The vast majority of decentralized finance (DeFi) tokens generate income through value extraction mechanism at the protocol level, suggests Messari’s analyst Ryan Watkins.
The analyst says there are three most common methods used to frame discussions about decentralized tokens’ value are: discounted cash flow (DCF), comparable company analysis (Comps) and precedent transactions (Precedents).
The main way for framing DeFi tokens’ value, Watkins says, is Comps, which is a relative valuation method.
“The way this is typically done is by dividing a token’s market cap by its earnings to arrive at an earnings multiple and comparing that multiple across projects,” Messari’s analyst adds.
Watkins points out this type of valuation is the primary method for framing DeFi tokens’ value as fundamental valuation “is unreliable for DeFi tokens at this stage.” The analyst also draws parallel between DeFi tokens and startups on early stage as both have “too much uncertainty over their future cash flows to build a model off.”
However, even this method of valuing DeFi tokens’ value has several issues from the point of view of earnings extrapolating the present, different value accrual mechanisms, different target markets and tokeneconomics.
The analyst suggests to pay attention to product’s product-market fit, team, community, and token economics.
To correctly analyze project’s value, one should also look at project’s earnings, volumes, users, and various use case specific KPIs, Watkins said.
Recently iHodl reported that DeFi protocol Balancer had been attacked by hackers who had stolen about $500,000 in crypto.
The attack was confirmed by Balancer Labs co-founder Mike McDonald. According to exchange 1inch, the attacker manipulated Balancer’s smart contract causing a lack of liquidity in its pools.
Meanwhile, the total value of the assets locked in the DeFi project Compound exceeded that of Maker on June 20, making it the largest decentralized finance (DeFi) project.
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