How to examine the fundamentals of a cryptocurrency project?
Project income, ecological income, and user value are actually a "three-body motion," mutually reinforcing but also mutually repelling, especially the latter.Author: Will, Generative Ventures
If the market is to be respected and mean reversion holds true, then in the long run, the market will not give weight to projects without fundamentals. Therefore, under the trend of increasing concentration of Bitcoin, the market will experience a painful correction back to fundamentals, both in primary and secondary markets; however, it seems that investors in the crypto space are not adept at fundamental investing, and even discussing fundamentals appears to be a rather dull and non-consensual topic. Thus, this article attempts to break this down and propose an interesting new perspective in the crypto space: "The Fundamentals Paradox"?
Our fund's view on project fundamentals consists of only three aspects:
Project Revenue
Ecosystem Scale
Social User Value
Details are as follows:
1. Project Revenue
This refers to the income that the project team, as providers of products and services, directly or indirectly charges users or clients. This is the most easily understood fundamental by traditional investors and financial systems, but it only applies to a small number of projects with actual revenue.
Typical examples include the interest margin earned by Tether and Circle as stablecoin issuers, the front-end fees charged by Uniswap, the fees collected by AAVE (most of which are used to burn tokens), the data service fees charged by Chainlink to partner projects, the transaction fees collected by Opensea for NFT trading, and the market transaction royalties collected by STEPN; these revenue scales range from tens of millions to billions of dollars. Among these, stablecoin issuers are the strongest, followed by DeFi protocols, while NFT asset trading platforms vary widely.
The greater the project revenue, the less the project team relies on selling tokens for survival, which helps support the long-term price of the token. Otherwise, everyone will scrutinize the finances of the foundations, as seen previously with Polkadot and recently with the Ethereum Foundation's budget review. At the same time, stable revenue also means stable budget expenditures, which aids in talent stability and product development iteration. Having project revenue also implies a certain equity value, thus there will be traditional equity governance structures. If the board and shareholders are diligent, the corporate governance of such projects will also be better.
The valuation model for this portion of revenue can refer to equity project valuation models. If it is SaaS, there are corresponding PS or PE multiples; if it is financial fee income or interest margin income, then it can be benchmarked against traditional financial metrics from card organizations or publicly listed asset management companies. The premium on valuation multiples is usually based on growth expectations, but if there is a premium without growth expectations, then sooner or later, the bubble will burst and mean reversion will occur, and one should not be surprised.
2. Ecosystem Scale
This portion of revenue does not go directly to the project team but is obtained by other stakeholders within the blockchain network.
Typical examples include the income of BTC miners, ETH stakers, and Tron stakers. Each year, the on-chain settlement of $20 trillion in stablecoins and a large number of smart contract transactions brings in $1-2 billion in ecosystem revenue for Ethereum and $100-500 million for Tron; this is very similar to how VISA and Mastercard distribute their transaction fees directly to all shareholders.
The stronger the ecosystem economy, the result of active trading and transaction volume, reflects the ecosystem's strength as a financial system and service capability. We can look at the ecosystem revenue divided by total transaction volume to understand the total cost the network incurs to provide services to meet trading demands. Interestingly, the transaction costs of crypto networks, viewed macroscopically, are only 1-2 basis points, which is one-hundredth of traditional finance's VISA and SWIFT banking systems, making it very efficient. This is also why we believe that stablecoin trading settlement is one of the most fundamental aspects of the crypto industry over the past five years. Meanwhile, some project teams can also participate in the ecosystem economy to generate income, enhancing their financial sustainability, which is a way to indirectly generate revenue and may also be the result of the ecosystem's early self-starting efforts.
The valuation model for this portion of revenue is more elusive. If we look solely at the equity value of staking nodes, we can evaluate it based on its asset return rate, which is akin to valuing a fixed deposit fund management scale, but this does not provide a valuation for the entire network. Of course, comparative valuation methods can also be used, for instance, VISA processes $150 trillion in transactions annually with a market cap of $500 billion, while Ethereum processes $100 trillion in transactions annually with a market cap of $280 billion. From this perspective, it indeed seems reasonable, and it is an angle we highly advocate: to look at how much trading scale this ecosystem supports rather than how much transaction fees it extracts.
This brings us back to a question: Does a larger ecosystem revenue necessarily mean greater value? This is the most important paradox this article seeks to explore, and the answer is not necessarily. One of the most important PMFs of blockchain networks compared to traditional financial systems is the low overall fee structure; in simple terms, traditional financial systems take too high a rate from people's economic activities, and blockchain aims to revolutionize this. Therefore, if under the same conditions of security and trust, a lower fee structure supports a higher transaction volume, that is the correct answer for the industry to establish itself and a killer move against traditional financial systems.
3. Social User Value
This is the most interesting fundamental. It reflects the positive externalities of the project, with a massive user base or user value recognized by users; it is somewhat akin to goodwill beyond financial fundamentals, though not precisely.
This is our belief: there exists a type of public good that has enormous user value but no business model; or, despite having a large user base, monetizing it could severely damage user experience, and even the governance of such public goods driven by commercial motives could become distorted. Therefore, such projects can actually price themselves through token issuance, which boils down to how to price public goods with significant value.
The premise is that it is used, widely used, and recognized by users. (Let’s not discuss those narrative-driven things that no one uses; they will eventually fail.)
For example, Wikipedia has no pricing and survives on hundreds of millions of dollars in donations each year. If Wikipedia issued a token, although it lacks the aforementioned project revenue and ecosystem revenue, the market could assign a valuation, which is essentially people pricing the goodwill of Wikipedia. Moreover, Wikipedia could generate income through token sales for operations, equivalent to token holders donating to Wikipedia. For Wikipedia, is a $50 million market cap too low? Is $5 billion too high? This is purely a price based on the social value users attribute to Wikipedia. In fact, Bitcoin itself is a massive goodwill pricing, a comprehensive pricing of elements like "technical scarcity," "anti-regulation," and "security" given by society.
Thus, I even believe that projects oriented towards user social value need not be viewed from a financial perspective and may not even have to be blockchain projects; they could be from an AI perspective, social networks, or even consumer goods. However, the key point is that there must be users; Wikipedia has not just a few hundred million monthly active users, but not some narrative-driven decentralized AI. This brings us back to a fundamental question: do products that no one uses but are ideologically correct have value? I find it very difficult. Because value is assigned by people, there must first be users.
So let’s all take a look at what exists in this world that has a massive user base but lacks a good business model yet has significant social value; these could be considered for tokenization.
The most interesting part is that the three aspects (project revenue, ecosystem revenue, user value) actually form a "three-body motion," mutually reinforcing yet also mutually exclusive, especially in terms of mutual exclusion.
It is not the case that the larger the ecosystem economy, the greater the social value; if the fee rate is too high, it will create friction similar to traditional finance.
It is not the case that only social user value exists without considering project revenue and ecosystem revenue; otherwise, there will be significant selling pressure in the secondary market, requiring strong donation willingness to support it.
If project revenue is substantial while ignoring the other two, there will ultimately be backlash, as is currently the challenge faced by stablecoin issuers.
This three-body motion relationship is also why it is difficult to value crypto projects from a single perspective. In fact, the order of ABC, relative to traditional and equity perspectives, is CBA when viewed from a more innovative and public perspective. Regardless of the perspective, projects lacking all three fundamentals cannot sustain long-term value.
