Generative Ventures Partner: On the Four Valuation Drivers of Crypto Projects and the "Dragon Ball Model"

Author: @willwangtf (Partner at Generative Ventures)

The valuation/market cap support of a crypto project, aside from being influenced by the cyclical effects of funding and interest rate environments, is also affected on a micro level. Since most Token projects in this industry lack financial fundamentals, the demand for Tokens usually stems from expectations supported by non-fundamental factors. Based on my shallow observation of projects over the past year, I have attempted to summarize the following four driving forces:

Benchmark

The logic of benchmarking is quite straightforward. It serves as a lazy psychological refuge for primary investment institutions when they face early projects that cannot be analyzed using fundamentals or cash flow models. It is also based on the assumption that others will analyze it in the same way, constructing a value analysis method based on floating consensus. If BTC is a trillion-dollar asset, then ETH is a hundred-billion-dollar asset, ETH layer2 or ETH challengers are ten-billion-dollar assets, and core applications on Layer2 might be billion-dollar assets, and so on.

The so-called benchmark refers to a comparison in magnitude, but at a weaker order of magnitude, "as long as everyone thinks this price is reasonable." This also explains why Layer2s and Move chains are leveraged at the hundred-billion-dollar level, but benchmarks are not immutable. In their positions, they must also seek governance; if stronger new options emerge, the older generation will gradually recede. Recently, the market for Ordi, aside from Binance's listing factor, is primarily driven by the narrative of a secondary leading project within the BTC ecosystem. Similarly, this is why most assets fluctuate with BTC's price changes during market shifts.

The valuation/market cap of benchmark projects depends on the magnitude of the benchmark assets, the number of similar competitors in the field (which distracts investors' attention), and the historical position of being the first to propose such a benchmark narrative. To maintain the valuation of such projects, they need to "match their virtue" and gradually align with the second and fourth points below; otherwise, this easily conceived idea will attract many competitors, diluting attention.

Status

The logic of importance is also quite straightforward: "the industry position of this project is very strong." For example, Uniswap and Chainlink hold leading positions in DeFi, becoming essential and irreplaceable. Although the original demand for their tokens (governance and staking) can generate some demand, it is clearly insufficient to support profit-taking selling pressure. Therefore, the current equilibrium state also stems from holders' recognition of their industry status. However, whether this status can be strengthened is another matter, which will also affect expectations and subsequently supply, demand, and price. For instance, Chainlink has a relatively value-capturing token model, but market recognition still comes from the demand for Chainlink services from most DeFi projects and even future trading platforms.

The valuation of useful projects can also be benchmarked based on the size of their industry (e.g., DeFi) and the leading projects in that industry. For example, the importance of Chainlink to DeFi can at least give it a valuation above that of a unicorn. However, if the token lacks a long-term value capture mechanism, the selling pressure will still be significant before it unlocks.

Ponzi / Speculation

The mechanism of speculation is very clear: the token mechanism of this project creates an expectation that "those who buy first can profit from those who buy later." Everyone believes they are likely to run away before others and always think they have a keen eye for buying before the tipping point. In fact, many Ponzi schemes in this field are quite open; they are not deceitful or internal accounts, and everyone can see them. The differences in expectations determine who profits and who loses, but the biggest beneficiaries are inevitably the unscrupulous operators and project parties.

In the past two years, typical examples include Axie, Stepn, and Luna. The characteristics of these projects are that they experience extreme fluctuations and have varying degrees of short lifespans. Projects that climb particularly high may still have a situation where "a skinny camel is bigger than a horse" after falling, and they may not completely dissipate. However, most investors in these projects will inevitably end up losing everything.

The design of speculative projects tests one's skills; marketing and timing also test one's skills, and how to exit gracefully is also a test of skill. Therefore, as the market and investors evolve, the challenges for operators in this field are actually increasing day by day. Moreover, with changes in the interest rate environment, the attractiveness to investors is not a one-size-fits-all solution; the effectiveness will also diminish marginally.

In fact, Ponzi schemes are ubiquitous in life, differing only in degree. As long as the existing and future capabilities are insufficient to fully redeem, Ponzi is essentially an exploitation of those with a gambling mentality.

The valuation of such projects is difficult to estimate and is usually viewed in conjunction with the valuation anchors of 1/2/3.

Fomo / Desire

The biggest desire in this industry also stems from FOMO, which is the expectation that this industry will become as widespread and widely accepted as the internet, known as Mass Adoption. For instance, there have always been many desires for innovation on the application side within the industry, with social and gaming being typical examples. A good desire is one that has not yet been realized but is grand enough to feel achievable; in other words, desires can manifest as hopes in some way. Previous games and social projects fall into this category, such as Axie, Stepn, Cyber, etc. Now, for instance, there are those AI projects. However, desire-driven projects must be the first to do something to garner sufficient attention, as everyone is at a starting line that has yet to be realized.

Desire is beautiful, but hope is even more beautiful. Hope comes from the feeling of getting closer to realizing desires. The creation of this feeling depends on the measurement standards: is it DAU? Is it the amount of attention? Is it being reported by mainstream media? All of these can be valid.

Our fund differs from most that understand web3 as the internet; our understanding of mass adoption is from an asset perspective. If crypto assets account for 5% of the liquid assets of the world's population, that would amount to at least $20 trillion, representing at least a 20x beta compared to the current market cap. However, the driving forces behind asset allocation and the development of the internet are not aligned. Therefore, we see that all crypto projects attempting to leverage internet-driven forces find it difficult to become mainstream assets. I have analyzed this in other tweets.

Currently, the FDV of leading projects that only meet this single attribute ranges between $1 billion and $3 billion.

The above four driving forces are not mutually exclusive; rather, they synergistically enhance each other. This is something everyone can easily cite numerous examples of from daily experience.

In addition to the four driving forces mentioned above, there are certainly more fundamental or basic driving forces:

• Useful: Similar to needing ETH as daily transaction fees or requiring a certain NFT to obtain a specific right.
• Revenue: Similar to the fee-sharing model of GMT or certain DeFi tokens based on staking yields from fees.
• Deflation: Similar to the deflationary expectations created by Binance for BNB back in the day.

The above three are similar to off-chain tickets and stocks and are relatively easy to understand. However, 5 is difficult to support large market caps, 6 faces regulatory challenges, and 7 requires the project party to have strength and for investors to recognize its credibility, all of which place extremely high demands on the project party itself.

Gathering the above "Seven Dragon Balls" will undoubtedly make it the jewel on the crown. Everyone is welcome to analyze which categories the current mainstream projects belong to in the comments section. In the Seven Dragon Balls, the "effectiveness" varies in duration, and the "potency" varies in strength. Most are extremely sensitive to liquidity and may be considered by value investors to have no fundamentals at all. Everyone is welcome to analyze this together.

Postscript

Every time I take the high-speed train, I think of a metaphor. The design of ETH is somewhat similar; ETH itself is (1) fuel (2) a ticket (3) a stock. This triune design can initially create FOMO, but in the medium term, there will be issues where adding fuel cannot accelerate, and in the long term, using stocks as tickets and fuel becomes too precious. Hence, there are concepts like "coal-to-electricity" and "layered networks," which involve separating railway operating companies or capital operations like the independent listing of the Beijing-Shanghai line. It is actually quite similar to telecom operators, with a feeling of "electricity + service fees + stocks" combined.

Thus, the sequence is often to first lay down the tracks, then burn fuel, and finally sell tickets. However, everyone knows that there are too many tracks without trains or too many empty trains in this industry. Therefore, everyone wants to pool their efforts to fill the carriages with chickens, ducks, cattle, and sheep. However, our type of train network primarily focuses on establishing a value consensus through technology and game-theoretic means, with the primary purpose being the transportation of "capital," as only the transportation of capital is the most efficient and suitable for this type of network. This is also why web3, driven by internet application thinking, has long since collapsed; because if one uses a sledgehammer to kill a chicken, that chicken is too expensive and cannot be sold at all.

So, looking back, the essence of this industry is to use a multi-price driving force token model to fund public infrastructure, which starts from the circulation of the most scalable financial resources. What is the byproduct? It is the invention of a pricing and circulation model for public goods. Therefore, instead of constantly thinking about the business world and internet models, it is better to think more about what public goods exist in today's world that are of great social value but have not been priced? Although they are very valuable, their circulation efficiency is extremely low, and there is a lot of friction? This may be where the real opportunity lies.