Thursday 14 January 2021 2:49 pm

The zombie token apocalypse lurches on

Each week, another crypto project ‘moons,’ and many more leave bag holders ‘rekt,’ ever wonder what’s behind these sudden moves?

The Initial Coin Offering (ICO) era reminds many people of scams, over-inflated valuations at launch, and dead on arrival projects that rely on market makers to appear alive, which is akin to an overextended billionaire living on an expensive credit line and, finally, creativity when it comes to the naming of the companies. 

Clearly, some founders had a field day flipping through history books and searching for that miraculous Greek god or obscure element meant to instil confidence in token holders and their ‘community.’ If only so much effort actually went into delivering the end product, the market may have evolved faster. 

Nonetheless, years later and zombie tokens are still around. Greek gods have been replaced by activities including yield farming, liquidity pools, and staking. Yet, under new projections from Bakkt Holdings, cryptocurrencies could grow threefold by 2025 into a $3 trillion market. These estimates were published as part of an investor presentation released Monday in connection with the firm’s plan to go public via merger with Victory Park Capital, a special-purpose acquisition company (SPAC). 

It was only last week that the industry’s total market capitalization surpassed $1 trillion for the first time, tripling that in four years would represent incredible growth. The years of work done behind the scene to institutionalise the market place and broader infrastructure are finally bearing fruit, with market participants getting to access solutions including prime brokerage. And with companies going public, there is ever-growing interest in digital assets from traditional asset management. 

Reanimating portfolios

Despite increased institutional adoption, and a recent all-time high for bitcoin, the world’s largest digital asset by market capitalisation, there still appears to be a lack of consensus or meaningful approach to valuing digital assets. Fundamentals, including on-chain metrics, only get one so far, as evidenced by the recent gamma squeeze which propelled Bitcoin all the way above the $40,000 level. The growth of the derivatives market is yet to plateau and this only means that spot markets will become increasingly more impacted by the positioning of derivatives venues.  

If an institutional investor can allocate to Bitcoin without having a time-tested approach at valuing such assets that claim to offer an alternative store of value proposition, what is stopping that same allocator from exploring the world of Decentralised Finance (DeFi). How does one value “food coins” like SUSHI and HOT DOG that dominate DeFi, and those that embrace the liquidity mining frenzy. To begin with, the food coin frenzy is something that crypto media helped to hype, although the Sushiswap protocol is truly well, alive and very much thriving.

The hype surrounding DeFi has been almost impossible to ignore and given the incredible growth rate also meant that a lot of top talent has moved over from centralised protocols to decentralised ones. The supply vs demand curve of experienced engineers also pushed salaries to sky high levels, something that Zeth Couceiro, Founder at Plexus, is all too aware of. 

The DeFi revolution has been such that the leading protocol Uniswap is trading at an annualised revenue of close to $600 million and market capitalisation of $6.2 billion (fully diluted basis). This means that after Ethereum and Bitcoin, which are valued significantly higher, Uniswap is the 3rd largest fee earner in the digital assets ecosystem. Relative to its market capitalisation, it means the protocol is trading at 10x multiple (price/sales). Using the same approach would put Bitcoin at 700x and Ethereum at 49x price/sales multiple. 

If all that wasn’t compelling enough, the infamous fork of Uniswap that is Sushiswap, which caused a stir in the market in September when ‘Chef Nomi’ faced a public backlash after cashing in his chips, so to speak, is trading at even lower multiples. What’s more, is that SUSHI’s recently released roadmap contains a v3 proposal dubbed MIRIN (on the nose, of course). 

There, it is envisaged that the natural progression of DeFi integration and capitalisation by exchanges is centralised, through proposed Franchised Pools — LP Expansion Program. In short, this offers users of centralised vendors the option of becoming liquidity providers through the Sushiswap protocol. Thus, users are provided with more yield-bearing options, and also the opportunity to earn revenue through transaction fees. This isn’t meant to “shill” Sushiswap but, instead, offer perspective into the very complicated (and also very profitable) world of DeFi. Which, as per the above, is making inroads towards its centralised counterparts.

Crypto AM: Technically Speaking in association with Zumo