TOKEN2049 - Valuing Smart Contract Platforms - Martin Köppelmann (Gnosis)

yeah so token 2049 and I think my talk is about evaluating tokens and specifically about evaluating well the largest stokin we have and we know either so I think we still have fairly poor methods to give yeah give gives those tokens the value and I want to hopefully how can I start my okay here we go show you kind of my model of how we try to give value to user so assigning value to smart contract tokens of smart contracts platform I think the ontology methodology could be applied or can be applied to other smart contract platforms using a discounted cash flow flow mythology so the old wisdom was ether ether has value because it's needed to pay miners for transaction fees and my claim is that is false kind of to put it to put it kind of drastically I like to say well in theory you could pay a miner via PayPal so it doesn't matter kind of with what method you pay the miner in the end you just like want to convince them or to bribe them pay them whatever that they will include your transaction into the blockchain and via what Channel and via what currency that payment is happening there is not necessarily a good reason why that has to be or should should be easier and and that's actually the same same thing for for other blockchain for Bitcoin of course as well so there has been I'm not sure whether it's true but there has been rumors that for example coinbase has in like arrangement was miners where they kind of just upfront well arranged or pay them specific amount to be able to process a specific numbers of transactions to a given kind of upfront defined price and again this payment can happen via whatever PayPal so so the the way I look at it is the value for Mesa doesn't come from its being used as as at the payment token for for transaction fees but instead in the proof of stake world only easer holders will have the right to in a way sell transactions so transactions on aetherium are scarce resource at a valuable resource and we will look into that more why and in the end only holders of ether will have the ability to sell that resource and therefore of course get whatever it's worth selling it so here we are looking at how much are people actually by paying for for transaction fees and yeah this is a comparison of ëthere IAM and in bitcoin it's on logarithmic scale so the gross here is quite significant again this is logarithmic scale and you can see like in the last year the etherium has catched up and in well some some places has overtaken or kind of well it's pretty much on par with Bitcoin just just in comparison is it worse I mean I tried to make it general this talk not just specifically about ether but currently it's simply not really worth looking at at other platforms the transactions fees paid on other platforms are just like non-existent so basically it's just easier and and a Bitcoin that have a significant fee market so let's look at the numbers in 2018 users have spent 148 million in aggregate in transaction fees basically for the right - yeah to include transaction on a theory and one thing I tried to like develop some understanding what people are actually paying for so I divided the transactions that you can do on aetherium in very rough four categories so the bottom category is just simple easier transfers and in a way that is the most boring the most boring applications it's not I mean it basically that's not like long term sustainable so so I mean if the thesis is people use smart contracts and therefore that's it what what the value comes from then we really should see growth in that category so those are the last two years so two years ago almost 50% of the fees spent were just spent for pure ISA transfers and again that that's I mean that that's that was at that point speculation that's not kind of a sustainable reason for for for a theorem to have value however now we have three more categories so the yellow one is the rise of tokens is just like pure token transfers purely like yeah transferring one one token and that is still yeah currently around twenty five percent but the most interesting categories are definitely the green one and the red one and specifically the green one so the green one is smart contract interactions where something something happens kind of it smart contract interaction including a token transfer so that would be like using your tokens on a decentralized exchange or using your tokens on a decentralized lending contract and I think that growth is quite significant so in two years ago the category was more less non-existent and now it's actually the largest category so now we are talking about roughly forty percent or thirty thirty eight ish percent percent of all of what spent on fees is spent for those kind of of transactions so now in the next slide I will kind of use use those numbers to present a kind of discounted cash flow but I mean really disclaimer I don't don't take the numbers too serious I mean you there there are a lot of assumptions and if you change the assumptions you can completely end up with a different evaluation but just roughly how could a discounted cash flow methodology look like so 2017 and 2018 those are numbers we know those are historic numbers forty million have been spent in transaction fees and twenty 1748 in twenty eight so what we do in the discounted cash flow model we give well future future expected revenue and again like I argued transaction fees will be revenue for each day holders we discount them so the first year it gets a factor of one and and all previous years are half but then we also make assumptions about about the transaction fees and here I only use kind of two numbers so one number is a growth factor of 3.5 and that's pretty random and the other number is a total addressable market so can afford on can we sustain this growth factor what's kind of the total addressable market and it's also a very mean random number I actually took it from from from your report so there was a report on like half a year ago that was kind of shortened easier and very bearish so I took that number from this bearish report and and applied it I mean it's a quite huge number and you could I mean I I will be careful arguing whether that's that's appropriate but again if you take those numbers then you would yeah kind of come up with a fair price of double roughly double what it is right now but again it's very easy to change those numbers and then kind of end up with with different affiliations it was more like about kind of what is the methodology or how do I see see that so short sanity check what would those numbers mean so what would need to happen to contend of continuously see this growth so see see 500 million and 1.8 billion in the next years specifically under the assumption that sharding and the increase of transaction volume will probably are very likely not come in the next two years so so I mean of course there are just two two ways how to increase the transaction fees one make one is to a single signal transaction needs to become more expensive and the other one is like scaling enable more transactions and for the next two years we cannot expect reasonably expect a significant increase of well throughput so right now a theorem supports five transactions a second if with that number we want to come well we want to we want to generate so much well revenue in a way after detection fees that would mean in in theorem transaction would cost eleven point five dollars so that would mean kind of only very high value transactions so that would be like large orders on decentralized exchanges kind of orders of at least very least a thousand dollars if not more that would mean kind of settlement settlement transaction of layer to scaling solutions after that so hopefully in your like 2021 we will see the sir charting charting kicking in so the sharding scaling is more or less like right now we have one aetherium with charting we will have 1,024 charts which all will have somewhat I mean more or less roughly the capacity of aetherium we will have some overhead because of cross shard communication so roughly will get a factor scaling factor of thousand so on the one hand now kind of was it was a previous model in mind you could argue oh great now we can like have thousand times thousand times that that kind of protection and thousand times that revenue but on the other end you could argue will charting kill the fee market so specifically if we have even unlimited scalability hopefully eventually will there actually be a few market will people be willing to pay I mean 11 dollars if fees if transactions are not discussed resource so my next point is to argue there will be always a scarce resource and that is what I call atomic state transitions so the way you achieve sharding or scalability is by processing transactions in parallel so I mean the transaction on this chart can be processed in parallel while another transaction is processed on that chart however if you want to if let's say you want on this chart there is an exchange and on this the other chart is also in exchange and you want to trade on both you can no longer do that atomically so so this is this is an example of a transaction that happened a few days on aetherium and and kind of all those things are actually smart contracts and you can see this is basically an arbitrage transaction doing arbitrage between two Dex's and I mean long story short the transaction comes in checks different prices on different Texas and in the end does does a simple arbitrage so it sends four point four point nine Easter here four point nine four easy here gets 641 die back uses those for the 641 die and gets four point nine five so a little bit more Easter back and again this is a this is very convenient of course for for market makers because they can do so things completely risk-free so this thing will either this straight will either go through atomically or or or fail or or they can just revert it so they have zero inventory risk so that basically means exchanges that are on the same chart will effectively share the same same liquidity so long story short is my argument is different charts will have or I mean that's an argument that is fact different charts will have independent fee markets and I would argue the fees will be quite different easily a factor of hundred so there will be chart with with the most like liquid exchanges where those high value arbitrage transics is happening and probably that chart will have a hundred times higher fee and I would argue that's great because it will basically allow all kind of applications on aetherium there will be the charts where well transaction fees will be very cheap and where it will be feasible to do your crypto kitties and at the same time the decentralized finance charge will just have much higher transaction so an analogy is just like square meter prices in the United States so you have your high density areas where everyone wants to be and just much more expensive to be there then somewhere in the middle of nowhere so last point is so far I only argued for the value of Easter with the expectation of of cash flow so the expectation of transaction fees and I completely removed the argument that's often brought up in in the Box a in discussion around store value or monetary premium and I do not I personally do not like really think I mean for different reasons I don't kind of buy into this theory but if you do then you can of course still make a point that Easter is well in a way without compete Bitcoin and simply for the reason that it is this kind of income from transaction fees is basically just a bonus so yeah I mean as Ryan argues it sets the floor it said some guaranteed basic value I mean a real world example like before Bitcoin I used to buy a lot of those those are silver 10 euro no coins so they have a nominal value of 10 10 euros you can actually buy them for 10 euros but the silver silver is worse or it used to be worse around 7 8 euros so kind of it was a hedge so if the monetary system completely breaks down then probably those things are still worse the silver so and and and you could of course make a similar analogy to eater so the the the nominal value is this monetary value but you still have the baseline utility value so last last two slides just a few observations that would confirm they presented assumptions so first is transaction fees would need to start to rise again actually for the last four months they were falling if we kind of small of course they would need to rise steeply actually right now gas prices are very much coupled or correlated with with the value of e sir I would argue long-term the gas prices will decoupled from the value of e sir and eventually value of EC will be a function of gas prices paid but but there will be no longer this tight correlation that also means if ether is used for store value or something and the price of ether goes up that does not necessarily mean that transaction fees go up so e surprise should follow transaction fee is not not the other way way around that is something I touched on earlier so if we assume those those higher transaction fees of course that will simply mean smaller transactions or low value transactions will be out priced and fine okay let's say that I already said yep well that's that's it so thank you yeah so just just mention those are the sources Block C is really good source for like a theorem on chain data well and and the other ones are probably more known I also kind of tweet a lot of about those stuff so yeah thank you