Foreword: in the current encryption field, there are few projects that can generate cash flow. In addition to the centralized exchanges and mainstream public chains, some defi projects can generate real cash flow. So, if we follow the P / E ratio of traditional finance, can we give the value of defi token? There must be some problems and imperfections in this method, but it might be a way for us to understand the value of defi protocol.

In traditional finance, price earnings ratio (PE) is a simple and clear formula, which can be used to understand how investors evaluate the company’s future growth expectations relative to its earnings. By definition, the PE rate means that the market is willing to pay x dollars for every dollar a company generates. High tech growth stocks like Netflix have a PE ratio of 84.2, which means the market is willing to pay $84 for every dollar Netflix earns.

Generally speaking, P / E ratio is an effective tool to evaluate capital assets. Capital assets, such as stocks, bonds and income generating properties, all provide investors with cash flow based on future earnings.

With the emergence of defi in 2019, we can see a new currency agreement on Ethereum. Many of them generate cash flow by charging small royalty. These cash flows are used to: 1) distribute them directly to the participants in the ecosystem; 2) drive scarcity by destroying native tokens. Although the destruction of native tokens may not intuitively bring benefits to token holders directly, token destruction is actually a dividend, because it leads to an increase in the proportion of token holders in the network or agreement.

With many unlicensed currency agreements accumulating cash flows, P / E ratios can be a useful tool to evaluate native tokens because they have similar properties to traditional capital assets. Considering that encryption assets are still in the early stage, this is not a perfect measurement or evaluation method, but it does provide a simple framework for comparing the relative position of the same type of token.

From the perspective of encrypted assets, the price earnings ratio equation can be expressed as follows: current market value / annualized income

Revenue from the defi token

That’s the background of the currency agreements we’ve chosen, and how they capture costs through usage.


It is a synthetic asset issuance agreement in which SNx holders can pledge tokens and earn the fees generated by trading synthetic assets.


In multi mortgage Dai, the point difference between DSR and stabilization fee can be used to destroy MKR.

*Kyber Network

KNC tokens are used to pay for token transaction costs. A part of KNC is destroyed and permanently removed from the circulation supply, and the remaining part is allocated to the Reserve Manager of the pledged KNC.


Token transactions generate eth based fees, which are allocated pro rata to the liquidity providers that pledge Zrx.

*Nexus Mutual

Eth and Dai from expired insurance are added to the capital pool, increasing the value of the nxm token.


When rep token holders honestly report the results of any forecast market, they can earn eth (soon DAI) fees.


The cost of the loan is distributed between the lender and the agreement. The cost of the agreement is for the destruction of the lend token.


All transactions on uniswap generate fees, which are allocated to the liquidity providers of each respective liquidity pool.

How to value the defi token

(annual cash flow of currency agreement, token terminal) synthetix

From the perspective of annualized cash flow of major currency agreements, synthetix is an obvious leader. It generates annualized fees of nearly US $32 million through synthetix exchanges. Synthetix charges 0.3% for all synthetic asset transactions, and the fees generated are distributed to SNx Pledgors pro rata, who provide pledge for underlying synthetic assets.


Although makerdao is the currency agreement with the largest market value and the basis of other currency agreements, it only captured $6.7 million in annualized income through stabilization costs. Recently, it has gone from SCD (blue fox note: single mortgage DAI) to MCD (multi mortgage DAI). At the same time, it has also changed the destruction power of MKR, because it has introduced DSR (blue fox note: Dai saving rate).

DSR allocates the stabilization fee from the outstanding debt of the system to Dai holders (locking their Dai in the holder of the smart contract). As a result, there is a difference between DSR and stabilization fee, which is currently 0.25%, of which DSR is 7.5% and stabilization fee is 8%. The cash flow generated from this difference is used to purchase and destroy MKR, thus providing a wide range of dividends for MKR holders, who are responsible for governing the overall system( Blue fox note: this new value capture mechanism leads to a decline in MKR sales in the short term, because most of the stabilization costs are allocated to DSR, which originally used to destroy MKR. However, if we can stimulate a larger cake, the amount of destruction will not necessarily be small in the long run. The key lies in the M1 money supply that Dai can capture.)


Two of the biggest unlicensed liquidity protocols in defi are kyber and uniswap. They are the only two of them that can generate 7-digit annualized revenue. For kyber, part of the cost is used to destroy kyber’s KNC token, and the other part is allocated to the pool manager. Importantly, kyber’s upcoming katalyst upgrade will change the way expenses are accrued, allocated, and destroyed throughout the system. Another well-known unlicensed liquidity protocol, uniswap, is an ecosystem of unpublished tokens, in which fees are allocated to liquidity providers who pledge the token pairs of Eth and other tokens in the pool.


Nexus mutual is the last monetary agreement that can earn real cash flow. It is a decentralized insurance agreement. Nexus mutual operates in the way of “bonding curve”, and users can buy insurance on the smart contract of value storage( Blue fox note: bonding curve is proposed by Simon de la Rouviere, which describes the functional relationship between “token purchase and sale price” and “total token issue amount”)

This kind of insurance covers the occurrence of hackers or vulnerabilities in the smart contract within a specific period of time (set by the user at the time of purchase). If the insurance matures and there are no claims, Eth and Dai used to purchase the insurance are added to the capital pool, thereby increasing the value of the nxm token.

0x, August and AAVE

The last few major currency agreements, including ox, August and AAVE, have received some fees, especially when looking at their liquidity market value. AAVE is quite new and we can discount its accrued expenses. However, ox and August have been on the Ethereum main network for quite a long time.

Having said that, it recently changed its token economy model to allow liquidity providers to pledge Zrx and earn eth denominated fees. On the other hand, August is waiting for the upcoming V2 upgrade, in which it predicts that the market’s capital pool will be priced in Dai instead of eth with high volatility. Among other improvements, this change will increase the accessibility of the decentralized forecasting market platform.

P / E ratio

Taking into account the cash flows generated by all of the above agreements, here are the P / E ratios of these major defi tokens (higher may mean overestimation)

How to value the defi token

As we can see, in terms of encrypted assets and traditional capital assets, both synthetix and nexus mutual have very low P / E ratios, only 5.7 and 13.2, respectively. Given that these tokens drive open, unlicensed financial products (synthetic assets and insurance), the future growth of these currency agreements may be underestimated by the broader market.

The second is kyber network, with a P / E ratio of 31.2, at the same level as Microsoft PE’s 30.27. Kyber network built itself as one of the leaders in unlicensed liquidity agreements in 2019, but the price action reflecting this growth has not yet been realized to a large extent. In the next few months, with its upcoming katalyst upgrade (token economy restructuring), it will be interesting to see how its P / E ratio changes.

Makerdao, which has a price earnings ratio of about 80 times, corresponds to many of today’s high growth stocks. More than 12000 mkrs have been destroyed (blue fox note: according to the current price, it is equivalent to the destruction of about 7.5 million US dollars of tokens). Meanwhile, the circulation of Dai exceeds 100 million. Makerdao has achieved great growth in the next few years, and it will continue to be one of the core projects of the development of defi.

How to value the defi token

(from makerburn) although the dollar price has been stagnant, this is largely due to the underperformance of Ethereum in the past few years. From the perspective of ether, MKR is actually doing well, with its assets up 124% in eth price since January 2018.

The rest of the token currency agreements, such as ox, AAVE and August, all have extraordinary P / E ratios, which are almost unimaginable according to the traditional capital market. In this way, we can assume that these agreements may require larger usage to generate cash flow, or reconstruct their token mechanism to capture the value from usage and agreement fees.

Comparison with cefi

While open, unlicensed currency agreements look exciting, we’re also seeing token strategies from major “crypto banks,” such as coin an and BNB.

Every quarter, coin an will use part of the profits generated from its operation to destroy BNB tokens. Based on its quarterly profits, coin an can effectively bring benefits to BNB token holders. Although the community has some different opinions on how to carry out the destruction of these tokens (for example, BNB tokens are not purchased from the open market, but are destroyed from its crowdfunding reserves, which have never entered circulation, etc.), in terms of annualized revenue, centralized licensed cryptobanking is better than decentralized unlicensed currency agreements. And far better than them( Blue fox notes: as far as the current value capture is concerned, encryption banks represented by exchanges are still the biggest value capture. For details, please refer to the previous article “value capture in the encrypted world: who is the super capture?”

In the past four quarters of token destruction, coin an has destroyed nearly $115 million worth of BNB tokens.

How to value the defi token

According to the annual income of US $115 million, the current market value of BNB token is US $2.83 billion, so the P / E ratio of BNB is 17, which is relatively reasonable for the token with the highest value in this field. Of course, although the benefits are impressive, it should be noted that BNB token holders do not have the same legal protection as equity holders.

Two thinking experiments

1. If Dai reaches 400 billion, what will happen

In the article “Ethereum’s economic bandwidth Theory: eth’s multi billion dollar market”, Dai’s potential under several assumptions is summarized. The idea is that if Dai captures a small fraction of the global money supply, then we need billions of dollars of Dai in circulation, if not trillions of dollars.

So, in this case, what will be the impact of the MKR token? With the price earnings ratio of MKR, the cost of spread, and the circulation of Dai, we can use the following algebra to predict the price of MKR.

Our formula for calculating MKR price is as follows:

Current market value = earnings * P / E ratio

If Dai captures

51% of Argentina’s M1 supply = US $13 billion

1% of us M1 supply = US $40.3 billion

10% of us M1 supply = US $403.4 billion

And let’s assume that

Spread: 0.25%

P / E ratio: 80

MKR supply: 1000000

So, we come to the conclusion that

If it reaches 10% of M1 in the United States, the price of MKR will exceed $80000( MKR’s current price is $617)

Just like the article “Ethereum’s economic bandwidth Theory: eth’s multi billion dollar market”, the above figures are just for understanding the possible future value of MKR, so we should have our own thinking. (blue fox note: the author here means that all the above figures are just thinking experiments, not necessarily things that will happen, so we can’t make investment decisions based on these, Need to have your own judgment and thinking)

The estimated price of MKR does not take into account the MKR destroyed in the past, but is only calculated from the fully diluted MKR supply. In addition, DSR, stabilization fee and potential spread will change in the future( Blue fox note: according to the past governance history of maker, DSR, stabilization fee and spread are almost certain to change in the future, so the above calculation is just thinking exercises.)

In addition, if these figures are realized, the P / E ratio will also change. If Dai continues to capture more money supply (and there will be less money supply available in the future), investors may price MKR at a lower price to earnings ratio due to the expected decline in future growth( Blue fox note: in other words, the global money supply is relatively fixed. The more money that Dai captures, the smaller the space for the future. But maybe it’s too early to worry. After all, it’s not even a drop in the ocean now.)

The opposite may be true: if Dai’s narrative as a global, unlicensed and stable value storer is widely accepted, and the market believes that there are still significant growth opportunities in the future, then investors may price MKR higher.

2. What happens if uniswap issues tokens?

Uniswap quickly built itself into one of the leading unlicensed liquidity protocols on Ethereum. In 2019 alone, uniswap accumulated $1.69 million. However, although it allocates millions of dollars in fees to liquidity providers, it lacks native tokens.

(from defirate)

Let’s assume that uniswap decides to integrate native tokens in the future. So what is the “fair value”? In terms of liquidity market value, where will it be?

First, we quickly design a token economy for uniswap to capture value from its transaction costs

In order to become the liquidity provider of uniswap and have the right to obtain the cash flow of the agreement, the user needs to hold x number of uni tokens.

Not elegant, but simple. Uni will represent the right to charge from uniswap.

So, considering the current income of $1.69 million, what is the market value of uniswap?

If the price earnings ratio of kyber network, its closest competitor, is 31, then the token liquid market value of uniswap can reach US $52.39 million. If, considering the explosive growth of uniswap in the past year, investors may think that the price earnings ratio of its token should be higher, let’s increase its price earnings ratio to 50.

At a P / E ratio of 50, uniswap’s current market value will reach $84.5 million, more than kyber’s current $76 million( Blue fox notes: 50 * 1.69 million US dollars = 84.5 million US dollars. In addition, the current market value of kyber is 77 million US dollars.)

Just for fun, if we raise the P / E ratio to 100 (still less than half of Tesla’s). Uniswap’s current market value will reach US $169 million, making it among the ranks of other defi agreements, such as August (US $158 million) and synthetix (US $185 million) (blue fox note: synthetix’s market value has fallen sharply recently, to US $153 million)


Considering that these currency agreements generate cash flow and have properties similar to traditional capital assets, it makes sense to calculate the P / E ratio for the defi token.

Importantly, defi tokens are less likely to accumulate a currency premium (which SNx may have), as they primarily drive underlying agreements and do not serve as reserve assets or a store of value( In other words, the token of these agreements mainly captures the cost value, rather than the value of the currency itself, which is obviously different from the bottom assets of the public chain such as BTC and eth. That’s why synthetix recently considered increasing its collateral to eth

Therefore, from the perspective of traditional capital assets, it seems fair to observe the defi token in this way. Tokens like synthetix and nexus mutual have a low P / E ratio, indicating that they are used in a high volume relative to their market value. This may mean that they are undervalued by the market as a whole, or they have little expectation of their future growth (which seems unlikely given that defi is still very early and their future potential)

On the other hand, tokens like August and 0x have very high P / E ratios, which means that these token agreements are in a difficult period in terms of accumulating large amounts of cash flow relative to their market value. It seems that encryption investors either (1) overestimate these assets, or (2) have high expectations for their future growth.

In any case, from the perspective of P / E ratio, the defi token can give investors a clearer understanding of the usage of these agreements and the potential investment opportunities in the future.

It is also obvious that this industry is an emerging industry. In terms of cash flow, there is still a long way to go to compete with the authorized encryption banks, while the gap will be even greater if we compete with traditional companies.

Risk warning: all articles in blue fox notes can’t be used as investment suggestions or recommendations. Investment is risky, so individual risk tolerance should be considered. It is suggested to conduct in-depth investigation on the project and carefully make their own investment decisions.

Responsible editor; zl

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