OKEx Insights: Fully Diluted Value (FDV) May Mislead Investors and Traders
Original title: "Fully diluted values may mislead DeFi investors and traders"
Original author: Robbie Liu
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The so-called fully diluted market value refers to the market value after all tokens in the total supply of digital assets are issued.
For example, Uniswap will eventually A total of 1 billion UNI tokens will be issued over four years. If we assume that the price of UNI is $3, then the fully-diluted value (Fully-Diluted Value, hereinafter referred to as FDV) will reach $3 billion. As of October 15th, the decentralized exchange (DEX) had a circulating supply of governance tokens of $185,059,564 and was actually trading at $3.36 per token, giving UNI a market cap of $623 million — the same as The current FDV of US$3.364 billion is still far behind.
Well-known DeFi projects currently have huge differences in market cap to FDV ratios. For example, Yearn.finance distributes its total supply of YFI tokens during a week, which means its market cap to FDV ratio is equal to 100%. Curve, on the other hand, issues 2 million CRV tokens per day through liquidity mining, which will gradually inflate its supply to a maximum of 3.03 billion CRV, resulting in an extremely low market cap-to-FDV ratio of 2.64%.
In contrast, SushiSwap strictly limited its token supply to 250 million on September 20 , according to the current SUSHI price of 0.76 US dollars, its FDV dropped to 99 million US dollars. This puts Sushiswap's market capitalization to FDV ratio at approximately 76.93% after supply reduction. Its main competitor, Uniswap, has a ratio of about 18.51%.
Most fully diluted market caps are higher than current market caps. Source: Coingecko, OKEx
How important is the FDV of cryptocurrencies?
The question worth examining here is whether FDV is a key indicator for the cryptocurrency market. Are market participants rational about theoretical valuations over the next few years?
In order to answer this question, we compared the data behind the three DEXs of Uniswap, SushiSwap and Curve, and compared them with Proven cash flows are compared.
Financial data for Uniswap, SushiSwap and Curve show some key differences.
Sources: cryptofees.info, CoinGecko, OKEx
First of all, in terms of price, the market cap of CRV is The lowest FDV ratio, the worst performer. Its current price of $0.54 has dropped 99% from its peak of $54, while the price has not risen much from the bottom.
Among the three DEXs, Curve has the lowest ratio of market value to annual fee at 6.26, but the ratio of FDV to annual fee The ratio was the highest at 237. Given that its current total value locked is approximately 53% of Uniswap’s and its 7-day average fees are 19% of Uniswap’s, we can infer that market participants are concerned about its large token offering. We can also see a steeper curve for token supply growth. Hence, underlying daily selling pressure pushed its token price up to 16% of UNI.
CRV's inflation curve is dramatic. Source: gov.curve.fi
Refer to the disadvantages of FDV
In the cryptocurrency space, many people are afraid of increasing token supply. Or more precisely, they worry about aggressive inflation rates. Coupled with the low probability of major changes in project fundamentals in a short period of time, the market's response to ongoing new token offerings is to keep lowering prices.
CRV is a good example. This has created a strange phenomenon that the society has Curve as one of the most stable liquidity mining platforms, but everyone is trying to stay away from buying CRV tokens in the secondary market. Curve's market capitalization has not changed much since mid-September, and has even declined, amid a sharp drop in prices and rising inflation.
CRV's market capitalization has been declining for most of September. Source: CoinGecko
For long-term investors, FDV denomination may be a good measure, as it can make them better It can accurately judge whether the value of an item deviates significantly from the standard. For example, the FDV of CRV climbed to $160 billion on the day of listing, which is about 65% of BTC. This makes it easy for investors to perceive that CRV is overvalued. Additionally, it helps investors avoid valuation traps caused by low initial token counts.
One disadvantage of referring to FDV is that it can misleadingly increase the total value of the project. For example, suppose a project currently has 1 million tokens outstanding. This afternoon, it will announce the issuance of an additional 10 million tokens over the next three years. Does that mean the project's "market capitalization" will go up 11x this afternoon? The current FDV may become irrelevant as the program director can suggest changes to the supply curve at any time.
The discussion on valuation methods is ultimately about whether a token is worth buying. Will lowering FDV by lowering inflation lead to higher token prices? Sushiswap gave us a good example.
The left circle in the table below coincides with Uniswap’s launch of the UNI token, which resulted in a rapid TVL increase for competitor SushiSwap decline. The circle on the right coincides with SushiSwap’s decision to hard-limit its supply at 250 million tokens, which caused miners to opt out as they felt there was too little incentive to continue mining on SUSHI. This means that when rewards decrease meaningfully, miners flock to the next project.
After the two announcements, the total value of Sushiswap plummeted. Source: DeFiPulse
In liquidity mining, sustainability is key because the mining time is not short. For example, Uniswap rewards are divided into 4 years. Reducing the total supply of tokens may increase the price, but it will not change the value of the project. At the same time, it doesn't make the asset suddenly more scarce.
When comparing the three DEXs, SushiSwap has the best financial position with the lowest FDV to annual fee ratio of 18.30, the highest market-to-cap ratio of 76.93%, because it suddenly lowered the token supply. However, market participants do not agree with its approach, which is reflected in its price. To make matters worse, its price rebounded only 10.26% from its all-time low.
Another example, on September 20, CREAM burned 67.5% of its token supply. The token price would have tripled - if FDV had remained the same - but by less than 50%. Likewise, for a yield mining project that will take years to finally wrap up, scarcity isn't a major factor to begin with. Therefore, the reduction in yield mining output will not significantly affect the price.
The destruction of the CREAM token supply ultimately did nothing to stop the general price decline. Source: CoinGecko
Cheap FDV itself cannot provide token price support
In summary, the case of CRV shows us how aggressive inflation rates can prevent investors from buying and holding newly issued tokens. On the other hand, the example of SUSHI shows us that a large reduction in supply, while making FDV look cheaper, does little to support the price.
Liquidity mining rewards or inflation supply play a huge role in user acquisition. Being able to attract users to a project and allow the underlying value to grow faster than the token supply can be diluted is critical.
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