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Traditional stock market valuation techniques reveal overvalued DeFi projects

May 14, 2020

While it is difficult to define the intrinsic value of most cryptocurrencies, decentralized financial tokens or DeFi seem to be a big exception.

As Lucas Campbell, analyst at Fitzner Blockchain Consulting, explained in his blog Bankless, many decentralized financial protocols can be viewed as products with well-defined sources of income.

For example, Maker (MKR) earns money using the interest rates it calculates on its credit platform. Decentralized exchange protocols such as Bancor (BNT) and 0x (ZRX) also receive exchange fees.

Traditional stock market valuation techniques reveal overvalued DeFi projectsTraditional stock market valuation techniques reveal overvalued DeFi projects

The economy that links this revenue to the token is diverse, but can be summarized in systems based on burning the supply, e.g. B. at MKR, or in systems in which token holders are rewarded with more tokens such as ZRX.

The analyst then compared each protocol’s earnings since 2019.

Maker loses ground

From mid-2019, Maker’s interest payments made up the majority of DeFi’s revenue. This was mainly due to protocol problems in maintaining the DAI link, where interest rates rose to over 20% in no time.

Towards the second half of the year, various factors such as the introduction of Dai Multi Collateral, the introduction of the Dai stability rate, and the events on Black Thursday drastically reduced the actual revenue of the protocol.

Source: Bankless, Token Terminal

Source: Bankless, Token Terminal

Since then, protocols such as Kyber, Synthetix and dYdX have had a larger share, although DeFi’s total sales have declined in recent months.

Over- and undervalued logs

By determining a project’s specific sales volume, analysts can re-enter some metrics that measure a stock’s price.

One of the simplest measures is the price-earnings ratio (PE), which compares the price of a share with its relative share of the company’s profit.

In a DeFi context, the stock price becomes the token price, while the protocol’s earnings are in the denominator.

Source: Bankless

Source: Bankless

Two outliers are immediately recognizable from the DeFi projects with a token: Augur (REP) and 0x with ratios of 16,761 and 6,935, respectively.

By comparison, Ford’s PE quota is 9.05, Facebook’s 28.7 and Tesla’s 198. The latter is an exaggerated move where investors expect the company to be strong in the coming quarters Growth will record.

The most undervalued project among its competitors is Bancor with a quota of 56. This value corresponds to some technology stocks where the PE quota is generally higher than that of established industrial companies.

Overall, many DeFi projects are rated with three-digit log revenue, an average that is remarkably close to that in traditional markets. However, Augur and 0x appear to be quite far from their usage metrics.

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