Please note that this letter is not intended as financial advice.
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Here we go deeper into FEI Genesis analysis. We are going to use proxy metrics to find P/E, P/BV and protocol security.
Protocol Security
FEI is backed in last resort by Protocol Controlled Value (PCV). The trust in PCV is what sustains the incentives for traders to keep the peg of FEI to $1. Due to the volatility in ETH, it would be better to have at least 1 PCV/FEI in this initial phase.
I think the minimum for protocol security would be 0.2 of pre-commit. Although FRAX has 87% of collateral, it is all USDCoin that is not volatile as ETH.
Downside risks - Decrease in PCV: ETH volatility and the number of Peg reweights the Protocol is capable of executing. The way to mitigate this risk is to diversify PCV, not holding only ETH, and creating new bonding curves (for example with Compound).
Upside opportunities - Increase in PCV:
Earning liquidity fee in Uniswap: 0.3% of the volume is paid to PCV as liquidity provider of the pair ETH-FEI. More traded volume, more fees for PCV.
Growing FEI: as more users buy FEI for $1 in ETH in the bonding curve, it dilutes the risk of users wanting to sell FEI. PCV does not need to provide all the $1 to liquidity, investing the excess PCV to earn additional returns.
A low FEI Marketcap makes it more difficult to integrate with other crypto finance projects and concentrate the risk of users trying to sell their FEI. The FEI Marketcap needs to reach a sufficient level so that fluctuations in demand do not cause significant volatility. The volume traded of FEI, one of the main value drivers, will also be related to the FEI Marketcap. In the table below, I considered a good output from the Genesis is when the FEI Marketcap is above US$ 100,000,000.
Price to Book Value (PBV)
I consider the proxy for PBV, the relation between Tribe Circulating Marketcap and PCV, which could be considered the equity of the Protocol. From this calculation we have the following table:
I painted in red the scenarios that FEI Marketcap did not reach the $100,000,000. A PBV indicator above 1 is considering a potential growth of PCV with more users and a return on the capital invested. A PBV below 1 is considering the volatility of ETH price that can reduce the PCV. I think a PBV around 1 is fair.
Price to Earnings (P/E)
This is not actual earnings, but a proxy to earnings. As a liquidity provider in Uniswap, earnings for the Protocol are related to the traded volume of FEI-ETH1. As I said before, the volume is an important value driver.
To calculate the FEI volume, I considered the FEI Marketcap and multiplied by the average metric of other protocols (30d Mean Volume 24h / Marketcap), as DAI (6%) and FRAX(3%).
To get the estimated earnings I multiplied this volume by 0.3% and by 360 days.
If we consider the volume of FRAX and DAI and calculate the estimated earnings for FXS and Maker (the governance tokens for their protocols), it would be 31 and 12, respectively. Note that the intention here is just to compare potential earnings in terms of volume and not to provide an accurate estimate of their earnings as they may have other revenue sources and not all the volume traded accrue earnings for the protocols.
Another reference is that S&P 500 P/E ratio is 40.12.2
If FEI is integrated into other crypto finance projects such as Compound, Aave and Coinbase, it can see a relevant increase in volume, increasing the earnings and reducing the P/E. The question is, what is the growth we can expect for FEI? If it reaches the DAI marketcap, it could be 10x to 30x, depending on the Genesis initial FEI Marketcap.
Genesis Scenarios
I consider here two personas in the Genesis, the retail investor holders and the whales. I would expect that as whales have more capital, they would prefer to invest more in FEI and earn the premium of Tribe (10% of total supply). Also, I expect the current strategic investors in TRIBE already trust in the project and could be buying FEI in the Genesis. The combination of high/low holders and whales will give the end result of the Genesis. More holders result in a higher level of pre-commit and more whales result in more ETH value raised.
More holders and fewer whales | Fewer whales and fewer holders - the worst scenarios
Fewer holders and More whales - the best scenario
More holders and More whales - the intermediate scenario
If the final result of the Genesis is a low price for Tribe with good P/E and P/BV estimates, BOTs can start to buy at Initial DEX Offering (IDO) and do not give a chance to buy at a good price.
Another thing to be considered in the Genesis is the Tribe premium of 100,000,000 tokens (10% of total supply) distributed pro-rata according to ETH contributions. This will result in the following premium:
Investors could have an incentive to provide more FEI in the short-term only to win this Tribe bonus in the Genesis.
Some questions are still in the air. Which will be the driving forces in the Genesis? Whales or holders? Will whales optimize for governance control? Will we have a big sell of FEI after the Genesis?
Let's continue to think and discuss about the project.
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I would to thanks Yule for the conversations on this subject. You can check his article at https://yulesa.medium.com/the-fei-stable-coin-and-how-to-evaluate-it-4efbf2cae757
https://www.multpl.com/s-p-500-pe-ratio/table/by-month