Decentral Park Capital

Founder-led, multi-strategy digital assets fund.

Token Valuation Done Right: A DCF Model To Value Perlin's Native Network Token

The following post is a walkthrough on the methodology we followed to value Perlin's native network token, the PERL. The report and post were authored by @eliasimos, Senior Research Analyst at Decentral Park.

Key takeaways

  • Holding and staking Perlin’s native network token, will allow validators access to a stream of transaction fees, to be distributed to them as validator rewards.
  • As such we can deploy a discounted cash flows methodology to find the "fair" value of the token.
  • We conclude that a fair token price for PERLs, stands at $0.823, at a fully diluted market capitalization of $850,690,646.
  • The core technical assumptions that power this valuation are: [validator reward: 2%; main use case contribution: 65%; growth rate for TV: 2%; discount rate: 30%; float rate: 100%].
  • Through a scenario exploration exercise, we projected a fair value range between $0.177 and $2.675 per token.
  • We would strongly encourage further research on the modelling approach and more specifically, in incorporating variables such as token velocity to the model.
  • For the reasons above, we have open-sourced the valuation model.

Perlin; a short introduction

Perlin is a bleeding edge, lightning fast, DAG based distributed ledger, that offers Bitcoin level security through a novel, leaderless PoS consensus protocol (Wavelet), while achieving 31,000+ transactions per second and consistently has 0 to 4 second time to finality. What Perlin also brings to the table, is a straightforward token economics model, that lends itself out to applying a discounted cash flows approach to value its native token.
The main use cases that PERLs (the native network token) will assume, are to facilitate:
(i) payments for ledger transaction fees
(ii) payment for smart contract fees
(iii) as a PoS consensus token, used for running a validator node and and potentially
(iv) as a governance token as the network grows towards maturity.
Given that very little is yet known about (iv), for the valuation exercise purposes, this post will be focusing on use cases (i) through to (iii).
According to the team behind Perlin, the validators will receive the full amount that is collected on the ledger as fees, as a reward for securing the ledger via incurring the opportunity cost and risk that is associated with staking. As such, the Perlin token holder and validator, can expect a form of residual income to accrue to them over time, that is relative to the amount of value that is transacted on-chain.
The purpose of this short report, is to act as a walkthrough for the line of thinking we followed in this exercise, while acting as a manual for those that are interested in using the model to experiment with their own inputs and potentially even extensions thereafter.
While our selected assumptions are strongly influenced by our understanding of the fundamentals of the project, we will avoid getting too detailed on the technical and fundamental merits of Perlin as a nascent platform, and will solely focus on the valuation exercise.

The Core Assumptions

As a general purpose distributed ledger, Perlin can eventually assume a multitude of use cases. However, given the strong ongoing relationship that the team is developing with the ICC (the largest business organization in the world, with 6 million members in over 100 countries), and the first products that the team is building for the platform, we have benchmarked our analysis on the activity that will concentrate on Perlin, to come from 3 distinct industries; trade finance, supply chain management and distributed computing.
We have leveraged 3rd party evaluations to benchmark on rates of compound annual growth for each of the 3 industries, which we are using as a proxy for the transaction volumes that can be driven through blockchains over the course of the coming decade.
We have further assumed that technologies based on distributed ledgers will achieve varying adoption levels in the aforementioned industries, with different adoption patterns – though all based on a logistic “S- shaped” function.
At the same time, we assume Perlin’s share of the blockchain dominated partition in the industry, to be static and grow in proportion with the overall share of blockchain related solutions (for simplicity).
Given Perlin’s unique relationship with the ICC, our base assumption is that Perlin will be a market leader in the trade finance vertical with a 25% market share at the end of the decade, a strong player in the supply chain management vertical with a market share of 8% and a dynamic entrant in the distributed compute vertical with a 3% overall market share.
We have further assumed that the adoption curve will reach maturity faster for the first two use cases – again by merit of Perlin’s relationship with the ICC, and our evaluation the transformation capacity the already existing infrastructure and current modes of work allow, and slower for the latter.
The table below outlines the quantitative inputs of the assumptions above, and the resultant adoption rates for Perlin, as well as the total value Perlin stands to capture as validator rewards (assuming that the 3 use cases explored here attribute to 65% of the total value transacted on Perlin, and a 2% validator reward)

Transaction fees

Value will accrue to PERL stakers in the form of transaction fees on the platform. As such, our valuation of the PERL is based on an assumption of a given, competitive transaction fee level. To the best of our knowledge, the team has yet to decide on a transaction fee function, and as such, we have assumed a certain static fee level in order to calculate the amount of value that gets distributed back to the validators.
Our base case scenario benchmarks that level at 2% of the total value that gets transacted on the Perlin ledger. The main reason why, is that we feel that this is a fair multiple on the average transaction fees that users have to pay on existing comparables, while (in most cases) remaining competitive compared to centralized clearing parties, adjusted for transaction speed and resource availability.
Take Ethereum for example; the table below ranks 6 separate, randomly selected points in time from the past 12 months, and explores the relationship between median transaction value and median fee charged. 

The result is an aggregate 0.25% median fee charged for every transaction that is processed on Ethereum. Given that Perlin’s latest performance test recorded a resource availability multiple of 2000x compared to Ethereum (31,000 tps vs 15tps), we believe that a modest 8x increase in the cost of service (2% vs 0.25%) can be justified.
Given the above, and combining the output of the adoption rate assumptions outlined in the previous section, we arrive at a forecast for the total value projected to be funnelled through the Perlin blockchain and a resultant projection for the figure that validators stand to collect as fees.

Valuation assumptions

The final pieces of the puzzle that complete the discounted cash-flows model are relating to the modelling process itself. A core assumption in the process of arriving to a “fair” token price, is that the valuation of the whole set of tokens issued, is equal to the net present value of future cash-flows that will accrue to token holders.
In this line of thinking, tokens are effectively tickets to a stream of future income, and the maximum a potential holder would be willing to pay, is the value of the whole income stream discounted for risk, opportunity cost and the time value of money – so that cash flows of equal magnitude that materialize further away in time, have a present value that is smaller than that of cash flows that occur sooner. In this process, we assume a discount rate of 30% - the lower bound discount rate among venture industry standards.
We believe that both
(i) the unique opportunity that is presented to Perlin via the ICC membership and
(ii) the quality of the code and early reception from the developer community, de-risk the project and justify a more lenient discount rate.
In order to arrive to a valuation for PERLs, we then project cash flows 10 years out, discount them accordingly, add them up (including the cost of building the platform, which we have assumed to stand at $40M) and combine them with the terminal value we estimate for the project (capturing the value accrual beyond the 10 year period explored).
To do this, we used the Gordon Growth Method, assuming a 2% steady growth rate, and discount the resultant figure at year 10’s discount rate. The two modules, under the assumptions outlined above, give us a present value of $663M for the first 10 years of cash-flows and at terminal value of $188M that together give a net present value of ~$850M.
Divided by the total amount of tokens floating on the 10th year, generates a price per PERL that stands at $0.823.
(To keep reading on a scenario exploration exercise and how we arrived at a credible valuation range, refer to the full report here.)

Conclusion

Perlin is an exciting new entrant in the generalized distributed ledger and smart contract platform space. Though we understand that this is the most highly contested vertical among cryptoassets, we cannot help but look beyond the fact, accounting for both the technical innovations that Perlin brings to the table (leaderless PoS, high transaction speed and throughput) and the pipeline of business opportunities that the executive team has conjured up.
Besides the specific value opportunity that this type of analysis helped uncover (the lower boundary of the projected value range stands at around $0.177 a piece, ~ a 2x from current prices), what we are really hoping for here is to further the conversation on different approaches to value cryptoassets and give the tools to anyone interested, to build and extend on this type of modelling.
Solidifying a generally agreed upon toolkit for asset valuation in the cryptoasset space, is one of the keys to unlock the next stage of evolution in the industry, inviting new capital to flow into the space - so don't tread lightly!
Disclaimer: Decentral Park Capital is an investor in Perlin and a PERL token holder. The above DO NOT constitute investment advice in any shape or form.

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Comments

September 3rd, 2019

Probably even better applicable to security tokens. Glad you liked our work.

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