Seeking Uniform Valuation for Crypto – HASH CIB

Researchers currently divide crypto assets into different classes to value them: Productive and Non-productive (Phil Bonello), Currencies/Commodities and Utility, as well as some other sub-categories (Max Mersch), Capital and Consumable (Chris Burniske). While the definitions of these classes differ, the consensus view is that each class can be valued by a methodology applicable solely to that particular class. For example, everyone agrees that productive tokens can be valued by the analyst’s old friend, DCF; commodity/non-productive coins can be valued using the Equation of Exchange, and so on.

We hope to convince our colleagues to adopt our approach, which differs in several ways from those currently used. First we’ll describe the proposals that make our approach different, and then we’ll walk through each difference in turn, providing examples and a simple excel model that should help readers better understand our methodology.

Proposal 1. Classify the features or properties of different crypto assets rather than group these assets based on those properties.

Proposal 2. Use one model for all types of crypto assets: bring DCF, Equation of Exchange, Store of Value, and other valuation methods all under one roof.

Proposal 3. Determine the value flows generated by each feature or use-case of a crypto asset separately, but then attribute a combination of those flows to the whole network[1] the asset runs on, i.e. to all of the network’s tokens, regardless of how they are used.

Proposal 4. Value a crypto asset using the Net Present Value (NPV) of its Future Value Flow, or Discounted Value Flow[2]. The combined value flows of all of the asset’s features generate the valuation of the network that it runs on.

Proposal 5. Account for the often-overlooked cost to run a blockchain network.

Proposal 6. Future issuance (inflation) is irrelevant for blockchain network valuation; consider only currently issued tokens.

While we are confident about Proposals 1–4, we admit that Proposals 5–6 are debatable. Unlike the former, the latter proposals do not work well across all networks: for PoW blockchains, they require significant assumptions in order to hold. We need to conduct more research deeper into different types of blockchain protocols, to arrive at a correct solution. Nevertheless, we believe all the proposals are worth presenting now, to show the direction of our thinking.

Don’t classify the crypto asset itself; classify its value-added qualities or features. Some crypto assets may meet the definition of two or more classes: ETH 2.0, for example, will be used for staking, and therefore it would be a revenue-generating asset. But it is also expected to function as currency in transactions between different parties. Instead of worrying which class such an asset belongs to, we only need to know its features. To classify the features, we can use the same categories that crypto researchers have already proposed: Productive or Non-productive, Utility or Currency/Commodity, Capital or Consumable.

The properties of a single crypto asset can evolve. The economics of a blockchain can change and its native asset may obtain more than one use-case or feature, but putting a digital asset into a particular bucket restricts our mental modeling. Looking at its evolution as the gradual acquisition of different features allows us to adjust our valuation on the go rather than search for a new paradigm. We believe this more fluid approach is crucial for a still-nascent industry that is developing rapidly.

Bring all the valuation methods that we have so far — DCF, MV=PQ, SoV — under one roof, leave room for those we might have in the future, and work from that place to value all kinds of crypto assets. Because we have not divided crypto assets into different classes but rather classified the assets’ features, we can have one valuation approach that is applicable for all crypto assets and draw on different methods to value the various features of each asset. Those methods would be the building blocks — the Lego pieces — and the overall valuation model would be our house.

A combined valuation approach can accommodate different views on individual features, new methodologies for specific features, and even changes in the specific assets. If someone disagrees with a particular method of valuing a feature, or a new, more appropriate methodology is developed, they can substitute this new method in the combined model. For example, if someone comes up with a better solution for valuing commodity/currency property than the Equation of Exchange, we can easily substitute the new method for MV=PQ within the same model. We swap the old building block for a new one, leaving the house intact. Similarly, if an asset evolves, we do not have to reclassify it, we only need to see how its features may have changed. Each new feature adds value that can be evaluated using an appropriate methodology.

Determine the value flows generated by each feature of a crypto asset separately but then attribute those flows to the network the asset runs on, i.e. to all of the network’s native tokens, regardless of how those tokens are used. For instance, a token is used as a means of payment, this feature adds value to all of the network’s fungible tokens, not only to those participating in transactions. We believe this is the correct approach, as otherwise we would get different valuations for the same fungible tokens, which makes no sense.

Fungible assets have the same value regardless of our definitions for or classifications of them and regardless of how they are used. A dollar in our pocket has the same value as a dollar deposited in the bank, even though the former is a means of payment and the latter is an interest-generating capital asset. In the same way, a staked fungible coin should have the same value as a similar coin used for payments, e.g. staked ETH 2.0 should have the same value as a non-staked ETH 2.0.