Live From DAS: Building Empirical Valuation Frameworks For Digital Assets | Jon & Matthew

Transcript

I think all of the L1 tokens have to be money for them to work and the moneyness for a token I just say is the same as the PE valuation on a stock uh and that's assuming that fundamentals matter nothing set on zerox Research is a recommendation to buy or sell Securities or tokens this podcast is for informational purposes only and any views expressed by anyone on the show are solely our opinions not Financial advice but Ryan and our guests May hold positions in the company's funds or projects discussed what's up everyone thanks for joining us today we're going to be chatting about a uh top like my favorite Topic in crypto because it's so

controversial and analyst Circle circles it's valuation um and we have two kind of experts on that topic here with us today um do you guys just want to do quick brief intros tell us about you know what you doing in your firm sure um everyone uh my name is John um I'm one of the two co-founders and partners of DBA um pretty I'd say traditional um Venture fund um primarily we do private Venture deals we also do some liquid in there um that looks similar profile of like typical um very concentrated book long-term Investments um a lot of we do we're generalist across different sectors but in practice we end up a lot particularly infrastructure focused um lowlevel

stuff hey everyone uh Matthew seagull at vanc run the crypto research and manage one of our uh token strategies at venc we have uh Venture early stage Venture strategy we have liquid token strategies and we have active Equity strategy that's um should soon come to Market uh so we're involved kind of across the whole life cycle uh we also have a stable coin uh and an nft platform um yep that's us awesome thanks guys so I guess just like kind of level setting here when I when I you know look at what both of your firms do and like

from the perspective of a crypto native person like I would say Vanek is more on the trafi side just historically you know very traditional firm we have DBA which is very crypto native so like two kind of like polar perspectives here on how we tackle valuation in crypto and I guess just like level setting um you know Bitcoin historically has been viewed as a commodity or a money we now have thousands of tokens that are trading all with different toonomic models um may or may not acre cash flows so just like broadly like do traditional valuation metrics apply in crypto markets

today sure um so while we are the crypto native side here um I'm I'm also I'll call myself reformed tadvi um came from a traditional banking background was actually how I started before coming into crypto um so certainly at least colored by that um by I mean at least to me what we spend a I'd say like a reasonably meaningful amount of time on compared to a lot of other investors is definitely like thinking about valuation Frameworks and just like what like what are the fundamentals of a lot of these assets um and so while this isn't going to end up being you know you have a very specific cash flow model that in most cases you know you're going to be spitting out this is you know exactly the valuation that we want you know the cash flows are very predictable you know we could

forecast forward the next 10 years we're going to get we're going to get a 4% growth rate you you just don't get that with the vast majority of crypto projects um even the I mean one of the big difference for crypto versus a lot of traditional markets is that even the uh public projects um that are fully liquid I mean these are still Venture style um projects at this point where they're very very volatile and still very early stage and you know you're not be able to like confidently project a lot of these cash flows um that being said you do have to still have a strong understanding of like okay does this have the market outcome possible of you know can I get those 100x returns you know and a lot of that what that will end up coming from fundamentally is can this thing generate a lot of cash flows

so I mean like as a as a literal example you know if you were buying soul I mean like it was one of the first Investments that we did in our F first fund a couple years ago um in mid 2023 was you know you you want to have a decent understanding of like okay I can project out I can see a world where you know soul is capturing billions of dollars of revenue from the m and the fees and everything on the network um and you know I can back into a reasonable valuation based on where we're buying today um and that was the the kind of framework that you have but you're not going to end up with you know okay yeah I'm projecting exactly these are the cash flows that soul is going to get over the next two years and you know I'm

going to back into a DCF um the discount rates and everything would end up being ridiculous in most of these scenarios um so till I mean like the basic rules definitely apply of uh calist and stuff like that do matter a lot but in practice pretty much all the stuff is very early stage where you're looking for is there the potential to get this you know large growth in that over you know a few years I I used to say that crypto token prices were based half on fundamentals and half flows um I'm I've reformed those views I think it's you know 90% flows and 10% fundamentals um and you can see that in you know the market cap of xrp versus ethereum and just look at how much economic activity goes across ethereum

versus xrp like the market caps should not be the same but they are so you have to I guess respect the tape um one adjustment that we've made to reflect that is just being even more selective in what projects we're going to back you may have noticed uh many of our competitors have been throwing a lot of single token ETF at the wall this year in terms of filing we've been much more judicious on that and instead doubling down on our active strategies and it just means that we're passing on more Investments because the active strategies are looking for great doxed teams that are building products that are better than the trafi equivalent

where the token should be able to actually capture value over the medium run uh you know th I can't say that those types of projects have outperformed uh in this tape uh so we're just you know we've pivoted more to um equities frankly where you know traditional valuation metrics are uh more applicable and kind of doing some cross vehicle valuation so the Venture team like knows how their private companies are capitalized and what their valuation should be we use those insights for the liquid token strategies and then I've noticed that the equity markets are starting to price in some of the developments in Bitcoin and the

other tokens a bit more directly like one example that comes to mind is when Phantom wallet uh raised their last funding round and it was a $3 billion valuation and you had a publicly traded comp Exodus exod that was trading at several hundred million market cap so that fundraising event made the public Equity look terrifically cheap and actually then the public Equity promptly doubled right after the Phantom fundraising so we're trying to apply um some of those comparative approaches but the name of the of the topic here is empirical which I looked up in the dictionary beforehand just to make sure and um

it doesn't really apply because this is a new asset class so you end up with a lot of comparative Valu valuation and sentiment-based approach where a new token comes to Market it's likely to be overvalued because it's a retail audience we want to wait for it to come to Market go through the trough of disillusionment you know typically down 90% re-evaluate there and see if we can get uh a true kind of cash flow based upside interesting so one thing I didn't here there either of the explanations was like something like money um or um you know the collateral value of a thing but I did hear sentiment there are these crypto native stories that we tell one another that

explain perhaps valuation premium perhaps um the interesting ball that we see in the market on these assets what do you think about those like more crypto native angles on on valuation I think all of the one tokens have to be money for them to work and the moneyness for a token I just say is the same as the PE valuation on a stock uh and that's assuming that fundamentals matter but um if there's you know $3 billion in ethereum fees that were paid last year you know why can't we put a 30 times multiple on it say which is what an investor might pay for a high growth software as a service company and arrive

at you know hundred million valuation or whatever whatever whatever the numbers are uh I do think that that is a legitimate approach uh and moneyness is often times no different from just paying in advance for a future stream of income uh so I I think that like when Anatoli talks about salana not being money that is not true he's just trying to be careful in front of The Regulators who are watching but all of these tokens need to be money to work because they need to be used as collateral uh for other purposes and that's what makes the vity of money higher on crypto and eventually AC Cruise fees so moneyness is important in my opinion so I I definitely think it's important in ways I also think that

crypto people will just call everything money uh like whatever their token is because it very often just like sounds good and the reality is I mean like I mean you can go into the fundamental like what are the different roles of money and imedi of exchange unit account blah blah blah um but tldr I mean like these assets do definitely look different than traditional equities I mean like they are concretely used in a lot of these way whether it's collateral Andi all these different things um for I mean for a number of assets like eth that is like definitely the case where you actually like do have cash flows and then the like gigantic exception um is obviously something like Bitcoin like there there is no PE multim I mean it is strictly a negative PE multiple at all times like you you're just being

inflated away and losing that value it's not going to the Token holders um something like that I mean I what you were saying in kind of your first answer of like we're looking at flows I mean flows are the moneyness almost kind of at that point of like are are there more buyers than sellers I I mean that that that is what a money is um like are people just like using this as a story value and Bitcoin is obviously i' say very different in practice from the majority of assets um I I think a lot of people want eth to be in that category um because it makes it easier I think to ignore the fact of like oh yeah maybe we just don't need to generate fees or get a lot of activity in these things and we could just say it's a store of value um

I think in practice that's like going to be difficult for most of these L1 assets and they're going to need to show something like you know are they capturing meaningful R they're kind of fees an me from the Network that like there actually are good yield Dynamics for holding this token which I mean something like Soul where I mean over the past couple years where there are genu like genuinely just billions of dollars of fees going to the soul holders um so and then yeah I mean you can start to throw a multiple on that kind of thing I I think it's still hard to put a like any kind of reasonable multiple on most of these things um because again I mean like like how predictable are these cash flows um like going forward you could easily see these things moving 10 100x in either

direction of like the the revenues up and down like very reasonably um but but yeah there's gen there's generally just like a wide range of Bitcoin is this very special exception where like the p and everything just goes out the window um and the most other stuff you're looking for like some like what are some general tokenomics that we want here of like it actually is generating earnings the token holders do get that that there is value capture Yeah you mentioned tokenomics I think the interesting thing about crypto is that we play interesting games with the structure of the token so like volot locking or these like predetermined in inflation schedules um I don't know do you have thoughts on how those might impact valuations how you think about them when you're making decisions the like the inflation one is the one that I'd say probably has played

a large role and it's a big difference in crypto versus um like a a lot of traditional metrics of I I mean like basically all of all of these tokens generally you know some percent of them are staked whether it's 60% 70% value uh various based on the network um that are like actually capturing most of the fees and the inflation Rewards um the inflation rewards are not like actual value created by the network um and and yet you know some set Sub sub set of token holders may like want those and like they will actually be able to capture them if not everyone is staked um and this is the tricky one where a lot of people I think like treat inflation like incorrectly where you'll see a lot of people take like a pretty simple and I think incorrect calculation of you know when uh trying to calculate

like what like what are the earnings or the profitability or whatever this network and they'll take like what are the what are the fees being paid and then subtract out the inflation people do that all the time and it makes absolutely no sense that that is like one of the like simplest calculations I people do all the time that is just like very silly in crypto um and that that's just incorrect I mean like the token holders can get that um the thing that gets very tricky is you know what what percent of token holders are actually like getting that inflation um and what kind of assumptions do you want to make around that because you you can actually have like a positive real yield from getting inflation if you think that you know the staking rate is going to uh remain Rel relatively low because maybe

there's a high utility value to using this token in some other way and so only 20% are going to be staked and so that inflation like is actually like real yield than I am getting um and so these kind of Dynamics like do meaningfully shift across different networks um and so just like understanding like where you are in that Network and how they look across each other um those can be meaningfully different um and and how the inflation is used is also a big difference um of like most of these Pro State eworks you can take the token and just like get it um but a lot of other like l2s and other chains will often they will just have inflation that they will just like hand out as incentives um and that's just like a pure loss to all the other token holders I think there's two major

elements to inflation um the first is to use a like a trafi analog it's quite common for a an early stage growth Equity to be issuing a bunch of stock um because they have uh high capacity for uh reinvestment and there's a lot of demand from the marketplace uh even if it's dilutive and as long as the company is growing quickly uh it's okay to pay a bunch of new shares in compensation to employees or dilute existing shareholders in a new round but if your growth slows down to zero and you're still printing a bunch of new shares it's likely that your stock price is

going to be punished pretty badly so when we look at the crop of like l2s that came to Market kind of 2023 2024 um what you had was like very high inflation rates and starting from high tvl but then they didn't really grow and you couldn't observe meaningful kind of fee momentum and in that in in that case the inflation kind of is functionally a cost because it's these new tokens for whom there is no logical buyer uh so that's unattractive tokenomics uh and then the second is around the predictability of inflation uh and we kind of had this debate with Solana over the last couple weeks um yes Solana inflation rate was high but they had a

better mouse trap for some period of time so it was okay in my trafi example to like print new tokens because it was seeding an ecosystem that had high demand um and the predictability of it the inflation rate Falling by 15% a year at least gave people the opportunity to model with high certainty what Supply might look like in a couple of years um and then transitioning to a more fluid model where the staking rate or the inflation rate may depend on the proportion of tokens that are staked that introduces some more uncertainty into the markets the markets don't love uncertainty and all things being equal you might pay less uh for that type of uh uncertainty so those are two ways

that I think about inflation want to go back to the premium that we observed in markets I'm going a little bit off script here um some most tokens command very high valuation premiums on the market today do they deserve them most of them don't um I would be my like short answer uh I I would say a lot of them do not um and I I mean part of this also just goes to like token Supply me like a lot of like newly launched tokens for example like tend to have a small percent of the supply which makes it like very difficult to buy any of these new tokens um and so maybe they are like Justified on a market cap basis but not like an FTV which is maybe a separate Point um but yeah I I mean a

lot of these are are not going to be justified by but this again goes back to that point of like a lot of these like public you know projects I mean these are still Venture style like outcomes that you're looking at that are like these are very small early stage projects um that yeah 95% of them going to fail and then a handful of them are going to be 100x THX and like you you're able to underwrite that risk um and then you have I'd say a lot that are in that kind of middle area of you know people are assigning this like oh this L1 moneyness premium to it and I I think that lets you just like get away with a like a little too far with like a little bit of a ridiculous multiple when you know when you're talking about like multiple hundredx

type of PE um where I don't actually like see a path to like getting any kind of cash flows out of these in the long term um what you need though is just to see like is there a reasonable path to getting those cash flows in the long term like I I don't care if it's a th000 X or 10,000 xpe today it's like the whole point is like the thing just is you know it's pre-revenue it's not making money yet um so yeah yeah I think it comes down to position sizing because the cardinal sin as a fund manager in a sector or asset class is like if if the asset class works and you don't return your fund doesn't return then you know you got to make the money in a bull market um so and when you look at post the election uh you know what tokens

worked the best the cardos the xrps you know projects that don't really have meaningful fees but that are so illiquid that just a whiff of Hope and regulation and Innovation produces these incredible returns um so we kind of look at you know we have core positions that could be a 10% plus position maybe it's a traditional Equity like a coinbase or a real kind of um Revenue producing project like a eth or a soul and then we have Fringe 3 to 5% positions and then moonshots 1% so to go into something at 1% you don't need to tick all the boxes of great team product Market F on the

product and you know return to token holders maybe you hit one and a half but you see a path to all three uh and so you'll take a tiny position flyer on something without meaningful fees but I agree like at the current levels of economic activity vast majority of tokens um you know don't have a logical buyer we have like sub 30 seconds left I want to get your guys take on technical analysis I cannot go anywhere in crypto without seeing lines on charts do you guys use ta I have never drawn a line on a chart in my life and I do not know what any of the lines on the charts mean and I do not plan to change that uh I use ta for Bitcoin uh I think it plays into like you can know from the

Bitcoin blockchain whether every coin is in profit or loss and so that you can start to observe levels of resistance and support that correspond to those levels um for and and Bitcoin the inflation rate is so low that generally price equals market cap right but when you look at some of these high inflation tokens you may be looking at the price chart and it looks nothing like the market cap chart and so which do you want to perform technical analysis on probably the market cap chart is more appropriate than the price chart so the tldr on that is I do not use technical analysis for altcoins only for Bitcoin awesome thanks guys [Music]