By Will, Generative Ventures
If the market is respectable and mean-reverting, then in the long run, the market will not weigh projects without fundamentals. Therefore, as Bitcoin concentration continues to rise, the market will experience a painful correction back to fundamentals, and both primary and secondary will return to fundamental investment. However, it seems that in the crypto space, investors are not good at fundamental investment, and even talking about fundamentals seems to be a very boring and unconsensus thing. Therefore, this article attempts to break it down and propose an interesting new perspective in the crypto space: the "fundamentals paradox"?
There are actually only three fundamentals that our fund looks at when looking at a project:
1. Project Revenue
2. Ecosystem Scale
3. Social User Value
The details are as follows:
1. Project Revenue
This is the fees that the project party, as a provider of products and services, directly or indirectly collects from users or customers as income. This is the fundamental that is most easily understood by traditional investors and the financial system, but it only applies to a small number of projects with project income.
Typical examples include the interest rate spread earned by Tether and Circle as stablecoin issuers on US dollar deposits, the upfront fees charged by Uniswap project parties, the fees charged by AAVE (most of which are used to destroy tokens), the data service fees charged by Chainlink to partner projects, the fees charged by Opensea for NFT transactions, and the market transaction royalties collected by STEPN; these revenues range from tens of millions of dollars to billions of dollars. The strongest among them are stablecoin issuers, followed by Defi Protocol, and NFT asset exchanges have highs and lows.
The greater the project's revenue capacity, the less the project party relies on selling coins for survival, which is helpful for the long-term support of the coin price. Otherwise, everyone will keep an eye on the foundation's finances, such as the previous Polkadot and the recent review of the Ethereum Foundation's budget; at the same time, stable income also means stable budget expenditure, which is also helpful for talent stability and product development iteration. Project income also means a certain equity value, so there will also be a traditional equity governance structure. If the board of directors and shareholders will perform their duties, then the corporate governance of such projects will be better.
The valuation model for this part of revenue can refer to the valuation model of equity projects. If it is SaaS, there will be corresponding PS or PE multiples. If it is financial fee income or interest rate spread income, then you can benchmark it against the indicators of traditional financial card organizations or bank asset management listed companies. The premium of the valuation multiple is usually based on growth expectations, but if there is a premium but no growth expectations, then sooner or later the bubble will burst and return to the mean, so don't be surprised.
2. Ecosystem Scale
This part of the income is not given directly to the project party, but is obtained by other stakeholders in the blockchain network.
Typical examples include BTC miner income, ETH staker node income, Tron staker node income, etc. The $20 trillion of stablecoins and a large number of smart contract transactions settled on the chain each year bring $1-2 billion of ecosystem income to the Ethereum ecosystem and $100-500 million of ecosystem income to Tron each year. This is just like VISA and Mastercard directly distributing their transaction fees to all shareholders.
The stronger the ecological economy is, the more active and the more transactions it has, and the more it reflects the strength of the ecosystem as a financial system and service. We can use the income of the ecosystem divided by the total transaction amount to see how much the total cost of the network is to provide services together with the ecosystem in order to meet transactions. Interestingly, the transaction cost of the crypto network is only 1-2 basis points at a macro level, which is one percent of the traditional financial VISA and SWIFT banking systems. It is very efficient, which is why we believe that stablecoin transaction settlement is one of the most basic fundamentals of the crypto industry in the past five years. At the same time, some project parties can also participate in the ecological economy to obtain income and improve the financial sustainability of the project parties themselves. This is a way to obtain income in a roundabout way, and it may also be the result of the cold start of the ecosystem itself in the early stage.
The valuation model for this part of the income is more elusive. If we only look at the equity value of the pledged nodes, based on their asset yield, it is equivalent to valuing the equity of a fixed deposit fund management scale, which is not impossible. But this is not valuing the entire network. Of course, you can also use comparative valuation methods. For example, VISA processes 15 trillion US dollars in transactions per year, with a market value of 500 billion US dollars. Compared with Ethereum, which processes 10 trillion US dollars in transactions per year and has a market value of 280 billion US dollars, it is indeed reasonable and is also an angle we advocate, that is, to see how much transaction scale this ecosystem supports, rather than how much handling fees this ecosystem takes from transactions.
This brings us back to the question: Is the greater the ecological income, the more valuable it is? This is the most important paradox to be explored in this article, and the answer is not necessarily. Because one of the most important PMFs of the blockchain network compared to the traditional financial system is the low comprehensive handling fee; to put it bluntly, the take rate taken from people's economic activities by the traditional financial system is too high, and the blockchain wants to revolutionize this. Therefore, if the same security and trust conditions are met, the lower the handling fee to support the higher transaction volume, the correct solution for the industry to gain a foothold, and it is also the killer to attack the traditional financial system.
3. Social User Value
This is the most interesting fundamental. It is reflected in the positive externalities of the project, which has a huge number of users or user usage value, and the significance of existence recognized by users; it is somewhat similar to goodwill outside of financial fundamentals, although it is not accurate.
This is our belief, that there is a kind of public good in this world that has no business model but has huge user value; in other words, although the number of users is huge and it can be monetized through business, it will seriously damage the user experience, and even because business-driven corporate governance itself will distort the governance of such public goods; then this kind of project can actually be priced through the issuance of coins. To put it bluntly, it is about how to price public goods of huge value.
The premise is that there are people who use it, a lot of people who use it, and those who use it approve of it. (Don't talk about narrative-driven things that no one uses, they will fail sooner or later)
For example, Wikipedia does not have a price, and it survives with hundreds of millions of dollars in donations every year. If Wikipedia issues coins, although there is no project income and ecological income mentioned above, the market can give a valuation. In fact, this is equivalent to people pricing Wikipedia's Goodwill, and Wikipedia earns income from selling coins every year for operation, which is equivalent to token holders donating to Wikipedia. For Wikipedia, is a market value of 50 million US dollars too low? Is 5 billion too high? This is the price given purely by users for the social value of Wikipedia. In fact, BTC itself is a huge goodwill pricing, which is a comprehensive pricing given by society to the elements of "technical scarcity", "anti-regulation" and "security".
Therefore, I even think that projects oriented towards user social value do not have to be from a financial perspective, and they do not even have to be blockchain projects. For example, they can be from an AI perspective, social networks, or even consumer goods. But here’s the point, someone must use it. Wikipedia is more than just hundreds of millions of monthly active users, rather than a narrative-driven decentralized AI. This brings us back to a basic question: does a product that no one uses but only has the correct ideology have value? I think it's difficult. Because value is given by people, there must first be users.
So let’s take a look together, what are the things in this world that have a huge number of users but no good business model, but have great social value? These can consider tokenization.
Here comes the most interesting thing. The above three (project income, ecological income, and user value) are actually a "three-body movement". They will reinforce each other and also exclude each other, especially exclude each other.
It is not the case that the larger the ecological economic system, the greater the social value, because if the fee rate is too high, then there will be the same friction as traditional finance.
If it is not just about user social value, and completely disregards project income and ecological income, then the selling pressure in the secondary market will be very high, and it will require a strong willingness to donate to support it.
If the project has huge revenue and the other two are ignored, there will be a backlash in the end. For example, the current stablecoin issuers will face this challenge.
This three-body motion relationship is also the reason why it is difficult to value crypto projects from a single perspective. In fact, the ABC order is relatively traditional and equity-based, while the CBA order is more innovative and public-based. Regardless of the perspective, a project without the three fundamentals cannot support long-term value.
