Understanding what gives a token value is fundamental for investors and builders in the Web3 space. Token value stems from a combination of qualitative factors—like community engagement and narrative—and quantitative metrics such as Total Value Locked (TVL) and earnings ratios. This article breaks down both components to help you identify promising opportunities.
Why Do Tokens Have Value?
Tokens possess value for different reasons, much like traditional assets. At any moment, a token’s market price is a function of supply and demand. But where does demand come from?
A useful framework for understanding token value is the concept of "super asset classes," originally proposed by Robert J. Greer and later applied to crypto by Chris Burniske. These classes help categorize tokens based on their primary use cases and value drivers.
The Three Super Asset Classes
- Capital Assets: These tokens provide ongoing value through yields, governance rights, or cash flows. Examples include governance tokens like COMP (Compound) or MKR (MakerDAO), where holding the token grants control over a protocol or DAO.
- Consumable / Transformable Assets: These tokens offer access to a resource or service. Filecoin (FIL), for instance, is used to pay for decentralized storage on the IPFS network.
- Store of Value Assets: Tokens in this category are held primarily to preserve wealth or facilitate transactions. Bitcoin and stablecoins like USDC fall into this group.
Many tokens exhibit properties of multiple classes. Ethereum, for example, functions as a consumable asset (for gas fees), a capital asset (through staking rewards), and a store of value.
Qualitative Drivers of Token Value
Qualitative factors are the intangible elements that influence perception and demand. They include:
Narrative
Web3 is highly cyclical, driven by narratives like Bitcoin’s halving events or emerging technological trends. Projects that align with powerful stories can attract significant attention and investment. Leveraging partnerships, product announcements, and timely messaging can amplify a token’s perceived value.
Community
A strong, engaged community is one of the most critical assets for any Web3 project. Communities provide marketing support, governance participation, and feedback. Key platforms for community building include:
- Internal Tools: Discord, Telegram, and WhatsApp for direct engagement.
- Social Media: Twitter, LinkedIn, Reddit, and YouTube for broader reach.
- Content Platforms: Medium or Substack for detailed updates and insights.
Tools like LunarCrush can help track social mentions and engagement metrics, offering insights into community health.
Token Holder Distribution
A diverse and growing holder base indicates healthy decentralization and reduces the risk of manipulation. More holders often lead to better governance participation and long-term stability. On-chain analytics platforms provide transparency into holder distribution.
Product-Token Alignment
Tokens should complement the product by enhancing user experience or capturing value. Value capture mechanisms can include revenue sharing, buybacks, discounts, or governance rights. Even tokens with "weak" value capture, like UNI, can gain significant worth through governance power over valuable protocols.
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Quantitative Drivers of Token Value
Quantitative metrics offer data-driven insights into a token’s performance and potential. Key indicators include:
Total Value Locked (TVL)
TVL measures the total assets deposited in a protocol’s smart contracts. It’s a key indicator of trust and product-market fit, especially in DeFi. Higher TVL often correlates with higher usage and fee generation. Platforms like DeFi Llama track TVL across protocols.
User Count
The number of active users reflects adoption and engagement. Comparing user growth against competitors can reveal a project’s traction and market position.
Revenue and Fees
Revenue refers to the fees accrued to token holders after paying other stakeholders. For example, in an AMM, revenue is the portion of trading fees retained after compensating liquidity providers. Metrics like Price-to-Sales (P/S) or Price-to-Fees (P/F) ratios help assess valuation relative to earnings.
Market Capitalization to TVL (MC/TVL)
This ratio compares a protocol’s fully diluted market cap to its TVL. It’s useful for evaluating value relative to peers in the same sector.
Discounted Cash Flow (DCF)
DCF estimates an investment’s value based on projected future cash flows. While challenging to apply to crypto due to volatility and nascent markets, some analysts adapt traditional models by using higher discount rates to account for risk.
Combining Qualitative and Quantitative Analysis
Successful token evaluation requires balancing both aspects. A strong community and narrative can drive demand, but sustainable value depends on solid fundamentals like revenue, user growth, and TVL. Investors should consider:
- How well the token aligns with its intended super asset class.
- Whether value capture mechanisms are sustainable.
- How quantitative metrics compare to competitors.
- The strength and engagement of the community.
For founders, highlighting both qualitative and quantitative strengths is essential for attracting investment and building credibility.
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Frequently Asked Questions
What is the most important metric for valuing a token?
There is no single most important metric. TVL, revenue, user growth, and community health all play roles. The best approach is to use a combination of metrics tailored to the token’s use case.
How does narrative impact token price?
Narratives drive market sentiment and can lead to increased buying pressure during bullish trends. However, long-term value depends on fundamentals, so narratives alone are not sufficient.
Can traditional valuation models like DCF be used for crypto?
Yes, but with adaptations. Higher discount rates are often used to account for volatility and risk. Data availability from platforms like Token Terminal is making quantitative analysis more accessible.
Why is community important for token value?
Communities provide marketing, governance, and feedback. A strong community can enhance a token’s perceived value and utility, leading to higher demand.
What does TVL tell you about a protocol?
TVL indicates the amount of trust and capital allocated to a protocol. Higher TVL suggests greater usage and security, but it should be considered alongside other metrics like revenue and user count.
How do tokens capture value?
Tokens capture value through mechanisms like fee sharing, buybacks, staking yields, or governance rights. The effectiveness of these mechanisms depends on the protocol’s design and tokenomics.