Exploring Valuation Models for Crypto Projects

Crypto has become one of the most dynamic and promising sectors in the field of financial technology. With the entry of many institutional funds, how to reasonably value Crypto projects has become a key issue.

Institutional investors are increasingly interested in allocating crypto assets in their portfolios, but a key challenge is how to reasonably value these emerging assets.

Traditional financial assets, such as stocks and bonds, have mature valuation systems, such as the discounted cash flow (DCF) model and the price-to-earnings ratio (P/E) valuation method. However, these models may not be directly applicable to crypto projects, which often have different characteristics, economic models, and token functions.

Crypto projects can be broadly classified into several types, including:

* Public chains: These are the underlying blockchains that enable various crypto applications. Examples include Bitcoin, Ethereum, Solana, and Tron.

* CEX platform coins: These are the tokens issued by centralized cryptocurrency exchanges, such as Binance, Huobi, and OKEx.

* DeFi projects: These are decentralized finance projects that build financial applications on top of public chains, such as lending, borrowing, derivatives, and liquidity pools.

* Meme coins: These are tokens that are created as a joke or meme, and often gain popularity quickly through social media. Examples include Dogecoin and Shiba Inu.

Each type of crypto project has its own unique features and valuation implications. For example, public chain projects are more closely related to the size and activity of their user base, while CEX platform coins are linked to the exchanges' revenue and profit performance.

Here, we will explore several valuation models that are relevant to different types of crypto projects.

1. Public Chain - Metcalfe's Law

Analysis of the law

The core content of Metcalfe's Law: The value of the network is proportional to the square of the number of nodes.

V = K*N² (where V is the network value, N is the number of valid nodes, and K is a constant)

Metcalfe's Law is widely recognized in the value prediction of Internet companies. For example, in the paper "An Independent Study on the Value of Facebook and Tencent, China's Largest Social Networking Company (Zhang et al., 2015)", over a statistical period of 10 years, the value and number of users of these companies showed the characteristics of Metcalfe's Law.

ETH Example

Metcalfe's law also applies to the valuation of blockchain public chain projects. Western scholars have found that the market value of Ethereum is in a logarithmic linear relationship with daily active users, which is basically consistent with the formula of Metcalfe's law. However, the market value of the Ethereum network is proportional to the user's N^(1.43), and the constant K is 3000. The calculation formula is as follows:

V = 3000 * N^1.43

According to statistics, there is some correlation between Metcalfe's Law valuation method and ETH market value trend:

Logarithmic trend chart:

Limitation Analysis

When applied to emerging public chains in their early stages, Metcalfe’s Law has limitations. As the user base is relatively small, it is not suitable to use Metcalfe’s Law for valuation, such as the early Solana and Tron.

In addition, Metcalfe's Law is also unable to reflect the impact of the pledge rate on token prices, the long-term impact of Gas fee burn under the EIP1559 mechanism, and the public chain ecosystem's possible game based on Security Ratio versus TVS (Total Value Secured).

2. CEX Platform Coins - Profitable Buyback & Destruction Model

Model analysis

Centralized exchange platform coins are similar to equity tokens and are related to exchange revenue (transaction fee income, listing fees, other financial services, etc.), public chain ecosystem development, and exchange market share. Platform coins generally have a repurchase and destruction mechanism, and may also have a Gas Fee Burn mechanism in the public chain.

The valuation of platform coins needs to consider the overall revenue of the platform, discount future cash flows to estimate the intrinsic value of the platform coins, and also consider the destruction mechanism of the platform coins, and measure the changes in its scarcity. Therefore, the rise and fall of platform coins are generally related to the growth rate of the trading volume of the trading platform and the reduction rate of the platform coin supply. The simplified profit repurchase & destruction model valuation method is calculated as follows:

Platform coin value growth rate = K*transaction volume growth rate*supply destruction rate (where K is a constant)

BNB Instances

BNB is the most classic exchange platform currency. Since its launch in 2017, it has received wide acclaim from investors. BNB's empowerment has gone through two stages:

* Phase 1: Profit repurchase - From 2017 to 2020, Binance used 20% of its profits to repurchase and destroy BNB every quarter;

* Phase 2: Auto-Burn + BEP95 -