This is a basket idea, equal-weight in CRV (i.e. veCRV), UNI, and BAL which together represent three of the larger decentralized exchanges (DEXs) and automated market makers (AMMs) on Ethereum. At the highest level, the investment thesis for this specific group of cryptoassets is that trading fees on these protocols will eventually be "passed through" to token holders. In other words, although these tokens are not traditional shares in a company, they do capture cash flows from the protocol and can be valued as the net present value of all future (expected) cash flows to token holders or stakers. Moreover, it seems likely that these three protocols/platforms will see some of the largest amount volume and number of transactions over the next 5+ years as Ethereum and non-custodial trading and "banking" grow. This idea is obviously highly tied to the growth of DeFi in general.
Since this is a basket idea, we won't do a full deep dive into each token, but will provide a quick overview of the activity and then discuss each platform's unique strengths. Overall, it's fairly obvious that DEX volume is exploding. I had to triple check this number, but the first 4 days of January 2021 had more DEX volume than the first 6 months of 2020 combined. In some sense, I hesitate to post this during a clear acceleration, but with a long term lens, it seems like the true opportunity has not yet arrived.
Weekly DEX volume is still highly variable, but in an upward trend.
Uniswap maintains the plurality (43%) of DEX volume. Curve's market share is roughly 11%, and Balancer's market share is smaller at ~3.5%.
To simplify matters, these platforms work by pairing a supply side (liquidity providers or LPs) with a demand side (exchangers). Liquidity providers pool their assets into a constantly shuffled mix of assets (this is the automated market making aspect) and exchangers sell and buy whichever asset they would like to exchange from that pool, for a pre-specified transaction fee. These transaction fees represent the overall revenue opportunity for the DEX protocols.
Back of the envelope, the fully diluted valuation of these three protocols combined is roughly $6.3B (Curve: $2.3B @ $0.69, Uniswap: $2.4B @ $6.14, Balancer $1.6B @ $16.39). DEX volume over the last 30 days has been $26.5B which run-rates to ~$320B in annual volume. If we assume each protocol captures .04% in transaction fees, the earnings opportunity for DEX's in the next year (with zero growth) is roughly $128M. A 30x earnings multiple places the lower bound of this valuation at roughly $3.9B, representing about 40% downside from here, again with zero growth. It's difficult to truly assess the potential growth over the next 1-3 years, but assuming 50% growth for the next two years ($288M annual earnings) and a 50x earnings multiple, we arrive at a $14.4B valuation, representing 129% upside from here. https://duneanalytics.com/hagaetc/dex-metrics
Curve Finance (CRV)
Curve Finance is a DEX that currently focuses on stablecoin or 1:1 pairings for ultra low slippage and arbitrage trading. It is quickly growing to allow non stablecoin pools and even cross-asset swaps between pools.
In order to earn fees from the protocol, CRV holders need to lock (i.e. stake) CRV in order to turn it into veCRV (vote-enabled CRV). The longer a holder locks their CRV, the more veCRV the holder has. From this relationship, CRV becomes the native token needed to earn transaction fees from the protocol volume.
Uniswap (UNI)
Uniswap is considered the pre-eminent DEX for any and all ERC-20 tokens. Uniswap is actively working on v3, which we believe will significantly enhance the user experience and simultaneously lower transaction/gas costs for each trade and action.
Balancer Labs (BAL)
Balancer is a DEX and AMM that has a slightly different take on liquidity pools than Uniswap or Curve. Balancer pools can have arbitrary, constant weightings of the underlying asset, whereas Curve and Uniswap have equal weightings (for now). This difference unlocks a key use-case of the "Smart Treasury," which we believe could be widely used by new projects and DAOs.
Catalysts:
- L2 scaling (Optimism, zk-sync, etc). Transaction costs on these platforms are simply too high and solutions are on the way
- Blockchain (Ethereum) adoption and continued development
- Additional dapps building on top of base protocols
Risks:
- All protocols are subject to systematic, smart-contract risk
Curve
- De-peg of underlying stablecoin in any pool
Uniswap
- Trading fees are not passed through to token holders
- Continued SushiSwap forks?
Balancer
- Lack of adoption and outcompetition by other platforms
- Trading fees are not passed through to token holders
Not financial advice.
