If you’re one of our recurring readers, you may remember our Token Tuesday back in early September on Synthetix. In that article, we outlined the value proposition for Synthetix and the importance of derivatives for the future of decentralized finance (DeFi).
The derivatives market is by far one of the largest in legacy markets in existence today with a high-end estimated market value of over 1.2 quadrillion dollars. With DeFi taking reigns as the new Ethereum growth-driver (relative to the ICO Boom in 2017), this is a much healthier narrative for the decentralized computing network to secure its foothold in this next leg of innovation. As such, there’s plenty of market opportunity for Synthetix to build on, and is something we recognized back in August when we first began researching the protocol.
The one thing that stood out about Synthetix was its rather intuitive token model where staking SNX represented pro-rata economic rights to the fees accrued from exchange trading. More importantly, rather than relying on some obscure utility token to reward its stakers with fees, it uses sUSD: a synthetic US dollar. The use of a stablecoin to reward stakers allows us to use battle-hardened, traditional evaluation models, such as a discounted cash flow (DCF) model, to properly value the token. Our model was based on a few core assumptions, such as total market volume, Synthetix’s exchange market capture rate, and the total amount staked in the protocol. After some discussion on the assumptions between our internal team, we were able to come up with a valuation for SNX between $0.60 — $1.20, depending on the dilution of the supply.
Since then, Synthetix has seen a significant amount of growth in the protocol and has recently surpassed our upper valuation of $1.20. Therefore, we’ve decided to revisit our valuation model to update it to represent the growth we’ve seen since the initial release.
To give any unfamiliar readers with a brief overview on the protocol, Synthetix is a decentralized synthetic asset issuance protocol built on Ethereum where assets can be minted by collateralizing the protocol’s underlying token, SNX. By creating a generalized protocol to issue synthetic assets, developers and crypto investors can now gain access to a range of traditional and digital assets. More information on the interworking can be found here.
Since our last post, Synthetix has added a number of new synth options, further increasing the use-cases that make the platform so attractive. In particular, the most recent release included a DeFi basket, effectively allowing investors to purchase a token that was weighed by popular DeFi assets like LINK, MKR, ZRX, SNX, REN, LRC, KNC, BNT, and MLN (determined through Twitter Polling).
Similarly, Synthetix recently re-introduced inverse synths, a derivative that effectively allows investors to short any supported assets. In a market where shorting assets are often restricted to sophisticated investors comfortable leveraging margin trading or futures contracts, inverse synths provide an intuitive mechanism for retail investors to capitalize on short swings.
This year, Synthetix has seen parabolic growth in total value locked (TVL) and SNX price. When we covered SNX back in September, the price was sitting at around $0.36 with total value locked hovering at around ~$40M USD. Now, Synthetix has soared past Compound to #2 on DeFi Pulse in terms of total value locked with over $166M in nominal value, representing a +315% increase in total value locked. In terms of token price, the current value of SNX sits at around $1.34, resulting in a +272% increase in price since September.
Given that total value locked is denominated in SNX, we’ve seen a real increase in total value locked of 43% (% increase of USD TVL — % increase of SNX/USD). This growth has been nothing to brush off as synthetic assets begin to garner some traction within the broader DeFi community.
Digging into this a bit deeper, SNX locked has increased a moderate amount in the past 3 months from 99.3M SNX locked to 123M SNX locked (+23.86% increase in the past 90 days). This can largely be due to a combination of new stakers and new SNX being minted as part of their new issuance policy.
For those unfamiliar with Synthetix’s new issuance policy, there’s now a base issuance rate to SNX stakers on top of the fees accrued on the exchange. With that said, we can theorize that stakers are reinvesting their native issuance back into the protocol to compound their returns. As issuance continues to take place, we can expect that the total amount of SNX locked will increase in tandem as users continue to look to maximize their potential returns in the future.
Generally speaking, all fundamental metrics on Synthetix have increased in the past 90 days. One of the most important metrics for determining the proper valuation for SNX is the exchange volume, and in turn, the number of fees accrued. Looking at the Synthetix Dashboard, we can see that exchange volume has also seen an uptick as SNX exchange volume hit a relative peak earlier this week at over $831,000.
Since it’s still fairly early in the exchange volume growth, it will be interesting to see if this exchange volume is sustained in the coming future. Nonetheless, we’ll use this as a basis for updating our valuation on SNX.
When we first released our valuation on SNX in September, the core assumption was based on the amount of 24h exchange volume. In summary, 24h exchange volume began at $316k (which was accurate at the time) and scaled up to $45M by the end of 2023. Given that SNX has exceeded our growth expectations, we’re now starting the 24-hour exchange volume at $700,000 (which is slightly below relative peak) and scaling it up to $67.5M by the end of 2023.
With this, the current fee rate on all trades on the Synthetix Exchange sits at 0.3% which we assume will stay constant in perpetuity. With that said, the 24-hour network revenue can be seen as:
Now that we have the 24-hour network revenue, the last assumption we have to make is the percentage staked in the protocol which dictates the revenue per SNX token. One of our assumptions is that as network inflation decreases, staking percentage *may* decrease in the future, but we have yet to see any indication of this happening.
As such, we’ve increased the percentage staked across the board to scale down from ~80% to 65% (up from 50%) as native inflation continues to go down and staking returns begin to rely more heavily on fees.
With all of these assumptions in place, we can now begin to calculate revenue per token which can be seen as:
The last aspect of our model is to assume a discount rate on the token. In typical venture capital and early-stage investing, a discount rate between 30–50% is the norm for early-stage startups. With this, we assign SNX a discount rate of 40% which ultimately allows us to use a DCF model to calculate the value of the token. The math can generally be seen as
PV = (Year 1 Cash Flow /1+r)¹+ (Year 2 Cash Flow /1+r)²…+(Year n Cash Flow / 1+r)^n
Plugging in our numbers, we calculated that the value of SNX based on updated assumption lies somewhere between $0.91-$1.41 depending on the dilution of the supply. With SNX priced around $1.33, we believe SNX is currently trading around fair value as it stands today.
For a full breakdown of our assumptions, feel free to review our spreadsheet here.
It should go without saying that this is simply a model and is subject to change in the future depending on fundamental changes to the protocol. With that being said, there’s a handful of protocol improvements in the pipeline that we believe could bring SNX to a higher valuation, like the new DeFi baskets as well as the potential for Synthetix to accept ETH as collateral for minting new assets. If Synthetix begins to accept ETH as collateral, we could see a drastic increase in economic bandwidth for the protocol to mint new assets in the future. However, until we see that live in action we’re cautious to adjust our model any further.
Regardless, given the parabolic growth in Synthetix, we believe the token has finally achieved fair value and we see little upside in the short term as it stands today. All of that in mind, our model does not account for the irrational nature of crypto markets and the massive potential for “FOMO effects” that are common within crypto assets.
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