How to value DeFi tokens? Calculate the P/E ratio to estimate the value of UNI and YFI!
This article is authorized for reposting by the author Benson Sun. The original title is "How to Value Tokens for DeFi Projects? Using UNI and YFI as Examples". Please refer to the original article on Medium.
With the recent market correction, tokens in the DeFi sector have experienced significant pullbacks. Two of the most representative tokens, UNI and YFI, have both dropped significantly from their highs. Considering their income-generating capabilities at the protocol level, are the current prices of these two tokens undervalued? Is it a good time to accumulate on dips?
To answer this question, we first need to analyze how these two protocols make money:
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Table of Contents
- Uniswap charges users a 0.3% transaction fee for each trade
- Currently, the entire 0.3% fee goes to liquidity providers
- In the upgrade to Uniswap V2, the team retained a function where if activated, 0.05% of the fee will be directed to the Uniswap official protocol fee smart contract
- This 0.05% fee will be the income for future UNI holders
- YFI has a wide range of products (most still under development), with the main revenue coming from Vaults
- Vaults charge two types of fees: a 5% performance fee and a 0.5% management fee
- The 5% performance fee is collected each time profits are claimed, and this income is used to pay gas fees
- The 0.5% management fee is collected each time the principal is withdrawn
- Revenue from yearn.finance protocols will be stored in the TreasuryVault smart contract
Once we understand how to make money, we can calculate the P/E Ratios of the two protocols:
- Uniswap's daily average trading volume over the past 90 days (7/7/2020 – 10/4/2020) was $322.46M
- Calculating the annual dividends for UNI holders = $322.46M*0.05%*365 = $58.85M
- Current UNI price is $3.77, calculating market cap = $681M
- UNI P/E Ratio = $681M/$58.85M = 11.57
- Observing the TreasuryVault on Etherscan, there was a total income of $714K deployed 41 days after the contract's launch
- Calculating the annual dividends for YFI holders = $714K/41*365 = $6.36M
- Current YFI price is $17,321, calculating market cap = $519M
- YFI P/E Ratio = $519M/$6.36M = 81.6
The P/E Ratios of the two may seem significantly different, but the devil is in the details.
UNI has only issued 18% of its total circulating supply (180M/1B), with liquidity mining and team unlocks, UNI will continue to be released into the secondary market, meaning holders' dividend rights will be diluted, and at a very rapid pace. According to data provided by Uniswap officials, UNI's second-year circulation will surge to 450M.
On the other hand, yearn.finance's YFI was mined early, and dividend rights will not be diluted further.
The starting points for the two are different, UNI is like a stock that will continue to issue new shares, making the P/E ratio extremely unstable. What should be done?
In response to this issue, traditional finance would include shares that may become "new shares," such as stock options, convertible bonds, preferred stock, etc., which are known as "dilutive shares." Applied to UNI, the portion of future UNI issuance would be considered as dilutive shares.
Since YFI is calculated based on the total circulating supply, we can also calculate based on UNI's fully diluted market value, resulting in UNI's P/E ratio becoming: 11.57/18% = 64.3.
If we use the same standard - fully diluted market value/dividends for holders to calculate the current P/E ratios of the hottest DeFi projects, we get the following data:
UniswapUNI $3.78B/$58.85M=64.3 yearn.financeYFI $519M/$6.36M = 81.6 AaveLend $692M/$16.9M=40.9 CompoundCOMP $1.2B/$38.4M=31.2 curve.financeCRV $2.32B/11.95M=193.3 SushiswapSUSHI $89.8M/$7.3M=12.3 MakerDAOMKR $561M/$12.7M=44 Kyber NetworkKNC $207M/7.93M=26.1
Note 1: Due to the lack of reference in September's trading volume for Sushiswap, the author used the transaction fee income from the last 7 days instead of 90 days.
Note 2: Although CRV holders have a fee split ratio as high as 50%, due to Curve's trading fee of only 0.04%, the actual dividends received by holders are lower.
Note 3: KNC holders' fee split ratio is calculated based on burn+buy back, currently at 78.52%. (For details, see https://kyber.org/vote)
Did the results surprise you?
With the highest P/E ratio being CRV (193.3) and the lowest being Sushi (12.3), purely from a P/E perspective, UNI and YFI are not undervalued, but rather on the higher side among DeFi protocols.
However, the analysis only considers protocol income and does not take into account the value of voting rights. In the stock market, top companies generally have slightly higher P/E ratios. Given Uniswap's dominant position in DEX and YFI founder Andre Cronje's legendary status in the DeFi space, the author believes these P/E ratios are acceptable.
By the way, here is a list of large stocks in 1972 with the "highest" P/E ratios:
Many companies on this list have survived to this day and are leaders in various fields, such as McDonald's, Disney, Johnson & Johnson, Texas Instruments, and Coca-Cola. If you only invested in stocks with low P/E ratios at that time, you would have missed out on these growth stocks.
So, is the P/E ratio useless? Not at all!
The purpose of calculating the P/E ratio is not to find the lowest target and then invest heavily in it, but to measure whether the current token price is within a reasonable range. If we calculate the P/E ratios using UNI and YFI's historical all-time highs, both would exceed 150, and rational investors should not choose to buy at this time.
Returning to the main topic of this article, the author believes that the P/E ratios of UNI and YFI are within a reasonable range and there is no obvious undervaluation. Data analysis is for reference only and not investment advice.
Feel free to join my Telegram group (Benson's Rent Collection Classroom) to discuss more ways to collect rent in the crypto world, or subscribe to my channel (Benson's Trading Desk).
Further Reading
- After suffering from high gas fees, DeFi protocols focus on layer 2 scaling solutions Synthetix, Uniswap, Aave
- Zhao Changpeng on DeFi bubble, Ethereum 2.0: I was wrong not to see Ethereum back then, Vitalik proved me wrong
- DeFi Scam Prevention | What is yearn finance and YFI? yCRV, vault
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