Author: @nanbeiblock
Translator and editor: @Goldenchichi1
Original article: 被低估的X2Y2
Disclaimer: This paper is for sharing and learning purposes only. The content of this article is not investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. Always DYOR.
1. Introduction of X2Y2
X2Y2 is a semi-decentralized NFT exchange platform established in Feb 2022. Daily trading volume has already reached 25M USD four months after its launch and has around $4.5M volume after deduction of wash trading. The platform’s token, which shares the same name as X2Y2, has a market capitalization of $3.425M and an FDV of $28.5M. The most iconic property of X2Y2 tokenomics is that the token holders share the platform's 100% profit (transaction fee). Despite the project’s value-driven nature and outstanding data performance, the market still does not give X2Y2 a reasonable price. This article aims to process a rough evaluation of X2Y2 and propose some reasons why the project is undervalued.
2. Investment highlights
(A) On the trend of the fast-growing NFT market
If 2020 is the Defi year, then 2021 is the time for NFT. The total market capitalization of NFT excesses $17.7B in 2021, which was an astonishing 22000% pump from that of $80M in 2020. Many ‘Lambo dreams’ come true from the shocking bloom of some NFT collections such as Crypto Punks, BAYC, Azuki, and Goblin series. But these outstanding NFT projects are few, and most NFT projects can barely survive shortly. For non-professional and less engaging investors, discovering prime staking projects in the modern fast-growing studs-or-duds market is a hardship. Therefore, if we are pretty confident that NFT will keep blooming in the future, we need to get on the ‘train.’ NFT exchange platform is undoubtedly an excellent train to catch the trend. The reason behind that is the same as BNB several years ago and holding brokerage stock in a bull market, as an analysis perspective on the demand side. On the supply side, the choices for retail investors are X2Y2 and Looksrare only- so limited that busy investors who cannot involve too much in the market can save a lot of time on investigating.
You can see the reason why X2Y2 is a better NFT exchange platform to invest in in the article below:
(B) Value capture and empowerment
You can stake the X2Y2 token, earn the staking reward (in X2Y2), and share 100% of the transaction fee (in WETH). The current staking reward is shown below.
The APR of X2Y2 staking reward and market fee reward is 99.1% and 64.8%, respectively, as of 7th June 2022, which means you can still come to a breakeven point within two years even if the X2Y2 token goes to zero in the worst case.
Unlike Defi staking, you can earn WETH directly from the staking pool rather than project token (now you can earn more X2Y2 even with X2Y2 Compounder!). For an NFT exchange platform whose main income stream is transaction fees, X2Y2 shares 100% profit with the staking holders, which is rare in the modern trend (If to say the price of UNI and ENS is from their governance, consensus, and future value capture, the value of X2Y2 comes from its instant and future cash flow). “The value of a stock attributes in its present value of future cash flow.” It is not a strange experience that I feel painful explaining to my friends the values of some cryptos as I need to go through all the concepts of consensus, decentralization, and governance. In contrast, it is comfortable to present the value of X2Y2 just by showing my frenz the staking mechanism since it is very similar to that of stock.
I want to describe the mechanism as “almost perfect” because I do not want you to think this will be another ‘risk-free’ opportunity. X2Y2 is excellent, but we still need to think about another side of the coin.
When a regular publicly-traded company distributes dividends, a portion of profits is distributed while most are reserved for investment. Therefore, X2Y2 distributing 100% profit to stakeholders may be a disadvantage (10% treasury may be insufficient).
Moreover, there may be compliance risks, which may be one of the reasons UNI emphasized it would not accept any value capture in its IPO period. X2Y2 is unknown, but it may be the center of attention once it becomes more significant. Crypto investors shall take this into account too.
3. Valuation analysis
Valuation for the crypto sector is always a problem since people cannot evaluate most crypto projects with financial analysis methods commonly seen in traditional finance. Luckily it is easier to assess an exchange platform since it has stable profit models and income cash flow, which help us to identify undervalued and overpriced projects. I will analyze X2Y2 using Comparable Analysis and DCF Analysis below.
(A) Comparable Analysis
The latest NFT exchange financings are Opensea and ZORA, evaluated at $13.1B and $0.6B, respectively. Opensea is now the biggest NFT exchange, while ZORA is a decentralized NFT exchange that is currently free of charge. It thus cannot be analyzed with P/E ration evaluation, but it may start collecting fees according to its V3 update.
According to the graph above, X2Y2 and Looks’s PE ratios are 6.25 and 3.67, respectively, while the PE ratio of Opensea is 21.03, referring to its valuation in PE Round this January.
Let’s talk about the FDV of X2Y2 and Looks first. You may find that the data set is quite suspicious at first glance since most still believe X2Y2 is lower in value than Looks, but the fact was that X2Y2 lagged behind ten days ago. The turning down of Looks may attribute to the current deduction of its token incentive. On the other hand, X2Y2 had a solid bottom, and the price was pretty stable. Besides, while the current fee on Looks is 2%, X2Y2 is 0.5%, and thus the transaction fee of Looks is double of X2Y2 despite X2Y2 possessing two times the trading volume that of Looks.
If we evaluate them with MC, we can use the APY generated by current transaction fee rates for comparison. The current profit margin of X2Y2 from transaction fees is 54%, while Looks is 28.21%. We can conclude that the PE ratio of X2Y2 and Looks is 1.85 and 3.57, respectively.
Then we compare X2Y2 with ZORA and Opensea. Suppose you agree the evaluation of Looks is similar to how Crypto Native evaluates NFT exchanges. In that case, you shall also agree that the assessment of ZORA and Opensea is identical to how traditional VC evaluates similar projects. The PS of ZORA is 162.6, and Opensea is 0.42 with a 21.03 PE ratio. The valuation of ZORA is overpriced. Institutions give Opensea about 20 PE ratio scores, 6.25 times of X2Y2’s.
I think if Openaea is finally listed, its PE ratio will exceed 20 because the above PE is based on PE Round data. But for the convenience of analysis, we apply the 20 PE. Opensea dominated the market with a 99% market share during the PE Round. Thus, the industry leader valuation premium applies to Opensea. The type of investment is Equity Investment, and the institutions can share all kinds of profits (not just transaction fees); thus, an additional 20% Premium applies. After deduction of these Premiums, the PE ratio of Opensea is around 14.02.
Since Opensea is undervalued, we can develop a more reasonable PE ratio- 14 for an NFT exchange with a deduction of other markups. For that ratio, the price of X2Y2 shall be 0.63U.
(B) DCF Analysis
DCF Analysis method requires more subjective parameters than Comparable Analysis, not to mention that X2Y2 is just like a newborn baby (there is a lack of data), so the accuracy of this method shall be lower. Thus, I am going to conduct a rough DCFF analysis here.
The first parameter is the Discount rate; I use Risk-Free Rate + Equity Risk Premium. While the traditional financial industry uses the yield of Ten-year Treasury bonds as the Risk-Free Rate, I use the ETH staking rate for the representative in the crypto industry, which is 4%, according to LIDO real-time data. As for Equity Risk Premium, I input 16%, and therefore the discount rate is 20%.
Secondly, we need to evaluate the annual growth rate of X2Y2’s profit. Assuming there will be fast growth for five years from 2022 before it reaches a stable state and starts alleviating. We divide the situations into optimistic, neutral, and pessimistic. My rating is 60%, 40%, and 20%, respectively, and 5% estimated growth at a stable state.
In optimistic, neutral, and pessimistic situations, the valuation of X2Y2 is 0.41U, 0.68U, and 1.07U, respectively, all are higher than the current price of 0.28U.
Since I think the potential of the NFT market is super huge, an annual return growth rate of 60% may still underestimate the trend. For a tech-driven and user-friendly NFT exchange that already shares a portion of the market, the growth rate of X2Y2 can outperform the benchmark. Therefore, 1.07U may still is an underestimated price.
4. Why X2Y2 is underestimated
“All that is real is rational, and all that is rational is real.” X2Y2’s price has been between 0.2 to 0.3U for almost three months. If this is an underestimated range, what are the reasons?
- Pessimistic emotion of macro market: The price of BTC dropped from $45k to $30k, while that of ETH dropped from $3.5k to $1.9k. Most investors believe that the crypto market has already been in a bear market, and the performance of X2Y2 has been comparatively well during this time.
- Low circulation: X2Y2’s tokenomics encourages holders to stake, and thus 90% of the circulation is in the staking pool. Institutions are not able to absorb big chips in the market. Meanwhile, the lack of circulation may result in low trading volume even if X2Y2 is listed on some big exchanges (personal speculation). But this is a double-edged sword situation since the price is more controllable so that the price can quickly pump on the other hand.
- Selling pressure due to high staking yield: This is an old problem in crypto. Some investors use the current 100% staking yield to manage their own portfolio risk and contribute to selling pressure.
- Missing the debut bonus: I think this is the most significant reason. X2Y2 had no strong kick-off, a huge disadvantageous competition in a first-mover-advantage-driven industry. Also, X2Y2 was not the first exchange launching vampire attract to Opensea, and investors may not buy X2Y2’s vampire attract as attractive. Furthermore, there was a parameter setting mistake at the first stage of staking, resulting in colossal selling pressure, and the price rushed from $4 to $0.15. The sudden rush might scare some speculators who did not conduct a comprehensive investigation of X2Y2. More importantly, the active NFT traders are still a tiny group containing only 2M people; a few realized X2Y2, not to mention investing. Opensea is still dominating.
Last but not least, I am not writing this article for propaganda. It is evident from the above content that my expectation of X2Y2’s price is between $0.5 - 1.5, which is less than ten times the current price. Why do I still believe X2Y2 should be on our watchlist even in the crypto market where X100/ X1000 ‘Lambo Dreams’ are widely spread?
As an investor in the crypto market for years, I realize few projects are sincere as X2Y2. People in this market are talking about consensus and decentralization, but I am already tired of explaining why these concepts are worth investing in. X2Y2 could simply sell me a utopia dream filled with consensus and decentralization and dump me out later like a piece of shit. But what does X2Y2 tells me? “Forget about the lucid dream. We share you WETH. No more bullshit.“ That is a freaking cash flow, my frenz! Why buy another X100 “Lambo Dream” after all? Maybe, I still underestimate X2Y2?