A Powerful Tool for Valuing Tokens and Cryptoassets

Blockchains, with their tokens and cryptoassets, are micro-economies.

What’s cool about that is it’s possible to analyze these micro-economies to determine the value of a given token or cryptoasset today and in the future.

Several people in the blockchain universe with financial analysis backgrounds and skills are building early frameworks to value these tokens and opensourcing them.

And startups, or established businesses that want to add a token to their business model, such as a project called PROPS from YouNow to decentralize video applications, are using these early frameworks to figure out the right economic model for their particular token offering.

Things are moving fast.

My interest is to use and contribute to these valuation frameworks to invest in blockchain-driven businesses and social initiatives. I’m also interested in taking the complexity out of these frameworks, moving the complexity to the background, so that more and more people can participate in these micro-economies.

Fundamentally, blockchain applications and their tokens are for everyone. They’re digital communities with digital money and, most importantly, a level playing field. They thrive on network effects, smart governance, and the principle that anyone can participate and therefore value is distributed among all participants.

You may or may not care about blockchain technology and its micro-economics, thinking it’s boring, arcane, or over your head.

But what I’m pretty sure you do care about is having more options, more wealth, and more freedom for yourself and the people you care about. That’s what this blockchain and cryptomoney thing is all about.

In order to participate in these micro-economies we need a framework, a valuation framework, to guide us. And it’s emerging right now.

A conceptual framework is like a map. It’s a frame of reference that defines the most important things in a system so you can evaluate and achieve a desired outcome. Specifically, a valuation framework, and the mathematical model that emerges from it, is a way to value an asset relative to the other components in the system.

What does a valuation framework for blockchain tokens and cryptoassets looks like?

Chris Burniske of Placeholder Capital, one pioneer of this type of framework, starts with the premise that each blockchain project, given its relatively closed economy, can be valued, as a starting point, with what’s called the equation of exchange.

The equation of exchange looks at the relationship of four factors in an economy.

The four factors are an economy’s money supply (M), the frequency with which a unit of that money is spent in a period of time, which is referred to as velocity (V), the average price (P) of the products and services in that economy, and, finally, the quantity (Q) of transactions.

The idea is that these four factors, given how one influences another, can serve as the skeletal framework for valuing a blockchain based micro-economy.

The equation of exchange is written this way:


If that’s true – if MV=PQ is in fact a good way to value a blockchain’s token economy and individual tokens – the exercise one needs to go through is to determine the values for each variable, what the “M” monetary supply is, what the “V” velocity of the money is, and so on. In many cases, you need to make assumptions about what’s driving the calculation (e.g., what the “P” price will be for an available resource) for each variable.

Taking advantage of the equation of exchange is not a trivial exercise. And it’s not the only aspect of a valuation framework. It’s the core. But the point is that using a valuation framework is very doable and it’s well worth the effort. It’s a very powerful tool.

“Quality inputs, quality outputs” is what it comes down to. Let’s take advantage of the equation of exchange, and a broader valuation framework, to identify, use, and support the best blockchain projects and communities out there.

Defining Ethereum

How’s this for a simple definition of Ethereum in today’s New York Times:

“Ethereum is a global computing network operating according to rules defined by Ethereum software.”

Maybe that’s a little too simple.

But the article follows that up with a description giving you a better feel for it, which is “a global smartphone that can be programmed to operate according to the apps built on top of it.”

If you want to jump into the deep end of the genesis of Ethereum, I highly recommend this Wired piece titled “The Uncanny Mind that Built Ethereum,” profiling its founder Vitalk Buterin.

It has a really straightforward description of the blockchain and Bitcoin, which was to remove third parties from both the creation and transfer of currency. This was accomplished by recording payments (Bitcoin) on a new type of open ledger (blockchain).

The success of the Bitcoin blockchain made it obvious to Vitalik Buterin, and others, that you could use the blockchain to facilitate transactions and complex agreegments for anything (e.g., deeds to houses).

He realized the right type of blockchain network “could deliver every imaginable digital service, right out of the box,” and this idea eventually became Ethereum.

Vitalik recently spoke at Disrupt SF 2017 and this is how he described Ethereum:

Where Ethereum comes from is basically you take the idea of crypto economics and the kinds of economic incentives that keeps things like bitcoin going to create decentralized networks with memory for a whole bunch of applications.

In other words, Ethereum uses incentives in a decentralized network with shared memory to run diverse applications. Pretty simple.

(Photo: source)