Decentralized token controlled protocols have proliferated in recent years and become a multi-trillion dollar asset class despite the absence of agreed upon valuation frameworks. That is the power of a permission-less and transparent 24/7 global capital market. Imagine how big the market could be if we knew how to value these new assets.
The purpose of this essay isn’t to definitively resolve that debate, but rather to establish some general principles, in particular that, all things equal, decentralized token controlled protocols should be worth more than companies, something only loosely touched on in most discussions of how to value crypto assets.
Most discussion of how to value decentralized protocols grew out of the discourse on how to value Bitcoin as a non sovereign store of value. Since its earliest days, Bitcoin has been valued as Digital Gold, with some debate as to how much the TAM of gold would grow if it was more portable, divisible, and censorship resistant. For a while after this, most tokens were valued as currencies, with people deeply thinking about the equation of exchange and possible issues caused by the near infinite velocity enabled by digital assets.
Then with the rise of DeFi in 2020, came the rise of on-chain productive assets that generated on-chain cashflows, with folks trying to value these protocols using a standard discounted cash flow (DCF) analysis.
Play-to-earn gaming has exploded this year. Initially catalyzed by Axie Infinity, which reached over a million users without being allowed in either the Apple or Google app stores, the model has caught fire and spread to other extremely popular games like Defi Kingdoms and Thetan Arena.
This trend has been a core driver of MetaMask's explosive growth from 1M to >21M MAUs in 2021 and gaming sites currently represent 5 of the top 10 sources of activity for MetaMask users, which is probably best conceptualized as Web3 end user activity. It is worth noting that none of these sites is the aforementioned Axie Infinity.