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Indicator that can mislead traders: FDV

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A fully diluted valuation is the market value of all tokens in the total supply of an indexed asset after issuance

Original title: "OKEx Insights: Fully Diluted Valuation (FDV) May Mislead Investors and Traders"

OKEx Insights

A fully dilutive valuation is the market value of all tokens in the total supply of indexed assets after issuance.

Uniswap, for example, will eventually issue a total of 1bn UNI tokens over the next four years. If we assume A $3 UNI price line, a Fully Diluted valuation would be worth $3bn or something similar. As of October 15, the de-centralised Exchange (DEX) had $185,059,564 of regulated scrip in circulation and was actually trading at $3.36 per scrip, giving UNI a market capitalisation of $623m -- still a long way off the current FDV of $3.364bn.

The DeFi project, as it is known, currently has a huge difference in the ratio of market value to FDV. Forever Finance, for example, split its total supply of YFI tokens ina week, meaning its market value equals 100% of its FDV ratio. Curve, on the other hand, issues 2m CRV tokens a day through liquidity mining, which will gradually swell its supply to a maximum of 3.03bn CRV, resulting in a very low market value to FDV ratio of 2.64 per cent.

By contrast, On September 20, SushiSwap strictly limited its supply of scrip to 250m, reducing its FDV to $99m at the current price of SUSHI 0.76. That leaves Sushiswap with a market value to FDV of about 76.93%. Its main rival, Uniswap, has about 18.51%.

Source: Coingecko, OKEx

Most fully diluted market values are higher than current market values.

How important is cryptocurrency's FDV?

The question worth examining here is whether FDV is a key indicator of the cryptocurrency market. Are market participants rational about theoretical valuations over the next few years?

To answer this question, we compared the data behind Uniswap, SushiSwap, and Curve and compared it with the verified cash flow.

Data sources: Cryptofees.Info, CoinGecko, OKEx

Financial data for Uniswap, SushiSwap, and Curve show some key differences.

First, in terms of price, CRVS have the lowest mark-to-FDV ratio and the worst performance. Its current price of $0.54 has fallen 99% from its peak of $54, and the price has not risen much from the bottom.

Among the three DEX, Curve has the lowest ratio of market value to annual fee (6.26), but the highest ratio of FDV to annual fee (237). Given that the total value currently locked up is approximately 53% of Uniswap and the average seven-day fee is 19% of Uniswap, we can infer that market participants are concerned about its large scrip issuance. We can also see a steep curve in the growth of token supply. As a result, potential daily selling pressure pushed the price of its scrip up to 16 per cent of UNI.

Source: gov.curve.fi

The CRV inflation curve is dramatic.

Refer to the weaknesses of FDV

In the cryptocurrency space, many fear an increase in the supply of tokens. Or, more precisely, they worry about aggressive inflation. Coupled with the low likelihood of significant changes in project fundamentals over a short period of time, the market has responded to ongoing new scrip issuance by continually lowering prices.

CRV is a good example. This has led to the curious phenomenon that society treats Curve as one of the most stable and liquid mining platforms, but everyone is trying to stay away from buying CRV tokens on the secondary market. Curve's market value has changed little or even fallen since mid-September as prices have fallen sharply and inflation has picked up.

Source: CoinGecko

CRV's market value has been falling for most of September.

For long-term investors, FDV denomination may be a good measure, as it gives them a better idea of whether a project's value is wildly off the mark. CRV's FDV, for example, climbed to $160 billion on its first day of trading, or about 65% of BTC's. This makes it easy for investors to detect that CRV is overvalued. In addition, it helps investors avoid valuation traps caused by the low initial amount of tokens.

One disadvantage of referring to FDV is that it can misrepresent the total value of the project. For example, suppose a project currently has 1 million outstanding tokens. This afternoon, it will announce the issuance of an additional 10 million tokens over the next three years. Does this mean that the "market value" of the project will rise 11-fold this afternoon? Since the project director can always suggest changes to the supply curve, the current FDV may become irrelevant.

The discussion of valuation methods is ultimately about whether a token is worth buying. Would lowering the FDV by lowering inflation cause the token price to go up? Sushiswap gives us a good example.

The left circle in the table below coincides with Uniswap's launch of UNI tokens, which leads to a rapid decline in rival SushiSwap's TVL. The circle on the right coincides with SushiSwap's decision to limit its supply to 250 million scrip, which led miners to opt out because they thought there was too little incentive to continue mining at SUSHI. This means that when the pay is meaningfully reduced, miners flock to the next project.

Source: DeFiPulse

After the two announcements, Sushiswap's total value collapsed.

Sustainability is key in fluid mining because the mining time is not short. Uniswap, for example, is awarded for four years. Reducing the total supply of tokens may raise the price but does not change the value of the project. Nor does it make assets suddenly scarcer.

SushiSwap is in the best financial position when comparing the three DEX, with the lowest FDV to annual fee ratio of 18.30 and the highest market cap ratio of 76.93%, as it has suddenly reduced the supply of tokens. However, market participants do not agree with its approach, which is reflected in its price. To make matters worse, its price has rebounded only 10.26% from its historic low.

As another example, CREAM burned 67.5% of its token supply on September 20. Token prices should have risen threefold - if the FDV had held steady - but by less than 50 per cent. Similarly, initial scarcity is not a major factor in a mobile mining project that will take years to complete. As a result, a drop in liquidity in mining will not affect prices significantly.

Source: CoinGecko

The destruction of the CREAM token supply ultimately did nothing to prevent a general decline in prices.

Cheap FDV by itself does not provide a nominal price support

All in all, the CRV case shows how aggressive inflation can deter investors from buying and holding newly issued tokens. On the other hand, the case of SUSHI shows that the collapse in supply, while making the FDV look cheaper, has little support for prices.

The liquidity mining incentive or inflation supply plays a big role in gaining users. Being able to attract users to a project and allow the base value to grow faster than the token supply is diluted is critical.