What Methods Can We Take from TradFi to Value Crypto Assets | European Blockchain Convention

Transcript

B&M's Alex Wenham. I am the digital asset product and strategy lead at Bloomberg. It's my pleasure to moderate this panel. But before I get kicked off, you might be sitting here wondering why the OG of the financial data world is sitting here on a panel of esteemed guests. And I would say that you might think that I'll be out of place, but actually you might be surprised to know that Bloomberg has supported crypto assets in our ecosystem since 2013 with Bitcoin, since 2018 with the top 10, and as of the last year the top 50 using a data-driven methodology including custody where they trade size and liquidity.

So with that, I'll pass on the introductions. Thank you. My name is Vangelis. My background is computer science. I've been in crypto since 2016. I used to work with Animal Ventures, then Outlier Ventures in London, and a bit over a year ago I joined CoinFund. I'm part of the investment team with focus on tech research. I go deep into the anything that has to do with kind of Web3 infrastructure that enables devs to create dApps.

I I would go deep. So layer ones, layer twos interoperability. Um Um DBMS systems, storage, and recently I've been doing research on ZK. So that's a deep rabbit hole, I would say. So yeah. Thank you. Pleasure to be here. Good afternoon. Hi everyone. I'm Matthew Siegel, head of digital assets research at VanEck. VanEck is a family-owned business, Uh mutual fund and ETF sponsor, New York City-based.

I guess we're we're most known in this space for trying to bring a Bitcoin ETF spot spot ETF to market. Since that's gone nowhere, over the last few years we've focused on other investments in the space. So, we are LPs in a number of venture capital firms and we we co-invest at the uh seed and early stage side alongside some of those VC funds from time to time. We've got uh three actively managed funds in the US, two token funds and a and a lending vehicle.

Um we, because of, you know, the active approach that we've taken in the space, we've been able to sidestep some of the major bankruptcies. Although, it, you know, it's in the newspaper, we're a creditor in the in the Genesis bankruptcy via our lending fund and we're optimistic that fund shareholders are going to have a full recovery in that. And then, on the listed fund side, we've got exchange-traded notes in Europe, spot single token and multi-token products. And I manage one of our liquid token funds and run the research in the space, manage some of those VC relationships as well.

Awesome. All right, hi everyone. I'm Annelise Rachel. I've been working in crypto for a few years now. I spent a couple years at Arianna Simpson's crypto hedge and venture capital fund. And then, more recently, I worked at Bitwise, which is one of the largest crypto index fund managers in the world. So, yeah, I mean, between variety of experiences, definitely have used tradfi valuation approaches to get a better understanding of crypto assets. So, excited to be brainstorming with you guys. Let's get started. Awesome, thank you. So, I I think when we start well, at least at Bloomberg we're over the hump that crypto is a unique asset class that we would like to support like any other asset class we have in our Bloomberg ecosystem, be it fixed income,

FX, equities, et cetera. And then the first part that we think about is if you're going to describe crypto assets, you need to be able to describe what these crypto assets do, what kind of sector-based approach or taxonomy would you look at to try and apply to crypto assets. They're definitely not all created equal. So, we've created one taxonomy. I would say that we didn't create it because we felt it was it was needed necessarily, but one of the challenges you have with crypto, we select 50, if there's hundreds of if there's thousands of them out there and the taxonomy is applied to a thousand, you really kind of need a taxonomy that applies to your coverage. So, we created our own taxonomy, but I think higher level it's digital money, it's infrastructure, it's services. Under that you have, you know, meme coins,

wow. You'll also have, you know, payment methods in the infrastructure category, scaling, lots of different parts of that. But maybe if I pass to to Matthew first, maybe you can give the audience a view of how you would break down this taxonomy and where you are most kind of passionate about for the future use case of that technology. Yeah, so I think when when you're investing in this space, you're you're making a bet on like an alternative financial future and you're holding essentially a series of call options that are early stage companies that happen to be liquid. And you have to kind of have some guiding light as to how big this bet could be if these call options become in the money. So, we're

you know, broadly segmenting the world into three end markets, like the finance market, it's huge, $3 trillion market. The tech infrastructure market, which is about 500 billion or so. And then an emerging metaverse market, which you know, we're all going to all of us in this room hopefully are going to help build that. And that may be a $2 trillion market, you know, in call it 5 to 10 years. And we have some penetration expectations as to how much can a decentralized solution take as a percentage of the current market, how quickly will that decentralized option grow over versus the centralized option.

And then because these are networks, we assume some network effects. And we're we're looking for projects that can take, you know, 60 to 70% market share of their end market. They can't all do that by definition, but they're all call options on that eventual bull case. And then we're looking at those kind of 2030 numbers, which are, you know, a little bit of this and discounting them back. We're taxing them, but we're discounting them back at very high discount rates, like above 25% in some cases, in order to come to kind of bull case, base case, bear case expectations for for these tokens. And that's from an end market perspective. And then you have like the

more nuts and bolts of the taxonomy, what types of coins are these? And there's lots of different taxonomies to go around, but, you know, to illustrate some of them, the consensus layer, the execution layer, the app specific blockchains, DeFi, right? And some of these categories are um have demonstrated product market fit and there are clear network effects and even some of them are cash flowing now. And some of them have none of those characteristics and are loss making. And so then when you think about the macro, when we're in a risk on tape, like the market's willing to bid up the non-cash flowing assets.

And so you think about portfolio construction and what percentage of your portfolio you want to have in those types, even irrespective of what category they live on. So it's a it's a multi-factor approach. I think I've described kind of some of it where we're most enthusiastic about right now about the consensus layer and we're, you know, scratching our heads around whether some upcoming upgrades to Ethereum may change that balance of power as to who's capturing the economics from a blockchain transaction.

Awesome. And And Anice, the same question for you, you know, what part of the kind of crypto world, how do you view it and what part are you most passionate about? Yeah, so my focus has been Ethereum and emerging blockchains, which is a whole lot to specialize in. Um So, I guess you know, a lot of people have trouble especially those in like TradFi, understanding how to value you know, layer ones, layer zeros and so forth. And it makes sense, right? Like owning ETH is like owning a share of the internet, but then how do you value the the internet, right? I mean, there's all these applications and services built on top of it. So, something to keep in mind is that Ethereum does generate revenue,

right? I mean, you take revenue, profit, buybacks, dividends. A lot of these like these familiar metrics, they do apply in crypto. So, since inception, Ethereum has generated over 15 billion dollars in revenue. And since 2021, which is when you know, EIP 1559 was implemented, so Ethereum's monetary policy shifted, it's generated profit. So, since then, 80 to 90% of Ethereum's revenue has translated into profit profit for ETH holders. And you know, why is that? So, Ethereum generates its revenue

from network transaction fees. So, those are the fees that users will pay to interact with the Ethereum ecosystem. And because there's a burn mechanism implemented, um what that means is every time someone conducts a transaction, the majority of the fee that is paid, the base fee, is taken out of circulation, right? Think of it as like a buyback. That presents deflationary pressure during periods of high network usership. And that's because the base fee, which is the vast majority of the transaction uh cost, the base fee increases as network usership increases and then decreases, of course, as it falls network usership. And so if what we see is uh more ETH is being burned, sort of

taken out of circulation, than is being issued, that provides deflationary pressure to the asset. Um that's a positive, right? And then also now uh since, you know, Ethereum has uh transitioned over to a proof-of-stake network, you can stake your ETH. So not only are you benefiting from uh you know, ETH as a deflationary asset during certain during periods of high network usership, that is, but also you're able to earn staking rewards. Right now, the APR on staked ETH is around 5%. Um so I'll just say like you know, uh think of that staking uh reward as like a dividend. And it's not just like Ethereum and like so there's Avalanche as well, right? So when you're looking at these

uh different blockchain networks, keep in mind that um it varies, right? So Avalanche also has a burn mechanism. Um what adds to scarcity for Avalanche's coin is that it's also like a you know, token supply cap. All right, Bitcoin does not have a burn uh mechanism, but it does have a you know, uh coin supply cap. Um so yes, that's something to look at for sure. And keep in mind that of course the applications like on Ethereum you have Aave and Curve, they have their own um you know, token economics or monetary policy uh that you'd want to look at in order to uh like try to try to value these assets.

Cool. Vangelis? Thank you. Um I I would I would like to go a little bit deeper into the infrastructure as I've been doing research there and I would like to run you through an attempt of mine to value decentralized storage networks. And so the the way that I was thinking about it was from first first principles. So I would I would take let's say the equivalent in Web 2 AWS um GCP and I would I would look at the ratio of the the market cap

to the revenues and usually in in Web 2 these multiples tend to be anywhere between 5x and 20x I would say. And if we try to do the equivalent in kind of Web 3 and say that we would take FDV to network revenues those multiples would be anywhere between 400x 800x 1000x sometimes even more. And so you think like why is that the case, right? One scenario is that it could be because there is irrational exuberance.

The other scenario would be that investors are rational and because we're in the middle of a hype cycle you could extrapolate that in five or seven years from now those multiples in Web 3 will converge closer to kind of Web uh uh Web 2 uh the like the same as in Web 2. And so based on that then you you you you can carry on by extrapolating how big the market is going to be um how much of that is going to be captured by the network that you're doing the research on and from there you can you can see how much they need to make so you can have your returns.

Um So that's one way to look at it but then again if you look at it closer it it's it's actually hard to create like a one standard system to do this analysis predominantly because the the tokens are programmable and there are a lot of variables that can change that equation. So you have to kind of look at how much of the market that you are extrapolating in 5 to 7 years from now is going to be captured by the network that you're looking at and then how does the DAO like how have they voted to distribute this revenue to the nodes so that one

they are like they keep the network safe and they provide the service level that's needed so they can remain competitive in the market. And then how much of that is going back to the DAO and to the token holders so that so that they can find the right people and keep them happy and rewarded so they can carry on improving the network as as it goes so it kind of also remain competitive. So and that's a little bit hard to do because in in kind of web two the the way that the management works is is more like we know how it works right it's more classic but we don't know so much about how a a DAO would kind of do that and that's a little bit hard to kind of predict and and see which of these variables are

going to kind of change or not. So yeah there's We've had multiple debates on the on the DAO token side of things you know with the DeFi assets that we have you know to say can make a DAO and take UniSwap. You know what do those tokens actually give you they they don't give you a share of the protocol revenue they give you a right to vote. So when you're looking at the metrics to decide which one or how do you relative value these two assets? Are you thinking about how do you describe the efficiency of a DAO? Is it how many votes that everyone participates in? Is it agreement within that? Is it who is bringing up these voting proposals? It's a whole It's a whole other kettle of fish, but maybe if we if we avoid that rabbit hole, we can get back to it. Um so, what you've kind

of talked a little bit about is how you view the world where you see some some opportunities, what parts of the ecosystem you're passionate about. You know, you mentioned uh underneath a little bit around tokenomics, the burn rate in Ethereum. I think it's when you think about valuing uh these assets, the first thing you need to think about is is tokenomics. And the way that we at least look at it at Bloomberg is you can put a price on on an asset, but then there's metadata that you need to describe that asset. That could be descriptive data, like what is the proof of you know, consensus etc. mechanism. It could be uh actual technical information. It could be on-chain data.

It could also be tokenomics. So, I think we'll get to on-chain data in a bit, but maybe if you want to walk us through perhaps to that infrastructure layer or any other layer you prefer, you know, how you would view tokenomics and the the impact on valuation. Yeah, I mean, so so you said like, you know, you have to look at other metrics. I mean, who really cares about token economics if no one is using the network um or the application. So, there's a lot of overlap there between like usership including developer activity and token economics, right? I mean, that burn mechanism for Ethereum as well as Avalanche is a direct result of how um much the network is is being used, right? So,

um base fee increases with network uh usership. Um so, I don't know. So, I mean, you want to look at the monetary policy, but that's not the only thing you want to look at, right? The developer activity, okay, well, which network has the most vibrant developer activity? Ethereum, right? So, versus like, okay, Cardano. Um I mean, there's these like there's these other metrics you want to take into account. Some you want to be more, you know, wary of as well. Like daily active addresses is probably a better proxy to usership than the daily number of transactions conducted on a network, right? And also when you look at Ethereum, you don't just want to look at mainnet. I mean,

Ethereum's entire road map, part of the strategy is really like off-boarding the transaction activity onto layer twos. You need to look at the entire ecosystem. And that same approach goes as it pertains to layer zero infrastructure, right? You have like Cosmos that hosts app chains like Osmosis, for example. And when you're looking at like Atom, well, sure that's Cosmos, right? That's that's the native coin. But then, I mean, there's also Osmo. And Osmosis is the most popular app chain on Cosmos.

So, something to keep in mind is when you're looking at these like, you know, data dashboards like The Block or Artemis, they have good ones. Is if you're looking at layer zero, if you're looking at like Ethereum with its L2s, you want to look at, you know, what is happening on Polygon? Because that, you know, what what's happening on Polygon, for example, it's it's a ZK EVM that that will, you know, hit mainnet probably this quarter. That's a positive for the entire Ethereum ecosystem, right? But something else to keep in mind is also the road map.

So, you know, from since inception, it was known that Ethereum would eventually move on to a proof-of-stake network. But was it ever known that there would be an Ethereum and an Ethereum Classic? No, that wasn't known that, you know, happened within like a couple weeks, all that right? So, there's some things you can't forecast. Hard forks, for example, not all of them are, you know, can be forecasted. But, uh, yeah, you got to look at usership.

And it's usership that I say that makes, makes looking at monetary policy, like determines whether looking at monetary policy is at all worth it. So, I'd start with that. Can I just ask a side question? I hope it's not unfair and anyone can can jump in, cuz we're having this debate. You know, I was reading that Elon Musk, when he took over Twitter, he looked at how many GitHub um, submissions there were from uh, developers and the viewers. If you hadn't submitted submitted something in the last 3 months, you weren't doing any work. So, then he said that, and then of course what happened, lots of GitHub submissions came in. So, if you talk about developer activity on Ethereum, like like what is the metric that you think you can define? Because if you pick one, perhaps there's a self-fulfilling prophecy that that will go up.

Yeah, so if you check out like Artemis, or even like, I mean, the block pulled some Artemis for this one. So, you could look at like Okay, so active devs, you know, each dashboard has its own, but they it depends directly on the weekly number of commits per developer, right? And so, what you want to do is, I mean, some of the Okay, so what I love about like on-chain data is you can literally just reach out to these providers, like Artemis, and you know, and for them it's like 100 bucks a month. Um, and you can ask them to tailor the um, the metric, right? So, I don't really care about weekly commits. That's going to change on a weekly basis. But, you know, on a quarterly basis, that's a lot

more interesting. You want to check out the different time frames. And also different market cycles. I mean, whether we're talking about dev developer activity, whatever metric you want to use, um or you know, daily active uh, addresses, market cap, and so forth. What's interesting interesting to see is that cross every market cycle, the bottom is always a new time an all-time high in terms of being the bottom, right? Um, So, yeah, I mean there's a lot of different metrics you can use, but remember like Dev's is just one aspect. It's like are are the users coming? And maybe a stickiness ratio is good for that. Like daily active users over monthly active users

and yeah. Matthew, I want to give you a chance to talk about maybe the token tokenomics or other metrics you might think about what what you're looking at in your initial comments, but but if you like to also have another question I have another one for you, but I'll leave it to you. Yeah, I mean we're we're looking for hope cold hard cash, right? So, why why will this token be worth more in two to five years? And part of that is the architecture of the blockchain. Part of that is the the model that the token employs, right?

So, if you have a buyback and burn mechanism, that is cash pretty much directly in the token holders pocket. It also increases the probability that that token is going to be a security. So, in our funds we treat every token as if it's already a security and we have internal processes for communicating with protocols where we like ask in advance not to receive material non-public information and we have personal trading guidelines that govern that as well. So, like tokens with a like okay, we want the cold hard cash.

What's the probability that we're going to get that cold hard cash? Like has the project found a product market fit? Is is the tokenomics structured in that way? So, buyback and burn might be slightly better than a utility token model unless the utility token model has a cap and has clearly demonstrated product market fit. Are it Are the profits controlled by a Dow which has like not switched on any way that the token holder can directly monetize it. Well, then the probability of us receiving that cold hard cash goes down and if we're holding this collection of call options, then it's a matter of position sizing.

So, I I think maybe that explains in rough terms how we're looking at it. So, I want to talk a little bit about active wallets. I think you had mentioned it's better than transactions. So, we've looked at this all transactions are not created equal when you think about the value that they add to to a network. So, maybe Vangelis, I don't know if you're willing to to pick that one out cuz I think it's important to break down when you think about the economic value that some of these infrastructure layer blockchains are thinking about. Absolutely, but I have a question unfortunately. I mean, I've been thinking like how do you um you know, how do you extrapolate from active wallets when you're not sure how many of them are duplicates? It's it's

kind of hard to get clean data. That's another problem in kind of web three. And I think that yeah, like I haven't solved this yet 100%. Of course, you can make some um um inferences, but but yeah, I haven't I haven't solved that. So, we've done some work on that trying to derive the the tradfi equivalent of same store sales for blockchain. So, I've done it for you can do this for Uniswap and identify like what percent of the transactions are made by returning users versus new users and it's encouraging to see like despite the fact that I think it's IMF that said 70% of Uniswap transactions are by bots. Like there's a good chunky third or so that

are repeat transactors and to the extent that's a sticky, then you get conviction that there's real economic activity going. So, I think that same store sales or same address activity is maybe something Bloomberg can help you know, bring more visibility to. Until then, we're we're we've got it in-house. Yeah, I mean, there's flaws with it, but then it's not the most imperfect one. I think transaction count is a lot more imperfect than daily active wallet addresses. And even again, in terms of time frame, maybe look at like a it on a monthly basis. Um quarterly basis.

But yeah, no. I mean, transaction count is like uh like like Solana's. Uh I don't know. But anyway, yeah. The other thing I'd mention is that like there's there's the there's the fundamentals, which is where's the cash flowing and how are the incentives structured so that the token holder can see that cash. And maybe fundamentals are half of what moves this market, and then the other half is is speculation, and that is uh who owns the token now and are they buying or selling and is there going to be a new change in the equilibrium of buying versus selling.

And they're they're just uh acquiring data from Nansen and other providers uh and really just spending the time to get to know the larger holders of these projects so that uh when they move their tokens onto the exchange, you're already there and can sell, you know, maybe before them. Even like when it comes to confidence in um you know, in a crypto asset. I mean, you just look at the amount of staked ETH, right? It is the withdrawals aren't enabled yet. It won't be enabled until the Shanghai upgrade, which is expected in uh well, in March.

So, that means that no one has been able to withdraw any staked ETH. Um and I mean, you started staking what? In December 2020, even like late November actually. Um once that's enabled, what are we going to see? I mean, some people think that we're going to see like a massive sell-off. That's actually not even possible because there is a withdrawal limit in terms of um I would just daily withdrawals of of staked ETH. But now that you have the option to do that, that's going to bring in institutional investors, right? I mean, that's I mean, those are terms they're probably uh uh more um appreciative of. Uh you know, these these indefinite lockup periods are somewhat of a red flag for institutional investors. Um but up until then, like what are we seeing? We're

seeing that there's uh I don't know how much right now. Uh like say like a billion dollars, a significant amount of money staked and and locked in a in Ethereum, right? That is that shows the confidence. Whereas other um and of course like, you know, security I mean, that's a good proxy for security. Um whereas like other networks, what you'll see is like, okay, the lockup period um with withdrawals are for other um networks for most of them, withdrawals are uh um but you you can withdraw, basically. But um their lockup period sometimes can be like 24 hours, and I think that's more

of a red flag. Um 24 hours no limit sometimes. I don't know. I I uh I like the limits placed. I think yeah, that's important to look at, too. So, so it's better to have gates than than than no gates in these protocols. Yeah, because imagine like uh I mean, what does that mean? You could just like unstake everything, and then what about the security of the network, right? Um But anyway, even if people are unstaking, that doesn't necessarily mean that they they'll be a sell-off. You can take say that ETH um and then, you know, leverage it in say like DeFi investment strategies. There's other things to be done than just a for a mass sell-off to uh to occur.

So, maybe if we if if we level set, right? So, you know, the kind of genesis of this discussion is if you think about the investment strategies that exist today within this market, you've got, you know, uh listed kind of market cap weight normally uh ETFs that are kind of mostly a retail phenomenon. On the exact opposite side of the spectrum, you've got the PE universe with asset owners, you know, putting mandates with big PE firms, but in the kind of active management area, it's mainly an arbitrage or delta neutral strategy that's kind of deployed. And and that's kind of not something that you can put infinite amounts of capital towards, right? And the market structure of a lot of those exchanges are not the kind of operation that the traditional kind of investor or buy-side client might want to interact with. So, if you think about

what this discussion really means is how do we put these things all together to create a framework by which you can describe crypto assets. Because I I mean, you guys are the investors, so you tell me, but I think there's a a science to investing, which is a framework that everyone understands. Whether it be PE for equities or spread to gove- govvies for for bonds, right? Everyone kind of understood that. They read about it in university, and it's all agreed. So, so how do you kind of move to having a similar style model for crypto in general to then kind of start moving the investor strategies towards the more traditional space. That that's kind of what I think about at what we think about at Bloomberg.

Yeah, I mean, like Okay, first of all. So, my take is within the next few years, most of the uh most of the innovation will occur on the application layer, right? How many internets are there? There's one, right? So, why can't Ethereum host it all? I'm not saying that's the case. Um not investment advice. But um basically, uh you want to have a good understanding of, you know, maybe sure, multi-chain future as we've all heard 40 times in 2022.

But okay, so maybe there's three of them, right? Maybe there's like Cosmos, uh maybe there's Avalanche, maybe there's Ethereum, right? Um those are sound investments to make. You can stake, you can kind of get a dividend from that. Um you can look at the token economics and so forth. But then sometimes when people invest, they want the they want the next Solana, you know? So, it it really depends what you're looking for. If you want the next Solana, then maybe it's not going to be on the consensus layer, though, right? It's going to be on the application layer. And at that point, you can also look at monetary policy um for the application layer. Um for example, like take uh Aave. I mean, they will buy um so, there's like there's this fees for Aave, and they will

uh with those fees buy back on the secondary market like Aave tokens, and um then there's Curve, where what we get for that is like a it's like a 0.04% trading fee. And essentially, half of that goes to Curve holders, the other the other half goes to liquidity providers. So, that's like two very different token economics. I mean, you'd have to like look for yourself. And then, you know, you can create projections. If you like go on Token Terminal, you can see the revenue, and you can see the um you know, network transaction fees, all that.

Download it, make your um your assumptions. Keep in mind that roadmaps change, uh that hacks occur, that you know, there's hard forks, and so forth. And then, you know, I wouldn't ever project anything more than 10 years ahead of time, not in this industry. Not yet. Um may- maybe 3 years, I don't know. But, there's also other things to keep in mind like okay, the amount of uh an asset staked. If 99% of ETH is staked, how much is used, right? Like, you're not you it's not you're not using it anymore. Um so, looking at those like small like details are also very important. It's going to be an Excel sheet with uh a lot of tabs. Yeah.

I I think uh if we're going to ask what will bring more institutional investors into this space, which seems to be something that some of us are predicting at least, uh it's going to be around more transparency. One lesson we can take from the SEC settling with Kraken over their staking program is that the SEC objected to the disclosures of how Kraken was earning those returns, what percent was coming from the protocol, what percent was going into Kraken's own pocket, you how do you stake a stablecoin, right, which they were and Binance still is offering. Um and the terms of service are very, very important and I spoke to the general counsel of a protocol just earlier who was like, "Yeah, we're we're being you know, we're being more careful about how our terms of service are are written."

And the more transparency that the network participant knows around what the yield is, how it changes, um the more that this asset class will be understood and uh contributed to, invested in by institutional investors. Nice. So, uh so history doesn't well, often repeat itself, but it can rhyme, right? That's the that's the expression. So, maybe in the final minute here, what's that last thought you think is transferable from TradFi to to crypto in general?

I would stick to first principles, like going down to the uh fundamentals. Is it a service? Is it Is it a resource network? Like, what's the core value here? Why is it it can be better or it already is better than what what we have right now? And then um and then also looking at the DAO and the community because that's a very im- important part that is is not existent in kind of Web 2 and I would go from there. Discounted cash flow analysis. How an application or application or a network generates revenue and profits.

Awesome. And at least Matthew and Vangelis, thank you very much.