Simplifying the valuation of YFI with a Twitter Bot
Current crude YFI valuation using TVL
At the moment one of the most common ways of comparing DeFi protocols is looking at their Total Value Locked (TVL), as shown in https://defipulse.com/.
CoinGecko shows the Market Cap / TVL Ratio which is a crude way of determining whether a protocol is cheap or expensive. It is considered cheap when the Market Cap / TVL is low and expensive when it is high.
TVL is a crude measure because it does not reflect how earnings are made by the YFI protocol.
A more appropriate way of valuing YFI (and most other DeFi protocols) is to use a Price to Earnings ratio.
For YFI this is equivalent to the market cap ($780m today) divided by the annual earnings (based on the 0.5% withdrawal fee and 5% performance fee on subsidized gas, which occurs only when a trade is executed). The trailing PE ratio is the market capitalisation today divided by the earnings over the previous year.
All the withdrawals information is available on-chain or available here (this dashboard is great work!) https://explore.duneanalytics.com/public/dashboards/g0bGfgloeXBd9C18jpBjdXi5KkQjR7IXYqFRUnHk
Revenue might be more difficult to calculate but could be estimated by multiplying the TVL on a given day by the growth shown on the vaults page.
Other ways of determining the annual earnings for a rapidly growing protocol are by multiplying the most recent month’s earnings by 12.
Twitter Bot Request
Please could someone clever set up a Twitter bot that states the trailing PE ratio on a daily basis, or to make it more random the alert could be set every time $100m is withdrawn from the vaults. I appreciate this is not an easy task!
The Tweet could show:
- YFI price and market capitalisation
- Daily, weekly, monthly, annual earnings
- Trailing PE ratio
I see this as a more sophisticated version of the RenBTC bot (link below) which tweets every time RenBTC is minted or burned (produced by the @HAL_team)
Most people do not yet understand that DeFi protocols can have PE ratios. This is understandable since bitcoin’s valuation is often carried out by saying, “look it has these properties, so it’s better than gold, and gold has a $9 trillion market cap, therefore bitcoin’s market cap should be at least as high”. This bot could help demonstrate that DeFi protocols do have PE ratios, and that they are low relative to most tech companies that are growing more slowly than DeFi.
It is the natural progression from TVL on DefiPulse or CoinGecko.
Mechanism Capital produced a report covering the fundamental valuation of YFI for anyone interested https://www.mechanism.capital/yfi-frameworks-for-fundamental-valuation/