Value Functional Token: A Methodology for Valuing New Web3 Assets

In recent years, the rapid development of Web3 financial infrastructure is reshaping the rules of capital market operation. Its programmability and openness are also reconstructing the sources of asset value, promoting the emergence of a new type of asset form. These new assets not only carry traditional equity value, serving as a value mapping for platforms, protocols, or ecosystems, but also possess clear utility value, which can be used to pay transaction fees, obtain service discounts, unlock access permissions, and more. This report collectively refers to such new assets as "value functional tokens," indicating a composite asset carrier that embodies both "asset attributes" and "usage rights" dual value.

The emergence of new types of assets is driving the evolution of the concept of "value" itself, and the valuation methodology of value investors must evolve accordingly, just as the internet revolution at the beginning of the 21st century brought about a new logic for valuing internet stocks. Early advocate of cryptocurrency asset value investment, John Pfeffer, stated: "The first principle of value investing is to engage in independent thinking based on reliable valuation logic. When new types of assets first emerge, there is no corresponding valuation logic; value investors should strive to discover new valuation logic."

We believe that the most representative value-functional token currently is the platform token of the world's largest cryptocurrency exchange. This token reflects the value of the platform on one hand, and possesses actual utility value within the ecosystem on the other hand. It is one of the earliest examples of such assets and has the most mature practices.

In the past six years, we have successively released five reports and received numerous inquiries and feedback from investors and institutions. We continuously optimize our model, which has also received preliminary market validation. We now organize this set of methods as follows, hoping to assist asset management institutions, investors, industry researchers, and project parties in their analysis and decision-making regarding investment evaluation, asset pricing, and token economics design for value-functional tokens.

Web3 distributed ledger technology has already and will permanently change the foundation of capital markets. A more efficient and transparent Web3 financial system will undoubtedly become the core of future financial infrastructure. With the continuous improvement of global cryptocurrency asset regulatory systems, such as the recent passage of the "CLARITY Act" in the United States, and the introduction of stablecoin legislation in both the United States and Hong Kong, we believe that we will subsequently see a large number of new asset types represented by value functional tokens emerge, just like companies issuing new "stocks" will issue value functional tokens on public chains, which not only have "equity value" but can also be used in ecosystems to obtain benefits. We expect that value functional tokens will become the main form of asset carriers in future capital markets!

Definition and Characteristics of Value Functional Tokens

The value functional tokens defined in this report refer to crypto assets that possess the following two types of value foundations:

1. Asset Attributes / Equity-like Attributes: Represent the value mapping of a certain platform, protocol, or ecosystem. Its value is usually driven by macro factors such as ecosystem scale, user growth, and trading activity, logically similar to company equity.

2. Functional Attributes / Currency-like Attributes: Play practical roles in specific use cases, such as for paying transaction fees, gas fees, staking, participating in governance, exchanging services, or enjoying platform discounts.

For this type of asset, the report chooses to construct a valuation model based on the monetary equation (MV = PQ), primarily based on the following two considerations:

First of all, although value-functional tokens have certain "equity-like" characteristics, their asset attributes differ from traditional securities. Taking a token from a certain trading platform as an example, this token does not represent any form of equity or cash flow rights in the company. The founding team approached this from the perspective of ecological development, binding the interests of all parties involved in the ecosystem (shareholders, management, users, and other ecosystem stakeholders) together, placing the growth of ecological value on the ecosystem's unique token, and achieving the spirit of ecological co-construction and sharing advocated by Web3. Since 2021, the platform has further adjusted the token burn mechanism from "profit-linked buyback and burn" to "automatic burn based on on-chain transaction volume," actively severing the direct connection between token value and platform financial performance to avoid securities risks.

In 2025, the CLARITY Act released by the United States will further clarify the distinction between "digital goods" and "security tokens." Under this regulatory direction, we believe that the design of future functional tokens will lean towards the direction of "digital goods." Although there is value support obtained from traditional equity, the design avoids the standards of "investment contracts" and the Howey test for security tokens. Therefore, such tokens do not possess the legal characteristics of traditional equity assets; in terms of valuation methodology, it is also impossible to directly use enterprise valuation models based on discounted cash flows for assessment.

On the other hand, the value of functional tokens primarily comes from their actual use cases within the ecosystem. They serve functions such as payment, Gas, staking, initial offering, and participation in governance within the platform, essentially playing a role similar to the circulating currency in an economy. Their value is influenced by multiple factors including the scale of ecological economic activities, the frequency of token usage, and supply adjustment mechanisms. Therefore, compared to securities valuation methods, monetary equations are more suitable for capturing the "quasi-currency" attributes of such tokens and modeling the diverse sources of value within a unified logical framework.

In summary, the core advantage of using the currency equation to value functional tokens is that the model provides a clear structure, quantifiable variables, and a highly adaptable analytical framework that can comprehensively cover all sources of value for such tokens.

Building Valuation Models

This methodology constructs a systematic valuation model suitable for value-functional Tokens by combining the currency equation (MV = PQ) with the Discounted Cash Flow method (DCF):

MV = PQ: A structural logical framework for constructing the value generation of tokens. DCF: Discounting the "currency appreciation" brought by future ecological expansion and converting it into the current theoretical price of the Token.

Introduction to the Currency Equation (MV = PQ)

The quantity theory of money was proposed by economist Irving Fisher and is a classical theory that explains the relationship between the total amount of money and economic activity. Among them:

• M: Money Supply
• V: Currency Circulation Velocity
• P: Price Level
• Q: Total trading volume or total output value (Quantity)

In traditional macroeconomics, MV represents total money demand, and PQ represents nominal economic output, both of which should remain consistent in a long-term equilibrium state.

We believe that functional tokens with practical use cases in the on-chain ecosystem have an economic role that is highly similar to "currency within the ecosystem." Their value primarily comes from the expansion of the ecosystem's scale and changes in the token supply and demand structure, which highly aligns with the logic of the monetary equation. This model is particularly suitable for tokens with the following characteristics:

1. As the main payment medium within the ecosystem (such as fees, Gas, etc.);
2. Have a transparent issuance system, deflationary design or lock-up mechanism that affects the effective circulation volume;
3. Its value mainly derives from the development of ecological activities.

Structure modeling based on the currency equation

In the MV = PQ framework, the theoretical value of the Token is driven by two main paths:

• PQ: The total economic value of the ecosystem
• M × V: Represents the token supply and its circulation rate

Any variables that affect the value of the Token (such as the number of users, trading volume, destruction mechanisms, etc.) ultimately impact the Token price through their effect on PQ or M × V.

Among them, V (circulation rate) is a technical difficulty in modeling. Due to the lack of directly observable data, it is usually assumed in practical valuation that the initial market price has reflected a reasonable equilibrium state, and then V is inferred from the known PQ and M, assuming that the circulation rate will remain stable or moderately increase or decrease in the future.

Theoretical Price Derivation:

Unlike general national fiat currencies, the price of ecological tokens is usually denominated in US dollars. Therefore, in the model, the total circulating supply of tokens (M) can be divided into:

M = M0 × P*

Among them: M0: Actual circulation of the Token P*: Theoretical Token Price (in USD) V: Token circulation rate

Organized:

P* = PQ / (M0 × V)

The total value of the ecosystem (PQ) divided by the token circulation and turnover rate is the theoretical price of the token. This formula serves as the valuation basis of this model.

Introduce discounted cash flow (DCF) for quantitative valuation

The currency equation provides a logical framework for the token value generation mechanism, but does not directly output prices. Based on this, we further introduce the Discounted Cash Flow (DCF) method. By predicting the overall growth of the ecological economy, combined with changes in token supply and circulation rate, we calculate the annual increment of the unit value of the token, and discount and sum the future value to obtain the theoretical valuation. This process can also be understood as the present value calculation of "currency appreciation."

The specific steps are as follows:

1. Predict key variables (PQ, M₀, V)

Combine the token mechanism with business expectations to predict the ecological economic scale PQt, the actual circulation of tokens M0t, and the circulation rate Vt year by year.

2. Calculate the annual value increment of the Token (ΔPt)

Annual new ecological value: ΔPQt = PQt - PQt-1 The corresponding increase in currency demand: ΔMt = ΔPQt / Vt The corresponding Token value appreciation: ΔPt = ΔMt / M0t

3. Discounting Future Value Increment

Discounting ΔPt for each year at a fixed discount rate (e.g., 10%) and summing it up gives the total present value of the increase, which is the theoretical price of the Token:

P* = ∑[ΔPt / (1+r)^t]

Among them: r: Discount Rate NPV: Present value of total Token appreciation P*: Token theoretical price

Valuation Case: Taking a Token from a Certain Trading Platform as an Example

To demonstrate the applicability of this valuation method in practice, we take a certain trading platform's Token as an example and apply the "MV = PQ superimposed DCF" model for quantitative valuation analysis.

This token serves as a value-functional token, and the currency equation is the optimal valuation model.

The token is the core value carrier of a certain exchange ecosystem (exchange + public chain), and it has two sources of value:

1. Asset attributes/ quasi-equity attributes: The economic model of this Token integrates the value creation logic of traditional finance. Just as US stocks enhance shareholder equity through stock buybacks and cancellations, this Token continuously reduces the circulating supply through a quarterly destruction mechanism, forming a long-term deflationary trend on the supply side, providing stable support for the coin price. However, unlike traditional equity, the destruction mechanism of this Token is not linked to platform profitability but is anchored to the supply and demand relationship within its ecosystem. Therefore, this Token is not a strictly defined equity asset but possesses a "quasi-equity" attribute—constructing a value mapping relationship between the Token and the ecosystem by reducing actual circulation through destruction.

2. Functional Attributes/Currency Attributes: This token has various uses within the exchange and public chain ecosystem, including being used for paying transaction fees and participating in token sales within the exchange, as well as serving as a Gas Fee and participating in governance within the chain ecosystem. This token has essentially become a "circulating currency" within the entire ecosystem, and its value depends on changes in the scale of the ecosystem's economy and the supply and demand relationship of the token within the ecosystem.

In summary, as an ecological circulating currency, the value of this Token mainly depends on the monetary supply and demand relationship (MV) and the ecological economic value (PQ). Therefore, the monetary equation can comprehensively capture the core value drivers of this Token and is the best valuation model.

The valuation calculation of the Token

The analysis will revolve around the following three core steps:

1. Define and predict key variables PQ, M₀, V

2. Calculate the annual value increment of the Token ΔPt

3. Use the discounted cash flow method to discount and sum the future incremental value.

4. Define and predict key variables: PQ, M₀, V

Ecological Economic Total Value PQ

The ecosystem of a certain exchange mainly includes centralized exchanges and public chains, so PQ refers to the total value of economic activities driven by tokens in these two parts, which mainly includes:

1. In the revenue from transaction fees for spot and derivative trading on centralized exchanges (CEX), the portion paid in that Token (transaction amount × rate × proportion paid in that Token (assumed 50%));

2. Public chain Gas fee (total income of all Gas on the chain).

In the calculation, assuming the annual growth rate of the ecological economy is the following values, the future annual nominal economic total value PQt is summarized.