Ajit Tripathi is an EMEA partner at Consensys Enterprise, and a former director of fintech and digital banking at PwC, where he co-founded its UK blockchain and smart contracts practice.
The following article is an exclusive contribution to CoinDesk's 2017 in Review.
The ethereum founder did that again last month when he asked in a tweet: "Alright, the crypto market is now worth $525 billion, but how much of that valuation have we really earned?"
We can answer Vitalik's question by using the tried-and-true method of discounted cash flows.
This time isn't different
During the 1990s dot-com boom, valuation by counting eyeballs and various other body parts was rampant.
During the housing boom, valuation was whatever you wanted by tuning projects' default rates, prepayment rates, volatility and correlation.
During the current crypto boom, methods rooted in science fiction such as network-based valuation, technical analysis, Metcalfe's law and Moon-based valuation have all blossomed.
Unfortunately, whenver bubbles burst, discounted cash flows return with a vengeance.
So, while we all believe blockchain technology can solve all our problems including valuation problems, let's pretend this time is not different, and one day either everyone in crypto will have to generate fiat revenues and profits in some form.
The less likely that you will get the cash you think you will get in the future, the higher the discount rate. That is a big mess when you are dealing with anything except government bonds, which academic orthodoxy treats as risk-free (never mind the humongous national debt).
Asset pricing gets even worse when commodities and currencies are involved and we have to start watching costs and benefits of HODLing all your digital GODL or any "implied interest rate" you might earn on your GODL. That forecast of net benefit to the HODLer is basically your cash flow forecast.
So, as Vitalik pointed out – the crypto market is worth $525 billion but what did we do that is worth that in the future?
The question is what did we solve, enhance, or deliver that will make individuals, companies or governments produce more, be more efficient, or enjoy their lives and relationships more?
At a high level, we can ask:
1. What features (e.g. Truffle), products (e.g. UPort) or platforms (e.g. Digital Trade Chain) did we build that a consumer is using or benefiting from? No, I don't mean tether, Telegram chat channels, or proofs of concept.
2. Which enterprise solutions went live and how much new revenue or efficiencies did they create? This includes the work ConsenSys and IBM are doing in Dubai, trade finance platforms by IBM and R3, MUFGCoin and so on.
3. How much did we improve the infrastructure and stack by in terms of scalability, privacy, confidentiality and other such nice things? Quorum, zcash, Fabric, Corda, Coco – all count.
4. What original business models and technologies were created in 2017? ERC-20 tokens and CryptoKitties are included. Stablecoin crypto exchanges are excluded.
5. For each of these, what're the odds that we will see the invention used by a real person or enterprise over time? In the absence of any information, let's assume 50% for each.
Incremental value added in 2017
There is simply no way that we baked $500 billion worth of additional consumer value last year that we didn't have in 2016 – and all we had in 2016 was PoCs and a few promising ideas.
Any which way you make your list, there was just not enough useful kit in consumer or enterprise production last year.
Bitcoin scraped through to Segwit and all sorts of forks. A very large set of ethereum tools and solutions was released; Quroum, Corda, and Fabric became useful in the enterprise ecosystem, and a very small number of consortia got into technical production.
We bypassed VCs and made it possible for good, bad, and ugly blockchain startups alike to fund their runway.
So how much value did we add in 2017? When we calculate the consumer value of ERC tokens and CryptoKitties, and subtract the future disasters from future Amazons, we will probably get a smaller number than the $3 billion that was raised last year in ICOs.
Then we will thank Vitalik that all this money that could have gone into a largely useless coinware instead went into useful tech.
Why I bet on ethereum
Yes, there will be a lot more value created with blockchain in 2018 and even more the year after but there's so much future baked into the prices today – and it may need to be swapped around as we learn more.
I suspect that each year, half of the ICO-funded startups from the previous year will die – if they even make it that long.
Yet there will be the next Amazon or Google or Netflix in there. If you know how to pick them, go ahead. I don't.
This is why I am making a big bet of time on ethereum rather than a bet of money in crypto.
Ethereum has momentum, developer adoption, and a team that is willing to address the technical limitations even at risk to the price of ether.
It has people who are serious about the Web 3.0 vision and solving real consumer and business problems.
Does that mean $7, $70, or $700 billion is a fair value for ether? I can't say. Whether ether will go to the moon in 2025 depends on if ethereum is still the public blockchain in widespread use or if someone comes up with something much better, and if ethereum continues to evolve unlike some other crypto networks have.
Does that mean you should buy ether today? I can't and don't offer investment advice.
Should you start learning how to use ethereum to build solutions and decentralized businesses? Definitely – my son is learning how to build with ethereum and he is 14. He can do quite well just knowing how to build solutions for other people.
BUIDL, not HODL
When we are dead, it's not what we HODL or SODL that matters. It's what we BUIDL
So I advise everyone to think about that and BUIDL. Those who BUIDL do seem to enjoy it and look happier than the rest of us.
Besides, since BUIDLers don't have the time to day trade or buy dodgy coins, they are also a lot less likely to get REKT.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.