Update to our Analysis and Valuation of REN
By: James Todaro
Tags: Blockchain, Ethereum, Republic Protocol, Privacy, Ren

Discounted Cash Flow Analysis

With these assumptions, we can calculate the price of REN based on the network fees paid to Darknodes, the largest holders of REN tokens.

Given Ren’s network incentivization, namely fee generation, we have decided again that the best valuation method would be a DCF analysis. Fees, which are to be paid in ETH, BTC, LTC or other ERC-20 tokens, can be substituted for a cash dollar amount in a typical DCF model. Similarly, one can envision a fee generating node as a dividend paying stock or an annuity paying bond that lasts into perpetuity (less the costs associated with the electricity and hardware used to run nodes).

Using the formula for DCF, PV = [CF1 / (1+r)1] + [CF2 / (1+r)2] + … + [CFn / (1+r)n] + TV, we can discount our cash flows back to present day to arrive at a Present Value (PV) for the REN network.

PV = Present cash flow value

CF1 = Cash flow at the end of year 1

CF2 = Cash flow at the end of year 2

CFn = Cash flow at n specified year

r = Discount or required rate of return

TV = Terminal Value

Before continuing further, we must assign a specific discount rate, r. Presently, there is no appropriate risk rate in the digital asset marketplace that can be used as a benchmark. As such, we will borrow from other financial markets to ascertain an acceptable discount rate. The risk free rate is typically deemed to be the return rate on US treasury bonds — a return which is considered to be devoid of risk of loss. Moving along the risk spectrum to a more appropriate discount rate, we arrive at funding costs for start-up companies. In Series A equity funding rounds for venture capital, the generally accepted rate is between 30–50% per annum. As a digital asset platform with certain technological components that remain unproven, Ren has a relatively high risk profile and we believe that it is reasonable to assign a discount rate that is similar to that of a Series A round for a startup. Given this information, we have decided to settle on a discount rate of 40%.

Using our estimates of fees paid to REN nodes from Table 2 above, we can plug these CF values into our formula.

PV = 0/(1.40)¹ + 18,000,000/(1.40)² + 108,000,000/(1.40)³ + 404,000,000/(1.40)⁴ + TV = 153,433,465 + TV

Lastly, we need to include those fees paid after the four year period. We model the REN platform to last into perpetuity, as is appropriate in the equity markets. To do this, we use the Gordon Growth Method to find a Terminal Value, TV. We conservatively model out a sustained growth rate of 2% (g = 0.02), in-line with mature company estimates.

TV = [year 4 cash flow * (1+g)/(r-g)]

TV = 404,000,000*(1.02)/(0.4–0.02) = 1,083,340,658

Adding up our yearly cash flows and terminal value, we arrive at the below summation:

PV= 153,433,465 + 1,083,340,658 = 1,236,774,123 USD

Finally, by dividing our total network cash value (1,236,774,123) by the number of anticipated circulating tokens (500,000,000), we arrive at a price per REN of 2.47 USD. That is, with our best assumptions, REN could achieve a value of 2.47 USD per token. This represents an upside of ~26x (2,600% ROI) from its current price of 0.09 USD.

One final note is that this analysis does not take into account any additional fees paid to Darknodes from RenEx and other decentralized dark pools on the Ren network. We have intentionally excluded this as we project that there will be significant overlap between fees paid for processing trades and fees paid for private transactions as all trades processed on the network will already be private. Nevertheless, one could argue that by excluding the fees collected from dark pools, we have arrived at a conservative present value for REN.