How much is the governance token in your hand worth?

Author: Rhythm Research Institute

The market price of an asset reflects the balance between supply and demand of the asset at this moment point of consensus. However, in order to profit from the market, investors need to analyze the value of assets from different angles and using different methods, to dig out those assets whose value is overvalued or undervalued, and try to find out the consensus of most people. defect.

For the valuation of encrypted assets, some people think that Stock-to-Flow is very suitable for Bitcoin, and some people think that the Fisher formula It is more compatible with pledged tokens, but how should the governance tokens in the popular DeFi protocol be valued?

Governance tokens, as the native tokens of most DeFi protocols, reflect the value of the protocol from the side.

Governance tokens generally have the following functions:

1. Governance authority: Participate in protocol governance and modify protocol parameters.

2. Participate in liquidity mining: provide liquidity support for the governance token trading pair to obtain liquidity Sexual mining rewards and transaction fee sharing.

3. Pledge: Pledge governance tokens to obtain mining rewards and transaction fee sharing.

Governance authority brings governance value to governance tokens, while participating in liquidity mining and pledge is the governance token The currency brings usufruct rights. All valuation models below do not consider the impact of uncompensated losses.

Traditional Valuation Model

Traditional Valuation Model The value model mainly evaluates the value of the protocol itself through the revenue capability of the protocol.

Absolute valuation method:

-Free cash flow discounted valuation method:

CF (FCF) in the figure is free cash flow , i(r) is the discount rate, n is time, and TV is the final value.

For liquidity mining projects, the protocol’s free cash flow can be defined as mining rewards plus handling fees. In order to motivate different participants in the agreement, the free cash flow of the agreement will be distributed to the members participating in the agreement in different proportions. Usually free cash flow of traditional companies = EBIT - taxes + depreciation and amortization - changes in working capital - capital expenditures. For an agreement, mining and staking income plus handling fees can be recorded as profit before interest and taxes, and taxes can be recorded as development funds deducted from mining income by the project party (or other items deducted from mining income in the agreement) cost). There is no depreciation and amortization of the agreement deployed on the smart contract, and the change of working capital does not occur frequently, and there is no capital expenditure under the normal operation of the agreement.

So for an agreement, its free cash flow can be obtained through mining rewards plus handling fees minus other fees in the agreement Spending gets. Since most mining currency pairs are composed of ETH, the discount rate can be obtained by adding the ETH lending rate plus the risk premium of each contract. Since contract risk is difficult to accurately quantify, users can use the insurance rate of the project to evaluate, and the higher the risk of the contract, the higher the discount rate will be.

If the agreement develops smoothly, the increase in users will drive up the transaction fee income, but the mining rewards of the agreement usually will gradually decrease. If the rate of increase in handling fees is greater than the rate of decrease in block rewards, the growth rate of the protocol is positive. If the transaction fee cannot be effectively increased, the growth rate will be negative. The final value can be obtained by estimating the n+1 year cash flow and discounting it. Finally, discount the cash flow of previous years and the final value together to obtain the approximate valuation of the agreement.

-Dividend discount valuation method:

< br>

D in the figure is dividend cash flow, r is discount rate, and g is the growth rate.

The dividend discount valuation method is applicable to the valuation of the agreement after the mine is stopped, because the final agreement income will be returned to the agreement as dividends Participants, so we can directly discount the transaction fee. The discount rate for dividends can be the same as the discount rate in the discounted cash flow method mentioned above, and it can be obtained by using the ETH lending rate plus the contract risk premium. The growth rate is the estimated growth rate of transaction volume.

Relative valuation method:

- Price-earnings ratio valuation method:

For traditional companies, the price-earnings ratio is the most commonly used valuation comparison indicator. The numerator in the figure above is the market price of each token, and the denominator is the protocol revenue represented by each token. The revenue is the fee income of the agreement. Due to the sharp fluctuations in the price of governance tokens, the revenue from mining rewards can be excluded in the relative valuation method, and the fee income generated by each agreement can be simply compared.

An agreement with a high price-earnings ratio may indicate that investors have extremely high expectations for the future of the agreement, or that the value of the agreement itself is overvalued Estimated. By observing the price-earnings ratio, we can easily compare the relative value of different protocol governance tokens horizontally.

-P/E Valuation Method:

Municipal net Another common relative valuation metric used by traditional companies is the ratio, which reflects the net book value of assets per share. However, for the on-chain protocol, it does not have any book value, that is to say, the agreement does not have any entity rights that can be effectively liquidated at the time of liquidation, and the final equity of the currency holder is zero. Therefore, the agreement and governance tokens cannot be compared by price-to-book ratio.

Crypto native valuation model:

The native valuation model on the chain is more focused on valuing the governance value of governance tokens.

Absolute Valuation Model: Fork Valuation Method (POST FORK TO PRE FORK)

< /p>

In an article titled "A Framework for Valuing Governance Tokens: 0x" blog, author Phil J Bonello believes that network participants are willing to pay for 51% of governance tokens The maximum cost is the difference between the discounted value of the business before the fork and the post present value of the business after the fork.

In the article, Phil explained the logic of this valuation scheme:< /p>

In the original agreement, the participants engaged in a very successful business, in order to ensure the business To be able to proceed smoothly, participants need to have certain control over the protocol to ensure that future iterations of the protocol will not run counter to the interests of the participants. To have control, participants need to own 51% of the protocol governance tokens.

If you don’t buy 51% of governance tokens, participants can By forking the agreement, continue to engage in the original business on the new agreement. However, forking requires development and maintenance costs, and may affect business reputation, cause a decline in traffic, and ultimately lead to a decrease in revenue.

Assume that after the fork, the discounted value of the business will decrease by $1 million , then the participants will bid up to $1 million to purchase 51% of the governance tokens in the original agreement.

This model can evaluate the governance tokens of all DeFi applications . Essentially, the cost of a fork is the price of 51% of the total governance tokens in the agreement. From this, we can also draw another conclusion, that is, increasing the fork cost can increase the value of governance tokens.

Relative Valuation Model: Decisiveness Valuation

In another blog titled "A relative value model for governance tokens", Jake Brukhman, co-creator and CEO of CoinFund, analyzed the distribution of different tokens from the decisive perspective of governance tokens The proportion of tokens held by token holders has a decisive impact on protocol governance. Compared with the above-mentioned types of valuation models, the deterministic valuation method pays more attention to measuring the governance characteristics of governance tokens.

Simply speaking, under different token distribution ratios, holding The decisiveness of the final change proposal is different for different coin holdings of coin holders.

This model has the following four assumptions:

1. The distribution of tokens is open and transparent. is known.

2. There is no preset limit on the number of people and votes for passing a proposal.

3. Token holders who participate in voting can only support or oppose choose.

4. The approval rate of the proposal needs to exceed 50%.

The research report published by The Block provides a detailed example of this model illustrate.

Governance token distribution 1: four people equally share tokens

Under this token allocation ratio, each token holder has 25% of the voting rights , the decisiveness of each holder is 37.5%. In this article titled 《A governance valuation framework》The article has a detailed description of the formula for calculating the determinism.

In order to facilitate understanding, we can combine the possible ticket types List them one by one and analyze them from the perspective of a currency holder. In this case, we choose to analyze from the perspective of No. 0 currency holder. For the other three token holders, the number of ticket types that may appear is: 2^3=8.

As can be seen from the table above, holder #0 reversed the final outcome (via ) There are three ticket scenarios, namely Scenario 2, Scenario 3 and Scenario 8, so the decisiveness of No. 0 holder is 3/8, which is 37.5%. Since the distribution of tokens in this case is evenly distributed, the decisiveness of each token holder is 37.5%, which means that the probability of each token holder being able to "reverse" the situation is 37.5%.

Governance token distribution 2: 100, 100, 1

Under the second token distribution, there are two token holders holding 100 tokens tokens, each accounting for 49.75% of the total token volume, and the remaining one holds one token, accounting for 0.5% of the total token volume. At a glance, you might think that holder 0 and holder 1 are far more decisive than holder 2, but in fact the three of them are equally decisive. If we analyze this case from the perspective of currency holder 2, we can get:

From the perspective of No. 2 currency holder, we can see that there are a total of 2^2=4 possible situations. While holder #2 has only 0.5% of the holding weight, it is enough to affect half of the situation, with the same decisiveness as the other two holders who hold 49.75% of the tokens.

Governance Token Distribution III: Absolute Decision

Under the third distribution, there are 10 holders in total, holder 0 owns 52.63% of the total token volume, the remaining token holders each own 5.26% of the tokens. In this case, holder 0 has absolute control over the agreement, and its decisiveness is 100%. The remaining token holders have no say in the protocol.

Governance Token Distribution Four: Absolute Decision

Distribution 4 is similar to distribution 3. Holder 0 also has absolute control over the protocol, although the rest Coiners are no longer 0% decisive for the protocol, but their influence is negligible.

From this we can draw a conclusion:

1. Token holding is directly proportional to certainty, under certain token distribution The growth of will lead to decisive exponential growth.

2. Under certain token distributions, for holders with too few tokens, their decisiveness to the protocol is negligible.

3. The distribution of governance tokens may directly affect the value of governance tokens, and excessively centralized token distribution may cause the value of governance tokens to approach zero.

Related literature:

《A Framework for Valuing Governance Tokens: 0x》

《A governance valuation framework》

《A formal relative valuation framework for governance tokens》

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia