Valuation of Utility Tokens based on the Quantity Theory of Money

This article is gold, I have learned a lot about the basis of the theory of money and token valuation. Thanks Jay Pazos for sharing it.

Acronyms to remind:

  • TAM: Total addressable market.
  • SAM: Serviceable available market.
  • SOM: Serviceable obtainable market, the market that the company can realistically address.
  • PSOM: %market penetration of the company in SOM.
  • Q: quantity of the resource provided.
  • Q = SOM x PSOM


Ok, you do not have time to read the 6 pages article, just read the abstract, I guess it will convince you to read the rest.

A framework to value utility tokens would allow for more transparent Initial Coin Offerings (ICO) and help in the development of digital assets. In this paper, we derive a formula to value utility tokens and the network that supports it. We found that valuation is directly proportional to the price of the resource being provided and the size of the Serviceable Obtainable Market (SOM) for that resource. Also, it is inversely proportional to the velocity of the token. In section 4 we derive a formula for a crypto conversion factor that relates the price of the token to the price of the resource provided, the factor is not linear and has seven variables. For cases where the growth of SOM and the growth in price of the resource are not high, longer times to develop the network will
decrease valuation; this is because discount rates for start-up and growth companies are high. On the other hand, if the build-up of the network goes on-time as planned, posterior valuations of the network will yield higher values. As expected, valuation doesn’t depend on the number of tokens issued as that variable doesn’t appear in the formula. We believe that by making these formulas available to the Blockchain/DLT community,
we can help network developers to understand how key variables impact the valuation of the network they are trying to build.

Crypto-currencies are more stable than some fiat currencies

Since I look into trading on crypto-currencies, I use to invest sometime reading news about them, trying to understand the real use, the real applications that are solving real problems with these virtual coins.

The predominant comment you find when you talk to anybody is:

Bitcoin is very unpredictable and the value fluctuates a lot, it’s too risky.

So well, you read and read, and then you find so many users from countries as Venezuela and Argentina, that moved their money into some of the crypto-currencies. For them this is not a risk, is an opportunity to save their savings.


The graph below shows the BTC/USD (blue line) in comparison with BTC/USD.

You can clearly can see how unstable is Bolivar in comparison to BTC, both compared with the USD.

I live in a country that is stable, economically, politically and socially. But there are other people that are not as fortunate as me. And for them, doing the simple math demonstrate that crypto currency is more stable than their own local currency.

Why they do not change to dollars?

In so many countries for the tourists they offer hotels, adventure activities, flights… with a different price every single day. The business person, the first thing they do in the morning is to consult the USD value in comparison to the local currency and then s/he defines the prices for the day.

You can pay with local currency or in dollars, but they ensure some grade of parity.

It works like this and the fact is that the continuous flow of foreign currencies and many other things that work makes the things stable. I have seen this in different countries as Thailand, Costa Rica or Vietnam.

My point is that in countries that are not as stable as the ones mentioned above, the lack of foreign currency makes the companies and the people to run behind the USD, making the supply/demand balance very unbalanced.

So, for some of these people who are able to trade to crypto-currencies, they do it, it’s not risky, it’s an opportunity.


In Venezuela there are so many initiatives that are evolving to escape of the inflation situation. I found these two the most interesting ones: is a place where you can learn from scratch how crypto currencies work.

Banano , this is a crypto currency that comes from Nano project and tries to offer instant micro-transactions at low cost. Banano distributes the coin freely and easily using a couple of different mediums. There are individual initiatives where people is trying to use as coin to obtain food in Venezuela.

  • Here a video explaining how they do it.
  • Here an entry in Reddit asking about support.

Banano at this moment is still in distribution mode

New buzzword, Flippening

New buzzword, at least to me

Flippening is defined as an expected paradigm shift in the world of cryptocurrency, where the values of cryptocurrencies are no longer primarily based on the value of Bitcoin.

If flippening happens, it will mark the end of the absolute dominance and special status that Bitcoin has had in cryptocurrency markets ever since its inception in 2009.

Who can provoke it? Etherium, it’s basically the ecosystem that is growing at a considerable speed to provoke it.

Where can I check how is this evolving? For instance:

This page has 2 concerns to me:

  • They do not describe how the calculate the numbers they publish.
  • They do not provide a graph with the evolution during the time they have measured it.

Do you think that flippening will happen?

The extended concept of flippeting is based on the market capital.

In June 2017 it was closed to happen:

Flippening June 2017After that Bitcoin became extremely popular and you perfectly know what happens between October and December 2017.

Now, May 2018 the situation is:

Flippening May 2018Do you think that the flippening effect will happen?

If so, when?

I have no clue, but if I have to do a bet I would say that it will happen in Q1 2019. Why? Because there are so many ICOs published with consistent companies behind investing. Not all will survive, but that volume will be the one that will incline the sclale to the other side.

There is another significant flippening that long term investors are looking for

and it is that the number of token-users overcomes the number of token-traders. This article explains very well all the key aspects that will enable some crypto-assets to become long term investment assets.

Cryptoasset Valuations


I have had some conversations about the maturity of the cryptocurrencies market related to the maturity of the companies and how I miss to have the fundamental indicators as you can have for a public company (Revenue, Costs, P/E, balance sheets…).

The companies publishing cyptocurrencies are private companies and they do not have  obligation to share this information, but there should be in the future a general consensus about how to valuate their assets, the coins they put in the market.

As everybody can easily figure out, I always has stated that there will be a moment where so many cryptocurrencies will disappear as they do not make sense, and others will survive as they make sense and provide value.

Well, I would like to understand how to valuate them (better before they disappear).

Value… where? on the transaction.

The basis

The basic value of a cryptoasset is the value provided to a given transaction. If you perform a transaction via the traditional or existing channel this has a cost, a speed of execution and a given security.

If you execute that transaction through a crytocurrency, is it cheaper? faster? more secure?…

On top of that, the volume of transaction:

  • how many of these transactions are happening in the market?
  • how many of these transactions are managed through this blockchain environment?
  • What are the efforts of the company to attract more transactions to their ecosystem?

Cryptoasset Valuations

I’m a beginner on blockchain and on asset valuations, so I have look for the experts. I found this article written by  Chris Burniske, where he explains how to do the valuation (he attaches a nice excel that helps a lot to understand the details).

Each cryptoasset serves as a currency in the protocol economy it supports. Since the equation of exchange is used to understand the flow of money needed to support an economy, it becomes a cornerstone to cryptoasset valuations.

The equation of exchange is MV = PQ, and when applied to crypto my interpretation is:

  • M = size of the asset base.
  • V = velocity of the asset (shows the number of times an asset changes hands in a given time period).
  • P = price of the digital resource being provisioned (price of the cryptocurrency or crytoasset).
  • Q = quantity of the digital resource being provisioned

A cryptoasset valuation is largely comprised of solving for M, where M = PQ / V. M is the size of the monetary base necessary to support a cryptoeconomy of size PQ, at velocity V.

Next steps

  • I need to understand better the calculation of the market value.
  • Go deep on a real ICO and perform a valuation.
  • Understand how to do a token utility calculation.

Cryptocurrencies scams

The cryptocurrencies have a side B, the scams. There are so many, and we cannot ignore them. Ponzi schemes, false roadmaps, …

Shit happens, but with a proper due dilligence you can minimize the risks.

Basic due dilligence (basic questions)

The general consensus about due dilligence is: do a standard due diligence as if it is a traditional company, plus check specific questions from the blockchain environment. Things such:

  • Exaggerated returns percentages.
  • Not clear or very complicated transaction fees.
  • Who are the owners? (yes, some of the ICOS I have read they do not add any name, incredible isn’t it?)
  • Do they have a clear roadmap?
  • Are they achieving the defined roadmap?
  • What is the implemented token model?
  • What is the value of the cryptoasset in the value chain of economy?
  • How the crypto asset is evaluated?
  • Is the consensus model a trusted one?

I will list the ones that I know that happened, ordered by scammed amount:

  1. Pincoin token: A Vietnamese cryptocurrency company Modern Tech. The team disappeared after scamming around 660m$ (April/2018)

A complete blacklist of scams and potential scams being evaluated:

Etherium ecosystem

Simon Wardley says related to maps: practice, practice, practice… so here there is a practice.

The map

Development environment

  • Solidity: is quite mature and the community of developers is increasing, there are so many places where you can learn how to develop in solidity, and the documentation is quite good. There are other languages but not as popular as solidity: Serpent, Mutan, LLL.
  • Certification programs: for developers and for the applications itself. This is a natural step that will happen sometime.
  • B2C Vs B2B: right now the majority of applications are B2C, but I’m sure that in the future some B2B solutions will show up. B2B solutions are more difficult to identify as they are not always advertized publicly, right now the Pioneer CIOs are the main consumers that should be looking at them (settlers and town planners are still not interested on blockchain).
  • Official DApp store : this is something that will have to happen in the future. Right now there are some places publishing lists of available distributed applications, but there are not quality checks and there are not enough volume of users using them and rating them.
  • The API: the ability to interconnect with different environments is key, specially to promote the partnership between DApps that benefit to the end user, and hence enrich the ecosystem.
  • Waste of energy: this is a constrain provoked by Proof of work (POW) method. At some time this should be reviewed. Ethereum is trying to move towards proof of stake in it’s next release Casper.
  • Hyperledger: competition is a healthy fact, and a way to compare the evolution. We cannot compare apples with apples, but there are common components where you can determine some comparisons.
  • Ability to run private transactions : right now this is not possible, you can set the transactions as visible or private for all users, but not for restricted users or roles.
  • Reward for each block: the fact that there is a reward for each completed block makes the community to increase, this is an accelerator to me.

Etherium Vs Hyperledger

They are a different thing that will meet in some future.The main differences can be read here.

  • Etherium      = B2C, POW,                   , built in cryptocurrency…
  • Hyperledger = B2B, No-op and PBFT , no cryptocurrency required…

Remember the basic nomenclature of the maps Any suggestion to improve the map?

Etherium Maturity

This week I noticed 2 things:

Maturity of the ecosystem

I acquired the habit of checking the market capital volume of the 100 top cryptocurrencies. Doing it, I notice how the lifecycle of the currencies are happening. Some new births and some of them that are gone.

I have also checked some ICOs, reading the white papers, trying to understand who is behind them, if they are achieving the calendar communicated, etc.

In the road to reach the mainstream adoption of etherium, I guess there are still so many steps the environment has to take.

Official Etheirum App Store

Right now, there are some places where you can track some number of distributed applications based on Etherium. For instance: dappradar and state of the Dapps.

But they are not an official Store with some quality criteria that ensures some basis is still not there.

Apple, Google, Facebook “app stores”

If you try to publish an application on the Apple Store (that right now to me is the more high quality level one) you will notice that there are so many things that cannot be done with the purpose of protecting the end user.

Google restrictions is also high, but Facebook ones lack of control on some of the data that an application can retrieve from an end user.

What’s happening now?

Right now there are so many gambling games, pyramid schemes, and exchanges places that does not help to mainstream adoption.

Who will be able to drive the situation to the existence of an “official DApp store”?

Etherium is evolving as an ecosystem and the number of early adopters cannot be ignored.