The first thing to consider when trying to value a fungible token is the total value provided by the company/protocol that’s captured by the token. We can understand this as the value the company/protocol will provide to its users.
Next, we need to work out the value of each token; this can be accomplished by dividing the total value captured with the token by the number of circulating tokens. This provides a rough value that equates to a simple formula:
$Y / S = $Token Value
$Y = total mean net value in dollars that a user believes they will get from utilising or spending the token.
S = circulating supply.
$Token Value = intrinsic value of each token in dollars.
For example, if your company is selling a single $10 pizza voucher that a user can buy only with one token, and there is only one token circulating in total, then the value of each token is $10.
$(10) / (1) = $10
However, $Y here is the tricky part to calculate as it requires rather subjective and abstract assumptions; in the above example, someone may value the pizza lower or higher than its objective worth ($10).
Case 1: Bob doesn’t have tokens, but has $10 in the bank. Going on an exchange, buying the token, and paying for the pizza is arduous (ceteris paribus). To him that’s a $4 effort. Therefore, even though he can buy a $10 pizza, the $4 cost of doing so values the token at $6 to Bob.
Case 2: Bob got airdropped the token, and can spend it on a $10 pizza or a $10 NFT. Bob is very active in the community and feels like he’s part of a movement, so he wants the NFT. Let’s assume he values that social clout, and therefore the NFT, at $80. Hence, the token value to Bob is $80.
Case 3: Bob believes the token will go to $300 because he saw multiple influencers promote it on YouTube, TikTok, and other social medias. To Bob, the token is going to the moon. For him, the value of the token is now $300 (ceteris paribus).
This is why it’s almost impossible to calculate $Y accurately.
However, one can still make logical assumptions about the intrinsic value of a particular token.
► If a project has a huge community with a clear status hierarchy (e.g. they have a ‘Top Contributors’ public leader board), there will be a lot more Case 2 Bobs.
► If a project spends a lot on influencers as their go-to-market strategy that
state the token will go to the moon, there will be a lot more Case 3 Bobs buying the token.
Important note: we’re discussing value, not price; both are strongly
correlated, but not the same. The reason S increasing causes value to decrease is because as the token price falls (due to increased supply) the
company/protocol will increase prices for the things it provides, thereby
requiring more tokens to pay for them, thereby decreasing the value of each token.
However, a token’s value and price are not the same and is evidenced in that the company/protocol may simply not charge more in tokens as their token price falls — this means that the token price may drop, but the intrinsic value of the token will remain the same because each token can still be utilised to achieve the same gain in dollar value.
The way the value and price keep in sync is through arbitrage. If I can buy a
$5 token on a DEX and spend it on a $10 pizza on your platform, I’ll keep doing so until the price of the token on the DEX goes up to $10. Arbitrage of token price to intrinsic value is the same as arbitrage of token price on one
exchange to its price on another. The difference is that this arbitrage is
based on subjective and abstract value, meaning that it’s not as simple as
looking at two different DEXs open on two Google tabs and trading.
Fundamentally, it’s crucial to understand that the purpose of this exercise is purely to identify a mean intrinsic value of the token. It can all be
summarised by the following line:
The value of your token depends on how much value a user believes they
will get from utilising / spending said token.
- If your protocol has a token that’s used to buy vouchers, then the intrinsic value of all of your tokens is going be whatever the total value of your vouchers is.
- If your protocol has a token that’s only used to govern revenue share percentages then the value of your token is going to be the difference between the cost of the token & governance and the higher-yielding revenue share.
- If your protocol has a token with the only utility being staking in order to earn more tokens, then the intrinsic value of your token is going to fall into the Case 3 category, and then to $0 once people realise there’s a
new, higher paying Ponzi protocol available elsewhere.
At the end of the day, mean intrinsic value is meant to act as a rough guide
for what to price your token at — i.e. an approximate equilibrium price. If the intrinsic value of each token is lower or higher than the price you assumed, then your token will keep falling or climbing, respectively, until it reaches its intrinsic equilibrium value through arbitrage.
This is why most projects’ token price falls by 99.9%; they launch assuming
that their $Y is going to be $1, when in reality it’s around $0.01. Then they
flood the market with supply, and end up with a token that’s valued, and
correspondingly priced, at $0.001.
