DeFi versus TradFi: Valuation Using Multiples and Discounted Cash Flows

TL;DR

This paper evaluates DeFi tokens using traditional valuation methods like multiples and DCF, comparing them with traditional firms, revealing persistent overvaluation despite a prolonged crypto bear market.

Contribution

It introduces a valuation framework for DeFi tokens using established financial metrics and compares their valuation to traditional firms in similar sectors.

Findings

DeFi tokens are overvalued relative to traditional firms.

Both valuation methods indicate persistent overvaluation in DeFi.

Overvaluation persists despite prolonged bear market conditions.

Abstract

As of August 2022, blockchain-based assets boast a combined market capitalisation exceeding one trillion USD, among which the most prominent are the decentralised autonomous organisation (DAO) tokens associated with decentralised finance (DeFi) protocols. In this work, we seek to value DeFi tokens using the canonical multiples and discount cash flow (DCF) approaches. We examine a subset of DeFi services including decentralised exchanges (DEXs), protocol for loanable funds (PLFs), and yield aggregators. We apply the same analysis to some publicly traded firms and compare them with DeFi tokens of the analogous category. Interestingly, despite the crypto bear market lasting for more than one year as of August 2022, both approaches evidence overvaluation in DeFi.