Crypto Still Lacks a Valuation Framework

Transcript

If L1 blockspace is a commodity, then I don't care how big the network is. The valuation trends towards zero. >> Blockspace is not a commodity. Saying block space is a commodity is like saying corporations are a commodity because anyone can form a corporation. Valuations and value acrruel. I feel like this is the the last boss that that we need until crypto becomes an asset class at par with like all the other established ones. >> Right now in crypto, we do not have a shared model. networks are [music] more complex than companies. The early work in ascribing value to stocks and things like commodities sort of settled on two laws of physics of valuation which is either cash flow or scarcity. It's too

early to expect to [music] value these things on revenue. There will be a few winners of the L1's and those winners will distinguish themselves by Hello, Das. Thank you for being here. Uh, it is day three final of the conference and I'm excited to introduce you all to inflection point which is a new podcast that we launched this month, three weeks ago. This is our first live podcast. Um, some actually it's the

first time all three of us have met each other in person, so it's exciting for us as well. Uh, before we kick off, let's just start with some quick intros. So, David you >> Yeah. Hello everyone. Very excited to be here. Uh, my name is David Awan. I'm head of research at Anchorage Digital. Uh, before working at Anchorage, I had um positions in other crypto shops both on the sell side and on the buy side. I had the pleasure of working with Matt Hogan uh at Bitwise and before that I used to work in Tradfi doing sellside equity research.

>> Amazing. Uh Matt Hogan, chief investment officer at Bitwise. I've been there for eight years uh from dollar1 to about 15 billion in assets. Uh before Bitwise, I spent more than a decade in the ETF industry as the CEO of ETF.com, helping build the first data and analytics effort in that space. >> Go ahead. >> Hey everyone, Michael Mark Antonio. Uh I'm the head of DeFi at Galaxy Digital. Um we focus on all things trading and market making on decentralized networks. Um before uh being the head of DeFi at Galaxy, I spent most of my career as a corporate lawyer uh focused on M&A.

>> Okay, awesome. And I'm Mark Arjun. I'm senior research analyst at Blockworks and but now my proud title is host of this inflection point podcast. Um institutional focus podcast. So, but today we're going to talk about L1 valuations. It's a little bit more cryptonative than we our usual topics. Um, it's a difficult topic, but I wanted to share something very exciting with the audience. None of this information discussed constitutes investment advice or an offer or recommendation or solicitation by Blockworks, Galaxy, Bitwise, Anchorage, or any of the affiliate affiliates to buy or sell any securities. Okay, that out of the way, let's kick it off. Um Matt, backstage we were talking and this is your third city

in 3 days. You've been traveling along a while. So yeah, any any insights? >> Yeah, I was in St. Louis two days ago giving a speech to a CFA society and visiting uh a major national account firm and then in Phoenix yesterday at the Baron's uh top advisor summit. Uh I I tweeted about it a little bit and someone responded that there is uh not a crypto winner in institutional crypto. Uh there's a crypto winner in vaporware uh and a crypto bull market in institutional crypto. I think that is true. I'll give you a specific piece on the Barren conference. I've been going there for four years. It's the largest RAA gathering uh of the top RAAS. Four years ago, I was in a breakout session

pre-conference and this year I was the keynote launch speaker. And I'm not saying that like for me, I'm just saying that for crypto, it's moved from offstage to literally the keynote of the whole event possibly. And I think that's a sign of how far we've come and how much the interest is. >> Okay. Awesome. I mean, you you mentioned something there with the vaporware. I think that's kind of tying into, you know, this is an institutional conference podcast blockchain not bitcoin kind of uh narrative that we saw in 2022 and even before that. So let's just let's just get into the valuations, right? Like and specifically like L1's.

I'm going to give my take first and then you all please disagree with me where where you think I go wrong. So coming from a TRDI background, this is how I kind of view it. Uh I like the DCF model to to begin with. I like the fact that these chains have fees. I see them as GMV and then certain chains have burned. Some of the tokens that are used to process fees on the network are burnt. So I I see that as the chain's take rate. Um and that's basically the revenue. And it just happens that the blockchain uses all of its revenue for a share buyback. Um, at Block Works, we promote something called REV, real economic value, and it's a proxy for the

the demand of transactions on the network. And so, even if you don't like the DCF model, then you if the burn outweighs the token emissions, then you have a deflationary asset. Um, I think that may be also important if you are valuing it as a commodity or even as a store of value. And I know we don't like to use that terminology often here. Um, people disagree with me all the time. Uh, what what do you guys think? >> Yeah, I disagree. [laughter] So before we look at valuing blockchains, uh, we should first think about how other instruments have been valued in

the past and the history of them. So if you look at the history of how stocks were valued before 1934, so we could say between 1600 with the East India Company and 1920s, there was no formal methodology for valuing stocks. There was no agreement among stock purchasers about how a stock should be valued. And then in 1934, two guys Graham and Bell wrote a seminal paper called security analysis. and they came up with a formal methodology for how to value a stock. And that methodology looked at cash flows. It looked at financial statements, looked at uh book value and dividends. And

there was, it's not to say that they got it 100% right. They didn't. But what they did was they built a methodology, but that methodology was more important than just figuring out how to value the stock. It was the presenting the conditions on which you could ascribe value to something. And once everyone adopted it, two important things happened. First, the securities laws reflected that methodology. It is no surprise that the Securities Act and the Securities Exchange Act really focus on disclosure financial statements. Right?

This is effectively channeling what Bell & Graham put out. So then we had in 1938 we had uh the dividend discount model um and that was uh profered by a guy named Bell Williams and what he did was he said the net present value of the dividends of a of a company. That is how you value a company. Both of those methods uh had a very novel interpretation. it was that a stock has intrinsic value apart from the market value. Then of course we had the discounted cash flow model which basically just generalizes the discounted dividend uh model uh and

um and it looks at the future cash flows of a company and the CAPM model. But all of these models were critical for institutions to center around how to value these things. Right now in crypto, we do not have a shared model. And the reason is actually pretty uh obvious. Networks, let's talk about L1's. Networks are more complex than companies. Companies are complex, right? I'm not going to tell you it's easy to value a company. It's not. But networks are a degree of complexity above companies. And so what we've seen is a

bunch of attempts to value a network. And those networks um those valuation methodologies are they lack two critical features. One, they're not complete. They don't cover the entire range of the things that we want out of a valuation methodology. And two, no one agrees with what they are. And until we get both of those things, we're going to be we're not going to be able to uh we're not going to be able to really ascribe value in a shared way. Okay. And you're not going to see as much uh growth in tokens, but that is coming. And so, Block Works does a great great bit here because you're at least advocating for a model, right? That's important.

I'm going to split the difference and say you're both half right and half wrong. Uh so, so I think uh Mike, to your point, I agree that we don't yet have the model. I agree that will be hugely valuable. I think the early work in ascribing value to stocks and things like commodities sort of settled on two laws of physics of valuation which is either cash flow or scarcity right and I wonder if the model we're constructing has to build on those two laws of physics those are like you know like the gravity of financial assets and I agree we don't yet have the right mix and you can see people debating which of those two laws of physics apply to this new thing and the answer is probably a combination of both. I think the the the the tweak I would put on what you said

um is uh that I think the issue with revenue right now is that uh it's too early to expect to value these things on revenue. By which I mean imagine you were the CEO of Ethereum and you were in charge of setting prices. Would you set prices today to maximize today's revenue or would you set p prices today to maximize market share on the view that you can optimize revenue in the future once you're embedded? You would do the latter. If you did the former, you'd be insane, right? No one wants an average ETH transaction today to be 30 bucks. It would completely get lost, lose the market to everyone else. And so focusly exclusively on revenue today uh is like focusing on revenue for a seedstage

startup. So I think it may be part of sort of the endboss solution of how to value these things uh along with other aspects like this commodity aspect but I think uh we don't actually want chains maximizing for revenue today because they should be maximizing for market share and embeddedness. >> The cool thing about valuations is that if you ask four people you're probably going to have four different answers and that's what we might get here. I think it shows how early we are in this topic. Uh just before we get there, there's one thing I want to say. This is probably and we're talking a little bit about this on the backstage. This is probably the last foundational topic that we need to solve

for crypto as an asset class. And here I'm talking about crypto beyond Bitcoin and beyond the the hundreds of billion dollar assets like Ethereum. Uh I think this is what we need for us to see crypto as a much broader asset class. We solved blockchain scalability. We survived a very hostile um regulatory environment. We found a multitude of use cases with product market fit. Um I think there's still some things to figure out on those fields. We in the last episode we talked about the SEC guidance and that for some assets I feel like there's a few unanswered questions there. But now valuations and value acrruel, I feel like this is the the last boss that that

we need until crypto becomes an asset class at par with like all the other established ones. And I I agree with a lot of what you said, but the one thing I would say and this comes from my background as an equity research analyst. I've been doing DCFS for a long time, huge fan uh of of of all the current methodologies. But if you ask to a lot of the equity investors, the DCF is a tool they use, but usually it's not the main tool. Um, for a lot of folks, it's actually not even a tool. If George Sor I'm a huge fan of George Soros as the the investor, not maybe not the other stuff, but uh George Soros

says he he he never used it and he is probably the best performing investor of all time. uh he he he just has a different uh background and a different way uh of thinking of things. Uh GCFs are more art than science, especially for early stage assets. And I think that's getting to your point a little bit, Matt. Like a venture capitalist can probably do a GCF of an early early stage startup, but do you think anyone invested in Google's series A because they did a DCF of Google or Amazon or Uber? No. you were looking at the team, you're still looking at the market, you're still looking at some disruptive technology that you think will overtake u some sort of mainstream um investment

uh or mainstream uh sleeve of of the economy. So I think DCFS are very important, but I would say they might not be and for some companies maybe they're already in this stage where you can just justify your valuation from the DCF side of things. uh maybe some of the more advanced crypto dabs are already here, but I I don't think it can be the only uh the only tool. Still, it's a very important one because having revenue shows that the market is willing to pay for whatever service you're you you want to provide. Uh so I want to see DCFS as as a tool. Uh and I think that the commodity uh environment actually

will play a role. Crypto is a blend between commodity and and and like a a cash flow generating um business and we have to understand for each asset how big is the commodity side how big is the cash flow side even in L1 right Ethereum is commodity based I would say hyperlquid which is an 01 is probably very heavy cash flow based so it's going to be it's going to very asset by >> yeah I actually think that's a really good point we talk about it as an asset class it may not be an asset class in the sense that you can apply the same valuation metric to each different piece. Uh you may need very different valuation metrics for different parts of the stack from DAPs all the way up to Bitcoin.

>> Yeah, I mean valuing networks is more complex. I agree DCF is not particularly the most appropriate model for valuing a network. Um it's a part of the equation but it's not the full thing. I would think and just spitballing here the core intuition we are trying to solve for our value on a network is what I think it is network effects and network activity. Now DCF might matter as a proxy for network activity. If it has revenues it has activity right um but it's not the only thing that matters. There's a bunch of other things that will matter.

So there was a debate last year between Salana and Ethereum. Ethereum said the most important thing is TVL. Salana said the most important thing is revenue. I think they're both right. I'm not just saying that to split the baby. I think they're both right. Revenue matters because it is a proxy for activity. TVL matters because it's a proxy for security. Um, and if you care about the token valuation, you have to care about how valuable the network is. And that is can only be understood uh in terms of well the primary way it could be understood is how valuable are the assets that sit on that network right just as a thought experiment here right now Salana is

about a $50 billion network by market cap so you could take over the network with $25 billion I'm sure there's people here that have that much money and we could uh you guys could take over Salana theoretically you would never put more than 25 50 billion dollars of value on a network that could be taken over for half that, right? And so if you think about it, the more valuable assets that sit on a network almost inherently, the higher the price for the native asset must be because the higher that price offers greater security properties. So it's a complex topic um but I think the best proxy is

how to look at networks as economies and these are their own economies and they're very complex. I think we have to take a page out of macro honestly and how macroeconomists look at value in economies. Hey all Blockwork Works co-founder Michael Apaleo here. Quick break to talk about something we've just launched Block Works investor relations. As the market shifts toward institutional capital, investors want more transparency, more standardization, and a higher level of professionalism. But the traditional IR model is slow, manual, and not built for how crypto works. If you're building on chain, your data is already live. Your business is already transparent. The challenge is turning that into a clear, credible story for investors. That's exactly what we're solving with Blockworks IR. It's a single platform that brings together

real time analytics, branded investor portals, and hands-on advisory support so you can communicate what matters. If you're an onchain business looking to level up your investor strategy, check out Blockworks investor relations at blockworks.com/investor-reations. All right, back to the episode. >> I think you can't really just take over a network of 25 billion. It's not you can buy it outright. It will push up the price. But I I do agree with the networks cuz like network effects you can use something like metclaf's law to to judge something and it grows with the square root of the number of users and connectedness and I think it's more of a correlation. The more users who are on the network the more they trust the network the more they'll put value on the network. So I think it's more of

that kind of causality relationship and and the the other thing we talked about like yeah okay maybe revenue can be seen as a way of network effects but the reason one of the reasons and if you if you want to eliminate uh monetary premium from the conversation one of the reasons why Ethereum could be seen as more valuable is because of the diversification of the revenue streams and the sustainability of those revenue streams. For instance a software is a SAS company they have a recurring revenue model. So they're going to get be assigned a higher multiple premium than a bricks and mortar shop. On revenue, the revenue streams come from DeFi, from NFTs, from stable coins, from tokenization. It's very diverse. Whereas on Solana, it's a little bit more on the trading side and a little bit on the

speculative side where it might be a little bit more ephemeral. So I think maybe the market gives a higher multiple premium to Ethereum because of that more diversified and sustainable revenue and yeah fees coming from that. >> I think I I I just I think the metap law thing just to sit on that for a moment is only a useful metric as a precursor to revenue. >> If there is no revenue at the end of that rainbow it's a useless metric. The internet is the largest network in the world. The valuation is zero because it's not a precursor to revenue. I think that's a tool that people have used to value networks before we get to revenue.

Um, so I wouldn't use that as the end boss. I think I think the the the reason it's useful or rather it is only useful is what you're describing is true, which is that ultimately L1 block space is not a commodity. If L1 blockace is a commodity, then I don't care how big the network is, the valuation trends towards zero. uh if L1 block space is differentiated and more like nation state GDPs uh and more valued on security brand moat etc um then network effect is a useful proxy for how we eventually end up at revenue so I think that's probably like a key question and I actually agree with the point you were pointing towards Mark which is it is differentiated uh and therefore I do not think it is a

pure commodity and that is one of the reasons I'm optimistic long-term on L1 valuations agree with that and I think that gets to a very important point that I think speaks about the stage where you are in the industry right now. Blockworks is doing God's work showing like all sorts of fundamental metrics. You can see their research dashboards. It's really amazing. Um but if you if you use again and let's discuss like the quote unquote revenue metrics and DCF metrics, uh let's use multiples as a simplification of a DCF, right? You're not going to do a 10-year DCF, discount the cash flows. usually just going to do a revenue multiple or a net income or kind of profit multiple something like

that. Uh like in traditional markets the first thing about multiples is that they're forward-looking. So like no one is looking at let's say Apple's or Microsoft's price to earnings ratio of the last 12 months. Everybody's looking at there in the next 12 months or what 2027's going to look like or 2028 if you want to push forward. In crypto, I feel like we are still like annualizing the current revenue rate and that's the multiple we talk about. Also, like in Tradfi, if you if you go to a Bloomberg terminal, you you're going to find 25 analysts who cover Apple for or any big stock for a very long time and they going to have estimates for every single

important financial metric for the next three to five years. and you can just see pretty much where where where valuations are. And we I think we still need to develop that and I think Blockwork is being a very big pioneer in in that space. But I think we still need to develop this quote unquote sellside future estimate industry. It's hard to do because these things are still very early. But I I'm pretty confident that in a few I don't know maybe year or or two, we're going to start to be able to start thinking about estimates and you're going to see where the market is and I think let's say my opinion is higher or lower than that and that will

help me to underwrite an investment decision. Um, so, so, so, so, so there's still certain like things that need to come over time as the industry evolves that allow us to to look forward, which I think is what what what Matt was getting to when then you can use the Matt Calf uh, reasoning to to to project the future with a little bit more certainty. >> Yeah, I strongly agree with that. I will I I think it's a really strong point and I would note one of the reasons people are thinking these valuations are really high on these metrics is that they're all backward-looking. If you did that on equities, you'd be like have the same same sort of view. Um everything would be overvalued. So I think that's an

important point. So, you know, >> I was just going to say I think it's worth noting that when we're talking about valuations and the uncertainty there, I'm talking about and I think we're all talking about L1 valuations. I think for apps, uh, decentralized apps, let's say Uniswap or Morpho, um, a more standard DCF analysis actually makes a lot of sense because they are more like companies. Um, now they have network properties, of course, but they're more like companies. I also agree with you, Matt, about uh how blockspace is not a commodity. Saying block space is a commodity is like saying corporations are a commodity because anyone can form a corporation.

There's just infinite supply of corporate uh of corporate charters that you can get out of Delaware or any other state. um what matters is whether that corporation has other properties that people want to uh want to invest in and um so I agree completely there will be a few winners of the L1's I don't think um there will be one I don't think there will be a hundred um there will be a few winners and those winners will distinguish themselves by generating the most activity and being useful to the global economy So I I mean I I agree with that. I I love the revenue generating apps from a

sellside equity research background. I can just do a DCF, slap on a price to sales price to in um earnings ratio. So I mean that that's what I love writing about. But I I wanted to ask you all, you know, we're talking about this very abstract valuation stuff like when it comes to your maybe your PA or maybe for clients like what what are you actually looking at? Like if you maybe it's one metric maybe it's a combination of some like for me for instance something I track is a historical price to dex volume because dex volumes have been high highly correlated with price and it shows you activity it shows you network effects it kind of is a proxy that bundles a lot into one. So, I do maybe I make a mistake with the 30-day annualized. I know I don't really have power looking estimates, but like I

track price to dex volumes on the different um um L1s to kind of give me a gauge of where we are in the cycle and which is over or undervalued. What What are you all looking at? And >> don't get me wrong, I also look at the current revenue annualized. I'm just saying how I I would like the future to be. I don't I don't think we're there yet. Uh but yeah, I mean I I think for me um if it's and then again I think there is this distinction between commodity crypto assets and cash flow generating crypto assets and some L1 assets can be kind of both right again hype is is is A1 and they're they're very cash flow heavy um Ethereum is an L1 and they're very I would say commodity kind of

valuationheavy. So, so, so that's the first distinction. Uh, but all network utilization uh u metrics I think are are very helpful and I think this one you just mentioned is actually super interesting. Uh, Mark, I I I honestly haven't haven't thought about it. Uh, the other thing that for me is very helpful is to because we are now at a stage where you usually have a couple of competitors either within the same chain or crosschain. So, you can probably compare assets as well. So relative valuations I feel like are relatively interesting. Not to necessarily do long short positions. These are I think still hard to do in crypto, but at least to give you a sense of who is cheap or

expensive on a relative basis. Uh so I think for me that's that's kind of uh interesting. That's where Ethereum looks hard. Uh because like if you compare I fully agree with you. Ethereum is more diversified. Ethereum has a very strong foothold maybe in the more institutional tokenization side but Ethereum's network value is I don't even know the number right now ahead but it's what four times uh higher than Solana right so so that's where things start to get complicated for me when when you start to compare them with one another [snorts] >> yeah I agree with all of that I I think often from a 30,000 foot view and sort of early stage VC model uh when I think about most of no but not all these

assets which means uh that I value growth uh more than current revenue and I value market share in important niches uh as an extraordinary thing because I'm betting on that niche uh growing and uh revenue, network activity, transaction activity, wallets, etc. Um all of that contribute to the growth question. So those are all really important features, but I would rather have something growing fast with small revenue than low high revenue and growing slowly uh because I'm optimistic on the scale of the opportunity. And similarly, I would rather have something with a large and growing lead uh from a market share perspective in an area that I think will expand um rather than a shrinking market

cap or a small piece of a market that I think will grow just because I think most of these categories have, you know, 100x growth, right? Uh tokenization could a thousandx in terms of uh assets. So, you really just want to own that space in a fast growing area. >> Yeah. I'm often disappointed in relative value because it doesn't make a lot of sense how well there's two things. One, if you're looking just at revenues, then Hyperlquid and Salana should be valued roughly the same as Ethereum, right? Or it should be valued closer to Ethereum.

Um, and then you have to ask yourself, is Salana undervalued or is Ethereum overvalued? Um, and that is a tough one. The other thing is on DAPs even like when I'm looking at unis swap's volume and it's has it best day ever or best month ever in volume and the price barely moves you start to say am I right about the price or is the market right um this is what leads me back to a shared methodology it's not to say uh that everyone uses that methodology but at least everyone agrees that that's the foundation of some basis obviously if everyone uses the same methodology to value stocks, then no one would make any money because

there's no edge in using the the public methodology. Um, but you know, just having a shared uh sort of vocabulary about what a value system looks like for a L1 blockchain, I think is incredibly important and we need to get there. I don't know if it's going to come from, you know, block works or I don't know if it's going to come from academics. You know, historically, it's come from academics, right? And um I think institutions need two things to end to really enter crypto fully. The first they've gotten I think now or are getting which is regulatory permission but the second is intellectual permission and that comes from the

academics that comes from universities that comes from the economists who say these things have value and here's why. I would just add in because Mark won't uh that the closest we have is the work that Block Works is doing uh on investor relations and on the revenue stuff at least from my perspective >> especially what Mark's doing. I love my panelists. So [laughter] um so I I wanted to do okay this might I'm doing some market research here. This is the morning. So if you think that uh L1 asset with small inflation is okay, then stay silent and make me look like a fool. If you think that you would

like to invest in an asset that is deflationary and supply is decreasing over time, let me get a round of applause. Okay, that was pretty split there. Okay. Okay. Love it. I I appreciate the uh the commodery. >> What's your position? >> I deflationary assets. Yeah, I would love to invest in something that is decreasing supply over time. I don't think uh betray markets have anything like it. But >> but but one one quick point. I got >> we'll have to do another episode. But if if I am correct that a blockchain should be modeled more like an economy than a business. Um then you would have to say that you favor economies that are in deflationary, right? In a

deflationary spiral. Ah, I think that's uh that's trying to put it in a box. It can be both, Mike. It can be both. >> Well, it had to be in a box cuz we're we've got 14 seconds. >> Well, I I will have to tune in for the next episode of Inflection Point. Thank you very much for your time and thank you everybody. >> Thank you. [music] It's too early to expect to value these

things on revenue. Focusally exclusively on revenue today is like focusing on revenue for a seedstage startup.