# Valuing Digital Assets Mike Leach (vvander.eth) 2022-11-05 ###### tags: `economics` --- **Warning, this isn't complete, edited, or well-sourced. I may not finish this as it was mostly a personal exercise.** ## Part 1: Defining Value for Digital Assets *Note: is a refresher on value at an Economics 201 level; feel free to skip if you're confident here.* Traditionally, the market's valuation of any asset is theorized to come from two distinct categories: fundamental value and speculative value. Put another way, `Market Price = Fundamental Value + Speculative Value`. ### Speculative Value The shorter a trade's term is, the more vulnerable it is to speculative value fluctuation. Technical Analysis is the best weapon against such swings, but like most predictive mechanisms, it's partially an art, partially a science, very complicated, and prone to failure. If you dedicate your career to trading, you may do very well and beat the market cnosistently. Generally, however, most people do not. Speculative analysis is difficult and relies on intangible factors like market psychology and industry sentiment, each of which can display conflicting signals and may bear little relation to the actual future value of an asset, especially on longer time scales. ### Fundamental Value Fundamental value, on the other hand, is the portion exploited by firms like Berkshire Hathaway. Buffet famously saw that, in some special circumstances, the market fundamentally undervalues assets, so his fundamental analysis was highly profitable. The formula is simple: when an asset is fundamentally undervalued, purchase it and wait. The belief that market prices eventually revert to the fundamental value over a long enough timeline ([sometimes very long](https://www.goodreads.com/quotes/603621-markets-can-remain-irrational-longer-than-you-can-remain-solvent)) has generally been true, especially in the positive direction. Generally, fundamental analysis consists of comparative research on recent sales of similar assets. When listing a house for sale, realtors will perform this kind of analysis to determine a reasonable market price. This isn't as straightforward for a publicly traded commodity, but by segregating most of the speculative activity into futures contracts, the market is generally very good at determining current real commodity prices. ### Fundamental Value for Productivity-Based Assets Fundamental value isn't always as easy to pin down, though, especially for assets representing specific productivity. These assets (e.g. corporate shares) simply cannot be fundamentally analyzed in the same way that commodities can since their true valuation depends mostly upon speculation about future performance. For example, if the market values a business with a P/E of 10, it's priced as if profits will not change over the next 10 years. If another, similar business is valued with a PE of 20, that generally indicates higher *speculative* belief about the productivity of that business over the same 10-year time period. Hence, even a comparative analysis is only measuring relative speculation for these assets. The only method for fundamentally valuing a productivity-based asset is commoditization: totaling up its assets and liabilities and reducing it to a collection of commodities which have known fundamental value. Of course, this exercise is not very useful for deteriming the market value of the asset because, unlike a simple commodity, the futures market is built into the asset itself, and productivity-based assets generally carry speculative multipliers, since the conditions which produce that productivity typically don't change quickly. ## Part 2: Valuing Digital Assets All of the above generally translates into our new future of digital assets. Basic economic principles remain generally applicable, even with all the new and weird stuff happening in the crypto world today. Digital assets may be valued similarly to existing assets, though they tend to have significantly higher speculative value attached to them. ### Case Study: UNI Roughly 80% of all decentralized cryptoasset exchange activity flows through Uniswap. At least in theory, Uniswap is the work of many contributors, but the most notable contributor is a private company, Uniswap Labs. UNI, the token used for governance in the Uniswap ecosystem, has a "fee switch" which may be enabled in the future by project governance. This feature would enable fees on some portion of exchange activity to be directed into the Uniswap treasury. This has, so far, remained disabled for reasons like regulatory fears and maintaining competitive advantage. Currently, UNI is used solely within Uniswap governance for votes. [UNI's current market cap is $5.8b USD](https://www.coingecko.com/en/coins/uniswap). What type of asset is UNI? Currently, UNI purely represents voting rights in an enterprise which has no revenue nor valuable assets besides its treasury and its own branding and IP. To put it another way, UNI is currently a productivity-based asset which has fundamental value equal to its non-native treasury assets. [All of Uniswap's treasury is denominated in UNI](https://boardroom.io/uniswap/treasuryOverview), which means its fundamental value is zero and the $5.8b valuation is purely speculative. This equilibrium represents the market's collective belief that Uniswap may obtain >$5.8b worth of fundamental value at some point in the future. Nevertheless, speculative value is useful to the Uniswap project as UNI's value accrual has given it a very real $2.1b USD budget, which it puts to use through the Uniswap Grants Program and the recent creation of the Uniswap Foundation. In a world where regulatory fears prevent UNI from becoming a more traditional asset, this massive speculative value has allowed Uniswap to continue to build and fortify its market position. ### Case Study: RPL Rocket Pool, a protocol offering increased rewards over typical Ethereum staking, represents ~1600 node operators (~20% of the Ethereum network) and about 2% of the ETH staked. RPL must be staked to obtain voting rights in Rocket Pool governance, so it may be considered a productivity-based asset from this perspective. Unlike Uniswap, however, because a certain level of RPL stake is also required to collect the additional benefits of participation in Rocket Pool, RPL may also be viewed as a commodity with some additional fundamental value. If you have a hard time understanding this, consider the real estate assets necessary for a data center. Data centers need land, but the use of the land for this purpose doesn't degrade its objective value, and RPL is the same as this real estate. Therefore, RPL is both a prodictivity-based asset and a commodity together -- a hybrid asset. How is fundamental value calculated for hybrid assets? Through commoditization. Based on the existing usage, the fundamental RPL value consists of the $8m treasury plus an existing minimum stake of ~15k ETH or $24m USD, which totals up to ~$32m of the current ~$400m market cap. Although the speculative value of RPL is high at roughly 11.5x the fundamental valuation, it's within the realm of reason for both the technology industry in general and the crypto market specfically. Recently, in a highly contentious vote, Rocket Pool governance decided on a new algorithm for maximum staked RPL. Of the options, the most restrictive algorithm was chosen, which is, if using our land analogy, akin to a government increasing taxes on those with a lot of land. Some might prefer to characterize the situation as a government choosing not to decrease taxes on those with a lot of land, but the result is the same. While the fundamental value of RPL isn't changed, the cost of ownership for RPL is increased in real terms and thus a speculative devaluation ([sell-off](https://www.investopedia.com/terms/s/sell-off.asp)) of RPL occurred. Ironically, many of those with the most conviction in RPL value were the most affected by this decision, so the sell-off was dramatic -- roughly 25% in ETH terms. Today, the speculative value of the protocol is still very limited compared to other crypto assets like UNI. Rocket Pool's 11.5x multiplier for speculative vs fundamental value is more typical of a mature public company rather than an early web3 protocol. Where most crypto protocols prioritize leveraging their assets for growth (e.g. Lido) Rocket Pool chose instead to prioritize limiting token speculation. Unfortunately, this also hinders the ability for Rocket Pool to grow via increased treasury valuation. That said, as was discussed above, the impact of speculation on the price of an asset is most obvious in the short term. In the long run, RPL will trend towards its fundamental value. Although speculative value for RPL is lower relative to its peers, this event sped up that process, leading to a devaluation. Since Rocket Pool has no competitors in the permissionless staking space, the project continues to grow, but it is notably growing much slower than leading staking services. Although it is similar to Uniswap in its purely decentralized approach, confusion amongst the Rocket Pool community about the role of speculation has hindered growth.
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Notes on RPL Tokenomics Discussions

knoshua’s proposal

8/10/2023
My Values

vvander.eth

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RP Layer 2

Written by Xer0 Tldr: centralized SaaS provider build on Rocket Pool The goal for this idea is to help define a higher APR for ETH while still utilizing the Rocket Pool network. I’ve compared a few APRs below Solo-staking = 5% Lido-liquid staking = 4.6% (10% commission) Rocket Pool rETH = 4.3%

11/5/2022
Identity and Governance

vvander.eth - 2022-08-18 Recently, the Rocket Pool community has been working hard to formalize the DAO and get several initiatives off the ground. This is a great achievement and it's something I'm very proud participate in. Generally, this has taken the form of Rocket Pool Improvement Proposals, but it also includes a vote on the Incentives Management Committee initial member list, which includes several anonymous members. This is the subject of my writing today. Identity and its relationship to trust in the crypto realm is a touchy subject, as evidenced by the recent Tornado Cash + OFAC debacle. Privacy is a core crypto value. Nevertheless, all participants are responsible for the safekeeping of public goods, so we have to form an opinion on identity and trust in governance. Namely, is identity a useful input in deciding who we trust? Trust is a difficult problem. BrightID and similar projects aim to provide Proof of Humanity (PoH) without publicizing identifying information, but they are still nascent and easy to fool. PoH protocols might help prevent large-scale sybil attacks, but it isn't a solution for preventing smaller, more targeted sybil attacks like the ones to which a multi-sig is vulnerable. As any infosec professional will corroborate, security planning is all about the expected threat vectors. If you want to defend against a nation-state attack on your trillion-dollar blockchain, you're going to take different precautions than if you're just worried about your smartphone in a sketchy part of town. In Rocket Pool's case, its governance resources are already a decently high value target, so when designing governance structures, the DAO must account for actors willing to put in an enormous amount of time and effort into an attack -- e.g. paying several people to create the appearance of multiple active and engaged anonymous accounts with the explicit goal of campaigning for governance powers. This is especially worth thinking about when it comes to the more powerful protocol-level responsibilities like the pDAO guardian and the oDAO, but it's true for anyone given governance powers. The blessing and curse of crypto is that we can't rely on any authority to provide deterrence against such attacks, so we're on our own to design resilient systems.

11/5/2022
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