What is fair value for DeFi tokens?

The total value of assets locked in DeFi has grown from $677K at the start of the year to $3.8B just eight months later. As interest in the DeFi ecosystem has grown, DeFi tokens have out-performed top ten crypto assets such as ETH and BTC. The yield-farming phenomenon used by DeFi tokens such as the Compound Finance COMP token has provided further bullish momentum for the DeFi market.

While it seems counter-intuitive, it is likely to be easier to calculate the value of a DeFi token than that of a cryptocurrency, such as BTC.

Currently, DeFi tokens function as governance tokens. Generally, these provide voting rights without dividends and are used to decide what to do on a platform. Therefore, it is difficult to measure the value of such tokens. However, sooner or later, platforms will start charging fees.

In fact, some DeFi platforms are already keeping fees in their community pools (a pool from which to pay development, advertising, and other expenses). The source is a portion of fees charged for users’ loan transactions and coin exchanges in the DeFi ecosystem.

Because DeFi platforms are decentralized exchanges and lending platforms, cash flows – and fees – can be generated and tracked. Therefore it might be possible to use these cash flows to logically calculate the value of a DeFi token with the discounted cash flow (DCF) method.

While dividends are not currently paid to token holders, it will be possible to make dividend payments in the future. In addition, because the level of fees and dividend payments are decided by the votes of token holders, value can be calculated by assuming voting rights for a DeFi platform’s governance will be the rights to decide future dividends.

While these discussions have been ongoing, because no dividend payments have been made, it is difficult to project the extent to which cash flows will be generated by a DeFi platform in the future.

In any event, at present many tokens are being traded at very high prices compared to previous levels. The current situation where DeFi tokens may become objects of speculation, as opposed to having value based on fundamentals, is not atypical in the altcoin markets.

However, it is likely that once fair value is fixed, there will gradually be a convergence of value. Therefore, during a period where value has not yet been fixed and price movements are volatile, money is concentrating on the excitement of speculation.