1. Public Chain — Metcalfe’s Law

Law Explanation

The core idea of Metcalfe’s Law: the value of a network is proportional to the square of the number of nodes.

V = K * N² (where: V is the network value, N is the number of active nodes, and K is a constant)

Metcalfe’s Law is widely recognized in forecasting the value of internet companies. For example, in the paper “An Independent Valuation of Facebook and China’s Largest Social Network Company Tencent” (Zhang et al., 2015), over a ten-year period, these companies’ valuations showed characteristics consistent with Metcalfe’s Law in relation to their user numbers.

Ethereum Example

Metcalfe’s Law also applies to the valuation of blockchain public chain projects. Western researchers found that Ethereum’s market capitalization has a logarithmic-linear relationship with daily active users, aligning closely with Metcalfe’s formula. However, Ethereum’s network value is proportional to N^1.43, and the constant K is 3000. The formula is:

V = 3000 * N^1.43

According to statistics, the valuation method based on Metcalfe’s Law does show some correlation with Ethereum’s market cap trends:

Logarithmic chart illustration：

Limitations Analysis

Metcalfe’s Law has limitations when applied to emerging public chains. In the early development stage of a public chain, the user base is relatively small, making the valuation based on Metcalfe’s Law less suitable—for instance, early-stage Solana, Tron, etc.

Additionally, Metcalfe’s Law cannot reflect factors like the impact of staking rate on token prices, the long-term influence of EIP-1559’s gas fee burn mechanism, or potential security-ratio-based competition over TVS (Total Value Secured) within the ecosystem of public chains.

2. CEX Platform Tokens — Profit Buyback & Burn Model

Model Explanation

Centralized exchange (CEX) platform tokens are similar to equity tokens. Their value is related to the exchange’s revenue (trading fees, listing fees, other financial services), the development of the public chain ecosystem, and the exchange’s market share. Platform tokens generally have a buyback and burn mechanism, and may also incorporate a Gas Fee Burn mechanism similar to those found in public blockchains.

The valuation of platform tokens needs to take into account the overall income of the platform (discounted future cash flow to estimate intrinsic value), as well as their burn mechanism (to assess changes in scarcity). Therefore, the price movements of platform tokens are generally related to the growth rate of the exchange’s trading volume and the reduction rate of token supply. A simplified formula for the profit buyback & burn model is:

Platform Token Value Growth Rate = K × Trading Volume Growth Rate × Supply Burn Rate (where K is a constant)

BNB Example

BNB is the most classic example of a CEX platform token. Since its launch in 2017, it has been widely favored by investors. The utility of BNB has gone through two stages:

Stage 1: Profit Buyback (2017–2020) — Binance used 20% of its quarterly profits to repurchase and burn BNB.

Stage 2: Auto-Burn + BEP95 (since 2021) — Binance adopted the Auto-Burn mechanism, which no longer refers to profits but calculates the amount of BNB to burn based on BNB’s market price and the number of blocks produced on BNB Chain each quarter. Additionally, there’s the BEP95 real-time burn mechanism (similar to Ethereum’s EIP-1559), where 10% of each block reward is burned. So far, 2,599,141 BNB have been burned through BEP95.

The Auto-Burn formula is as follows:

Among them, N is the number of blocks produced on BNB Chain during the quarter, P is the average BNB price, and K is a constant (initially 1000, adjustable via BEP proposals).

Assuming that in 2024, Binance’s trading volume growth rate is 40%, and the BNB supply burn rate is 3.5%, with K set to 10, then:

BNB Value Growth Rate = 10 × 40% × 3.5% = 14%

This means that under this model, BNB would be expected to increase by 14% in 2024 compared to 2023.

As of now, over 59.529 million BNB have been burned cumulatively since 2017, with an average quarterly burn rate of 1.12% of the remaining supply.

Limitations Analysis

When applying this valuation model in practice, it’s necessary to closely monitor changes in the exchange’s market share. For example, if an exchange’s market share is continuously shrinking, its future profitability expectations may decline even if its current earnings are decent—thereby lowering the valuation of its platform token.

Changes in regulatory policy also significantly affect the valuation of CEX platform tokens. Uncertainty in regulations can shift market expectations of platform token value.

3. DeFi Projects — Token Discounted Cash Flow (DCF) Valuation Method

The core logic of using the Discounted Cash Flow (DCF) method to value DeFi projects lies in forecasting the cash flow that tokens can generate in the future, and discounting it at a certain rate to obtain their present value.

Among them, FCFₜ is the Free Cash Flow in year t, r is the discount rate, n is the forecast period, TV is the Terminal Value.

This valuation method determines the current value of a token based on expected future earnings of the DeFi protocol.

Example: RAY

Raydium’s revenue in 2024 is $98.9 million. Assuming an annual growth rate of 10%, a discount rate of 15%, a forecast period of 5 years, a perpetual growth rate of 3%, and an FCF conversion rate of 90%.

Cash flow over the next five years:

Total discounted FCF over the next 5 years: $390.3 million

Terminal Value discounted: $611.6 million

Total DCF valuation: $1.002 billion = $390.3m + $611.6m

RAY’s current market cap is $1.16 billion, which is roughly in line with the calculated valuation. Of course, this assumes a steady 10% annual growth over the next 5 years. In reality, Raydium may see negative growth in bear markets or growth far exceeding 10% in bull markets.

Limitations Analysis

There are several key challenges when applying DCF to DeFi protocols:

1. Governance tokens often don’t capture protocol revenue directly. To avoid being classified as securities by the SEC, most projects avoid direct profit-sharing. Although there are workarounds (like staking rewards or buyback-and-burn mechanisms), many protocols lack strong incentives to return profits to tokens.

2. Predicting future cash flow is extremely difficult. DeFi revenue is highly volatile due to rapid bull-bear cycles, changing user behavior, and intense competition.

3. Determining the appropriate discount rate is complex—it must factor in market risk, project risk, and more. Small differences in the rate can greatly impact the valuation.

4. Some DeFi projects use profit buyback-and-burn models. These mechanisms affect token circulation and value, and may make the DCF model unsuitable for such tokens.

4. Bitcoin — Comprehensive Evaluation Using Multi-Factor Valuation Methods

Mining Cost Valuation Method

According to statistics, over the past five years, the percentage of time that Bitcoin’s price was below the mining cost of mainstream mining machines is only about 10%. This fully demonstrates the important role that mining cost plays in supporting Bitcoin’s price.

Therefore, Bitcoin’s mining cost can be regarded as the price floor. Bitcoin has only occasionally traded below the mining cost of mainstream mining rigs, and historically, these moments have represented excellent investment opportunities.

Gold Substitute Model

Bitcoin is often regarded as “digital gold,” capable of partially replacing gold’s role as a store of value. Currently, Bitcoin’s market cap accounts for 7.3% of gold’s market value. If this ratio rises to 10%, 15%, 33%, and 100%, the corresponding Bitcoin price would reach $92,523, $138,784, $305,325, and $925,226 respectively. This model provides a macro-level valuation perspective for Bitcoin based on its comparability with gold in terms of store-of-value attributes.

However, Bitcoin and gold differ significantly in physical properties, market perception, and use cases. Gold has been recognized for thousands of years as a global safe-haven asset, with extensive industrial applications and tangible backing. Bitcoin, on the other hand, is a blockchain-based digital asset, and its value stems more from market consensus and technological innovation. Therefore, when applying this model, one must carefully consider how these differences may affect Bitcoin’s actual value.

Conclusion

This article aims to advocate for the development of valuation models for Crypto projects, in order to promote the steady growth of valuable projects within the industry and to attract more institutional investors to allocate assets into crypto.

Especially during bear markets, when the tide recedes and only the strongest remain, we must use the strictest standards and the simplest logic to identify projects with long-term value. With proper valuation models, we can discover the “Google” or “Apple” of the Crypto world—just as some did during the dot-com crash in 2000 when they spotted those giants early.

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