In this long post, I estimate an intrinsic value for SAFE coin, I identify potential problems with MaidSafe’s strategy, and I welcome constructive feedback and dialogue.
I have an equity research background and in that world, intrinsic value has an objective meaning. It’s objective in the sense that if you had a crystal ball and were able to give a dozen equity research analysts the future free cash flows for the next 20 years for the company in question, they will independently arrive at similar intrinsic value estimates using a discounted cash flow formula with some margin of error for different interest rate assumptions. And while stocks can go into irrational exuberance or pessimism for periods of time, it’s an efficient and liquid market so they generally revert back to something in the vicinity of their intrinsic value. I’m interested in applying a similar approach to cryptocurrencies since I think it’s possible and I think there’s a lot of hype in this space so intrinsic value helps ground the analysis and separate hype from fundamentals. I’m posting my analysis below for constructive feedback and dialogue. I’d argue this discussion is not just relevant for investors but also those in development who are deciding how to prioritize the allocation of development resources at MaidSafe. I can’t contribute with code since I’m not a programmer, but valuation analysis, and what that implies about effective strategy is something I do have some experience with.
There are two features that can give SAFE coin intrinsic value: 1) using SAFE coin to buy resources on the SAFE network and 2) using SAFE coin to buy goods and services in the real world. Since it appears like there is a relatively low level of attention being placed on facilitating the latter, I’m ignoring the latter aspect from my analysis for the time being and focusing on feature #1.
When dealing with currencies, I believe the intrinsic value formula that’s relevant is not the discounted cash flow formula that’s used in equity research but rather the quantity theory of money formula (namely Money Supply * Velocity of Money = GDP).
First, I’ll estimate SAFE’s GDP. A google search suggests that Apple/Google/Microsoft/Facebook collectively store 1.2 million TB of data and that the total amount of data on the internet is 1.3 billion TB. For the sake of analysis, let’s assume SAFE is a huge success and gets 12 million TB of data stored on it. Siacoin recently posted a tweet stating that rent on their decentralized storage network is $0.38/TB/month. Assuming SAFE network has a similar price for storage, this would imply SAFE’s GDP would be $55 million (calculated from $0.38 * 12 months/year * 12 million TB).
Second, I’ll estimate SAFE’s velocity of money. The US economy’s velocity of money ranges from 1x to 10x depending on whether you use M1 or M2 as the money supply base and depending on which point in history you look. Let’s assume SAFE’s velocity of money will be 1x in order to be aggressive in our valuation of SAFE coin.
Third, I’ll estimate the value of SAFE coin money supply. Using the quantity theory of money formula, SAFE’s money supply would be worth $55 million (calculated from $55 million GDP / velocity of money of 1x).
Presumably at this type of scale, SAFE will have reached its maximum coin supply of 4.3 Billion coins and so if SAFE’s money supply is worth $55 million per the analysis above, then each SAFE coin will have an intrinsic value of just $0.013/SAFE coin. That sucks, since I bought some MaidSafe at $0.15/coin because I thought the project was cool. While it’s obviously possible to change the assumptions to make the intrinsic value higher, I suspect that in order to get to a 10x return on investment at the current price, you’d need to believe virtually all internet data in the world goes through SAFE.
I think the best and only counterpoint to the above fairly pessimistic intrinsic value analysis is that I’ve excluded the intrinsic value associated with using SAFE coin to buy goods and services in the real world. The real world economy is much much larger than even a wildly successful SAFE economy could be and that helps to justify why the domestic fiat money supply in many countries is worth hundreds of billions of dollars and trillions for the largest countries.
However, just because the SAFE coin can work as a currency in the real world, doesn’t mean it will be adopted as such. Not even close. To be adopted by normal people, development resources would have to be allocated toward making it easy to use for the masses. A marketing budget would have to be created to educate people and build awareness. Relationship building and integration work would have to be done with payment processors. Merchant funded loyalty programs would have to be created to entice consumers given that credit cards give miles/rewards to consumers by taxing merchants. From watching videos of David Irvine, I get the impression that creating a global currency is not what motivates him, it’s not viewed as an interesting project for the MaidSafe team and it’s not something that excites them the way that creating a decentralized internet does. That would be okay if there was a plan to eventually create a treasury that’s directed by a DAO controlled by SAFE coin holders, since in that scenario, coin holders would collectively act in their financial self-interest and make sure that sufficient resources are allocated towards the global currency aspect of SAFE coin and not just the decentralized internet aspect. The latter is cool and technically game changing, but the real money is still in the former. My understanding is that a treasury directed by a DAO is not part of the plan. The closest thing to community-directed allocation of capital is the proposed rewarding of safe coins to app developers based on how much their app is used. However, that seems like a fairly ineffective solution relative to a DAO that could fund necessary projects that never get used much on the safe network but are still value add for the safe network (e.g. customer service support for the masses, marketing, relationship building with merchants / payment processors, etc.)
I’ll probably keep my coins regardless, but I could see myself investing a lot more in SAFE if there were clear and thoughtful plans on how to create adoption as a global currency and not just adoption as a decentralized internet. I welcome constructive feedback and dialogue.