One startup founder has done the math and he thinks the true value for the COMP token right now should be more like $40.

The governance token for the Compound lending platform has been trading between $172 and $215 over the last seven days, according to CoinGecko, after touching a yield-farming-fueled high of $373 on June 21.

Pankaj Balani, CEO of Delta Exchange, a derivatives marketplace for cryptocurrency, ascribed COMP’s high prices to “initial euphoria.” 

Read more: What Is Yield Farming? The Rocket Fuel of DeFi, Explained

Delta Exchange said the analysis was provided to help the market better price governance tokens as other startups look to replicate COMP’s success. In an email to CoinDesk sent via an external PR firm, Delta Exchange said it hoped to deflate the typical boom-and-bust cycle for new crypto tokens.

COMP craze

Compound began distributing its governance token on June 15, kicking off a yield farming craze throughout the decentralized finance (DeFi) ecosystem. COMP remains the most sought-after asset of the nascent crop of DeFi governance tokens. The asset remains lucrative to “mine” by using the Compound product.

Delta Exchange analyzed the price and determined that a reasonable estimate for a market price is much lower, however. The high price right now can be explained in part by a lack of liquidity, the firm said. The smart contract that governs COMP allows for 10 million tokens to exist, but not even close to that many are actually on the market. 

“As more and more supply is released every day, an equilibrium will be established and price will start to normalize,” Balani said via a spokesperson.

CoinGecko shows the circulating supply at 3 million tokens. The COMP governance design sets aside 40% of the 10 million token supply to be distributed to Compound users each day over the next four years.

Read more: Some Numbers That Show Why Yield Farming COMP Is So Seductive

In late June, Andrey Belyakov gave a similar price estimate (when COMP’s liquidity was $70 million lower) in a Medium post on ways to short COMP, including on his company’s own platform, Opium. He placed the price at $30 at that time.

At a price more in line with these estimates, Belyakov noted, it would no longer be profitable to take out a loan on Compound. Instead, fresh COMP would provide a light discount on a loan’s interest rate, in the form of cashback, which he describes as a “healthy and sustainable mechanism.”

Why $40?

Delta’s estimate is based on fundamentals in a world where all COMP are liquid. Co-founder Jitender Tokas provided the analysis that justified the $40 price estimate. 

Tokas assumed that eventually much of the current borrowing will unwind as COMP price recedes and people borrow less just to earn COMP and borrow for more organic reasons. He estimated the natural borrowing rate at approximately $400 million. Then he suggested a 5x multiple of Compound’s book, noting that a 2x to 3x multiple is typically allowed for a normal bank, as a way of capturing stronger potential growth for a new product. 

Read more: Delta Exchange Launches Crypto Interest Rate Swaps

The most generous allowance Tokas made was for the value of governance rights. He noted that in the equities market the value of voting versus non-voting shares is typically only about 5%, but there are many differences in Compound. It has less oversight and COMP holders have more powers. So Delta estimated the governance powers at 20% of the economic value of Compound.

So Delta’s analysis can be written as follows:

COMP Value = ($400 million loan book X a forward valuation multiple of 5 X 20% value for governance powers ) / 10 million total tokens = $40

The Delta Exchange team believes there will be many more tokens like this. Tokas wrote:

"The aim of this report is to give the people in the ecosystem a framework for valuing governance tokens. The success of COMP will inevitably result in many more governance tokens to hit the market. If we are to avoid creating pump and dump cycles, we need market consensus on how to value these tokens."

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