valuation is built on Chris B’s model and to reduce redundancies, we left out the line-by-line analysis. If you believe there are better models out there for valuation and metric evaluation, please comment and share with us. This project and community benefits the most when knowledge is used as a commons. For example we are working on the integration of an incentive to reduce the benefit of pooled staking. Thank you for your time and interest in The Digital Reserve.

Authors:

Troy Wiipongwii— Entrepreneur , Artificial Intelligence grad student, interested in research and applications of Blockchain.

Jomari Peterson — Serial Social Entrepreneur, Carnegie Mellon Alumni Engineering & Public Policy PhD Candidate, Former co-founder of Quantum Resistant Ledger