REN Token Valuation

The value of REN is derived from trading fees and bonds. Fees are paid by traders to darknodes in exchange for processing orders. Bonds are submitted in REN by both darknodes and traders in order to utilize the network. Fees and bonds are interconnected such that each darknode is required to hold a bond of 100,000 REN to gain access to the network and receive fees for processing orders. With this information and some basic market assumptions, we can diagram base and bull case scenarios for the potential value of REN.

Assumption #1: The digital asset market will continue to mature with increasing annual trade volumes

Since 2015, the annual total trade volume of digital assets continues to increase, as shown in the graph below:

In the year 2017, a total of 2T USD in digital assets was traded on public exchanges. As we approach the close of Q2 2018, over 4.5T USD has already traded this year. Conservatively, we project that about 8T USD in digital assets will be traded on exchanges by the end of 2018. Of note, these numbers do not include the unreported off-exchange volumes traded in OTC deals. Based on our market analysis, we perceive the last three years as periods of exceptionally rapid expansion of the digital asset sector. It is not reasonable to assume that the annual trade volumes will continue to grow at the rate shown in the chart above. If it did, the annual trade volume of digital assets would approach the 100T total annual trade volume of equities in 2019 and far surpass it in 2020. We think that it is unlikely that digital asset trades will exceed the global equity trading volume that soon. Instead, we will assume that the digital asset trade volume will grow at a more sustainable rate of 75% in 2019, 50% in 2020, 35% in 2021 and 25% in 2022. Based on these projections, the annual trade volume of digital assets will be about 35T in 2022.

Assumption #2: Trading fees on the Republic Protocol exchange, RenEx, will start at 20 bps for buyer and 20 bps for seller (40 bps collected per trade) and trend down over time.

The Republic Protocol team has specified that the fee rate for their exchange, RenEx, will be set to 20 bps for each buyer and seller. We will further assume that fees will trend down to remain competitive with other newly launched 3rd party darkpool exchanges. To support this assumption, we examined a few current market metrics. One of the largest, most liquid digital asset exchanges, Binance, has trading fees of 10 bps for each buyer and seller (5 bps during the promotional period). Another well known exchange, Bittrex, charges fees of 25 bps each. With lower liquidity in dark pools and OTC platforms, it is reasonable to expect higher trading fees. As a representative example, Circle generally collects between 25 and 50 bps from the bid/ask spread (12.5 to 25 bps each for the buyer and seller) in every trade.

The most popular decentralized exchange is currently IDEX with fees of 10 bps for market makers and 20 bps for market takers (30 bps per trade). As a decentralized dark pool, the Republic Protocol will initially have higher fees than its counterpart decentralized exchanges while simultaneously desiring to remain competitive with OTC platforms like Circle. At 20 bps for buyer and 20 bps for seller (40 bps per trade), the Republic Protocol will have initial trading fees higher than those on IDEX, but comparable to those of Circle.

Finally, we will also assume that on average 5,000 darknodes will be participating in order matching and earning fees. Although there are many factors that will dictate the precise number of darknodes that are active on the network at any given time, we feel comfortable modeling our assumption off other projects that have had similar node requirements.

Assumption #3: Dark pools will approach 15% of total digital asset trading volume.

As expounded upon in the previous section, dark pools constitute about 15% of the total volume in traditional equity markets. We believe that 15% is also a fair estimate for the eventual growth of digital asset dark pools. On the one hand, many digital asset traders gravitate toward options that allow greater privacy and anonymity, perhaps even more so than traders in traditional equity dark pools. This suggests that digital asset dark pools may capture more than 15% of the market. On the other hand, there are seemingly more retail investors in digital assets than in the equity markets, which could put a ceiling on the demand for OTC and dark pool trading options. For this reason, we will stick to the assumption that digital asset dark pools will mature to capture 15% of total trade volume.

Based on the above assumptions, we can now estimate a valuation of REN from the utility of the network in base and bull case scenarios. We are intentionally excluding a bear case scenario. As most decentralized projects including Republic Protocol are still in their infancy, we believe that the bear case valuation of these projects approaches zero over about 5 years, as historically demonstrated for a number of digital assets (historical snapshot from November 2013 of previously well known digital assets).

Bull Case Scenario

Table 1. Annual revenue per darknode in a bull case scenario

Before addressing the bull case, we would like to clarify our interpretation of this scenario. The bull case scenario is the upper limit of what REN could be worth assuming they achieve success to the very highest of expectations. We think this is an important metric to consider given the rampant euphoria in digital assets and blockchain projects. Many digital assets have reached markedly inflated market capitalizations predicated almost entirely on speculation. In some cases, the price of the tokens is so inflated that it approaches or even surpasses the token value as if the platform has already achieved successful adoption (while in reality the platform is still pre-launch or with minimal adoption). Knowing the upper limit of a token’s potential value is extremely helpful in screening tokens that may already be overvalued. For this reason, our bull case scenario is the upper limit of what each REN could be worth assuming the highest realistic success.

In our bull case scenario, we add one assumption to the above list, which is the market capture of the Republic Protocol. As shown in the table above, we assume negligible volume in 2018 as the platform will only first launch in Q3 2018. The market capture then trends up to 1.7% by 2022, estimating that the Republic Protocol will capture about 1/10th of the total volume of dark pools. In favor of this bull case scenario is the likelihood that the Republic Protocol will be the first mover in decentralized dark pools.

With this final assumption, we can calculate a price of REN based on the network fees paid to darknodes, the largest holders of REN tokens.

Given REN’s network incentivization, namely fee generation, we have decided that the best valuation method would be a discounted cash flow analysis (DCF). Fees, which are to be paid in ETH, BTC, or other ERC-20 tokens, can be substituted for a cash dollar amount in a typical DCF model. Similarly, one can envision a fee generating node as a dividend paying stock or an annuity paying bond that lasts into perpetuity (less the costs associated with the electricity and hardware used to run nodes).

Using the formula for DCF, PV = [CF1 / (1+r)1] + [CF2 / (1+r)2] + … + [CFn / (1+r)n] + TV, we can discount our cash flows back to present day to arrive at a Present Value (PV) for the REN network.

PV = Present cash flow value

CF1 = Cash flow at the end of year 1

CF2 = Cash flow at the end of year 2

CFn = Cash flow at n specified year

r = Discount or required rate of return

TV = Terminal Value

Before continuing further, we must assign a specific discount rate, r. Presently, there is no appropriate risk rate in the digital asset marketplace that can be used as a benchmark. As such, we will borrow from other financial markets to ascertain an acceptable discount rate. The risk free rate is typically deemed to be the return rate on US treasury bonds — a return which is considered to be devoid of risk of loss. Moving along the risk spectrum to a more appropriate discount rate, we arrive at funding costs for start-up companies. In Series A equity funding rounds for venture capital, the generally accepted rate is between 30–50% per annum. As a digital asset platform with certain technological components that remain unproven, Republic Protocol has a relatively high risk profile and we believe that it is reasonable to assign a discount rate that is similar to that of a Series A round for a startup. Given this information, we have decided to settle on a discount rate of 40%.

Using our estimates of fees paid to REN nodes from Table 1 above, we can plug these CF values into our formula.

PV = 0/(1.40)¹ + 84,000,000/(1.40)² + 321,300,000/(1.40)³ + 822,150,000/(1.40)⁴ + 1,506,093,750/(1.40)⁵ + TV

Lastly, we need to include those fees paid after the five year period. We model the REN platform to last into perpetuity, as is appropriate in the equity markets. To do this, we use the Gordon Growth Method to find a Terminal Value, TV. We conservatively model out a sustained growth rate of 2% (g = 0.02), in-line with mature company estimates.

TV = [year 5 cash flow * (1+g)/(r-g)]

TV = 1,506,093,750*(1.02)/(0.4–0.02) = 4,042,672,697

Adding up our yearly cash flows and terminal value, we arrive at the below summation:

0 + 42,857,142 + 117,091,836 + 214,012,390 + 280,034,686 + 4,042,672,697 = 4,696,668,753

Finally, by dividing our total network cash value (4,696,668,753) by the number of circulating tokens (519,094,022), we arrive at a dollar price per REN of 9.05 USD. That is, with our assumptions and best case scenario forecasts, REN could achieve a value of 9.05 USD per token. This represents an upside of ~94x (9,300% gain) from its current price of 0.096 USD.

Base Case Scenario

Table 2. Annual revenue per darknode in a base case scenario

In the table above, we forecast out our base case assumptions. As in our bull case scenario, the only assumption we adjust in this scenario is the REN market capture rate. Using more conservative projections for our base case, we model the platform to capture trading volumes that are more in line with numbers for decentralized exchanges such as IDEX, DDEX and the Waves DEX. IDEX, which presently has the greatest market share, captures about 0.06% of daily digital asset trading volume.

For the sake of brevity, we will not detail the DCF calculation as we did before. In this base scenario though, the resulting price per REN is 1.84 USD. This represents ~19x (1,800%) increase from its current price.

In summary, assuming a successful launch of the Republic Protocol platform and increasing interest in trading digital assets, the price of REN falls somewhere between 1.84 USD and 9.05 USD, respectively a 1,800% to 9,300% increase from its current price of 0.096 USD.