Exploration of Encryption Asset Valuation Models

Cryptocurrency has become one of the most promising sectors in the field of financial technology. With the continuous influx of institutional funds, how to reasonably value encryption projects has become a key issue. Traditional financial assets have established valuation systems, such as discounted cash flow models and price-to-earnings ratios.

There are many types of encryption projects, including public chains, exchange platform tokens, DeFi projects, and popular coins, each with its own characteristics, economic models, and token functions. Therefore, it is necessary to explore valuation models suitable for various segments.

1. Public Chain Valuation: Metcalfe's Law

The core content of Metcalfe's Law is that the value of a network is proportional to the square of the number of nodes.

V = K*N² (V is the network value, N is the number of effective nodes, K is a constant)

This law has been widely recognized in the value prediction of internet companies. An independent study on globally renowned social networking companies shows that, over a statistical period of 10 years, the value of these companies exhibits characteristics of Metcalfe's law in relation to the number of users.

As a representative public chain project, Ethereum's market value has a logarithmic linear relationship with daily active users, which basically conforms to Metcalfe's Law. Research has found that the market value of the Ethereum network is proportional to the 1.43 power of the number of users, with the constant K taking the value of 3000. The calculation formula is as follows:

V = 3000 * N^1.43

Statistical data indicates that there is indeed a certain correlation between the Metcalfe's Law valuation method and the market value trend of ETH.

However, this valuation method has limitations when applied to emerging public chains. For public chains that are in the early stages of development, due to the relatively small user base, it is not suitable to directly use Metcalfe's Law for valuation. In addition, this method cannot fully reflect factors such as the impact of staking rates on token prices, the long-term effects of burn mechanisms, and the potential games around total locked value based on security ratios in the public chain ecosystem.

2. Valuation of Exchange Platform Tokens: Profit Buyback and Destruction Model

The platform tokens of centralized exchanges are similar to equity tokens, and their value is closely related to the exchange's revenue (including trading fees, listing fees, etc.), the development of the public chain ecosystem, and the market share of the exchange. These tokens usually have a buyback and burn mechanism, and some also incorporate a fee burning mechanism within the public chain.

The valuation of platform tokens needs to consider the overall revenue situation of the platform and the token destruction mechanism. Its fluctuations are usually related to the growth rate of trading volume on the trading platform and the reduction rate of token supply. The simplified profit buyback and destruction model valuation formula is as follows:

Platform token value growth rate = K * trading volume growth rate * supply destruction rate (K is a constant)

Taking the platform token of a well-known exchange as an example, its empowerment method has gone through two stages: initially adopting a profit buyback model, and later transitioning to an automatic destruction mechanism combined with a real-time destruction mechanism. This mechanism calculates the amount to be destroyed based on the quarterly block count of the public chain and the token price, and destroys a certain proportion of the rewards in each block.

When applying this valuation method in practice, it is necessary to closely monitor the changes in the market share of exchanges and the impact of regulatory policies, as these factors may significantly affect the valuation of platform tokens.

3. DeFi Project Valuation: Token Cash Flow Discounting Method

The valuation of DeFi projects can adopt the token cash flow discounting method (DCF). The core logic of this method is to predict the cash flow that tokens can generate in the future and discount it to its current value at a certain discount rate.

The DCF valuation formula is:

PV = Σ(FCFt / (1 + r)^t) + TV / (1 + r)^n

Among them, FCFt is the free cash flow in year t, r is the discount rate, n is the forecast period, and TV is the terminal value.

Taking a certain DeFi protocol as an example, suppose its revenue in 2024 is $98.9 million, with an annual growth rate of 10%, a discount rate of 15%, a forecast period of 5 years, a perpetual growth rate of 3%, and a FCF conversion rate of 90%. By calculating the cash flows for the next five years and their present values, along with the discounted terminal value, the total valuation of the protocol can be derived.

However, the valuation of DeFi protocols faces several major challenges: governance tokens often fail to capture the revenue value of the protocols; future cash flow projections are difficult; determining the discount rate is complex; and the profit buyback and burn mechanisms adopted by certain DeFi projects may affect the valuation results.

4. Bitcoin Valuation: A Comprehensive Consideration of Multiple Methods

The valuation of Bitcoin can be approached from multiple perspectives:

1. Mining Cost Valuation Method: In the past five years, the time when the Bitcoin price was below the mainstream mining machine's mining cost accounted for only about 10%, indicating that mining cost plays an important supporting role for Bitcoin price.

2. Gold Substitute Model: Bitcoin is regarded as "digital gold" and can replace part of the value storage function of gold. Currently, the market value of Bitcoin accounts for 7.3% of the market value of gold. If this ratio increases, the price of Bitcoin will rise accordingly.

However, there are significant differences between Bitcoin and gold in terms of physical properties, market perception, and application scenarios. When using this model, it is essential to fully consider the impact of these factors on the actual value of Bitcoin.

Conclusion

Exploring the valuation models of encryption projects is crucial for promoting the robust development of valuable projects within the industry, and it also helps attract more institutional investors to allocate encryption assets. Especially during market downturns, we need to use strict standards and fundamental logic to identify projects with long-term value. Through reasonable valuation models, we hope to uncover potential stocks in the encryption field during bear markets, just like the tech giants that emerged after the burst of the internet bubble in 2000.