VeChain is an enterprise focussed blockchain with many large partners and some large early adopters such as Walmart China. It is consistently in the top 10 blockchain platforms by daily usage (via Blocktivity). It is also one of the very few blockchains providing an income stream to token holders as a result of real world usage.

The VeChain blockchain platform has an innovative two token structure that aims to separate an investment token (VET) with a utility token (VTHO).

Users of the blockchain need to pay gas for making transactions using the VTHO token. This token can be purchased on public exchanges. When VTHO is used, 70% of is destroyed / burned and the other 30% is retained by Authority Masternodes. These nodes are the only full nodes on the VeChainThor blockchain that are authorized to validate and produce blocks. Learn more about Authority Masternodes.

VTHO is generated by holding the VET token. There is a fixed number of 87 billion VET tokens which generate VTHO daily at a rate of 0.000432 per VET token. This results in a fixed number of 37,584,000 VTHO tokens generated daily.

There are special economic nodes and X-nodes that allow holders to receive “bonus” VTHO by holding a specific number of VET tokens in their wallet. While these nodes help VET holders increase their earnings, but I’ll ignore them for now to simplify the calculations.

How VET holders profit from the VeChain ecosystem

Users of the blockchain must pay for transactions in VTHO. In order to do this, VTHO must be purchased or generated by holding VET. As such, there is a market price established for VTHO (currently $US0.0015) which in turn determines the final fiat (USD) price of transactions on VeChain.

VET holders receive newly minted VTHO tokens on a daily basis that can be immediately sold for income. As such, VET holders obtain an economic return on their investment as follows:

R(d) = V * VTg * VTp

Where:

  • R(d) = Return (USD)
  • VTg = VTHO generation rate
  • V = Quantity of VET held
  • VTp = VTHO price (USD)

For example, holding 1m VET at today’s VTHO price:

R(d) = 1,000,000 * 0.000432 * 0.0015 = $US0.648 / day = $236.52 / year.

The two-token model results in a very clear economic benefit to VET holders that is analogous to the dividends on a company stock. In some ways, this VET “token” dividend is better than a company stock:

  • VET earnings are distributed daily, rather than quarterly or annually for company stocks
  • VET earnings calculations are very simple and clear. Company stocks often have complex GAAP and Non-GAAP measures to navigate before you can clearly understand a company’s earnings

Fundamentally, there is a clear economic benefit to holding the token and it should be valued based on current earnings and future project earnings (driven by growth of the VeChain blockchain). As an extension of this, traditional company stock valuation methods such as DCF or PE ratio should apply to the valuation of the VET token.

How will VET earnings change over time?

In the above formula there are two variables that will change over time, the price of VTHO (VTp) and the VTHO generation rate (VTg).

An increase in the VTHO generation rate will result in VET holders earning more VTHO which will increase their fiat (USD) earnings assuming the VTHO price remains the same. However, if more VTHO is generated, that should put proportional downward pressure on the VTHO price as there is now more supply of VTHO.

The VeChain Foundation controls the VTHO generation rate and they should only increase it when the volume of transactions on the blockchain increases, causing an increase in VTHO demand. As such, this additional VTHO generation should be absorbed by increased VTHO demand from end users, keeping a lid on the VTHO price and ensuring VET holders profit from the increased usage.

Additionally, the demand for VTHO is controlled by how much is consumed per transaction on the blockchain. Again, this is a variable the VeChain Foundation can control. A decrease in the amount of VTHO consumed per transaction will reduce the fiat cost to end users (less VTHO = less USD). This will result in less VTHO being burned across the platform and should put downward pressure on the VTHO price, reducing the earnings of VET holders. However, as before, the VeChain Foundation should only be making this adjustment this if the volume of VTHO transactions is increasing due to platform demand. Any reduction in the VTHO price should be to bring it back to “reasonable” levels so the final fiat price paid by end users is inline with the value they are deriving from the platform.

The VeChain ecosystem earnings can be modelled as follows:

Ve = Tv * (VTp * VTc)

  • Ve = VeChain total earnings in USD
  • Tv = Transaction volume
  • VTp = VTHO price in USD (fiat)
  • VTb = VTHO burned

Fundamentally, the VTHO generation rate (VTp) and the VTHO burn rate (VTb) are two powerful levers that can be adjusted by the VeChain Foundation to control the final fiat price per transaction for blockchain end users. Ignoring speculation, VET holders should have their earnings grow proportionally to the growth of the total fiat value (Ve).

Current VET earnings

According to VeChain Stats as of 21/07/2019:

  • VTHO price (VTp) = $US0.001564
  • VTHO burn rate = 118,332,488

This results in “earnings” for VET holders $185,072.011 for the week. This is less than the total economic value earned by the VeChain blockchain because Authority Masternodes retained 30% of the original VTHO consumed in every transaction, but that doesn’t impact the calculation of VET holder economics.

On an annualised basis this is earnings of $9,623,744.58.

Valuation metrics

As of 21/07/2019 the price of VET is $0.0061, so with 87 billion tokens that is a total market capitalisation of $530m resulting in a PE ratio of 53 based on earnings of $9.6m. As a guide, high growth Internet startups can have PE ratios in excess of 150.

This current market valuation is based on the current market price of VET using clear earnings from current mainnet usage levels.

As of 21/07/2019 the price of VTHO is $US0.001564 with 1 VET token producing 0.000432 VTHO per day. This is 0.15768 VTHO tokens / year equal to $0.00024661152.

The return per VET token is $0.00024661152 / $0.0061 = 4% annual return.

It’s very rare for early stage startups at a similar stage to VeChain to have any earnings, let alone pay dividends. As a guide to the dividends of mature technology companies:

  • Google - No dividend
  • Facebook - No dividend
  • Apple - 2%
  • Microsoft - 3.19%

A company dividend isn’t the full story as they have retained earnings, but it does help provide some context.

End of 2019 forecast

Lets assume mainnet usage increases by 400% by the end of 2019. This isn’t unrealistic considering Walmart China are the largest user with only 25% of their 2019 product range online and many more partnerships expected to come online.

On that basis, by the end of 2019 the mainnet annualised earnings rate should be $40m producing a PE ratio of 13.2.

That would also result in a daily average VTHO burn rate of 67m which is almost double the current VTHO generation rate of 37.5m VTHO. This will obviously put significant upwards pressure on the VTHO price, unless the VeChain Foundation adjusts the VTHO generation rate or usage per transaction.

While it’s difficult to know what the market will do exactly, the net earnings per VET token should increase proportionally to the increased mainnet usage. This would result in a yield of 16% which is way too high and a dramatic increase in the price of VET would be necessary to correct this.

Before the end of the year I expect the VeChain Foundation to adjust the “gas” price to maintain the fiat cost of transactions at a reasonable level, while also needing to increase the VTHO generation rate to support high blockchain volumes.

Valuation opinion

I see no reason that VET earnings should be treated any differently to traditional company earnings.

The potential uses and market size of the VeChain platform is measured in many billions of dollars of earnings. The potential for growth, combined with the current execution and partners already onboard, should command a traditional startup-like PE ratio as a minimum.

Assuming a PE ratio of 150 and earnings of $40m by the end of 2019, that would be a market capitalisation $6 billion – or about 12x the current VET price ($0.0732).

Assuming the growth continues, by the end of 2020 earnings could be closer to $200m per year which would put the market capitalisation at $30 billion - or about 60x the current VET price ($0.366).

The above is an ideal case, optimistic scenario, but gives an indication of potential future value. There are obviously many potential downsides, including the possibility that the current trials don’t work as expected and end up being shut down or the VeChain is not able to successfully manage the growth and speculation in VTHO to maintain stable fiat transaction prices for end users.

Either way, it will be a very interesting 18 months for VeChain.

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Posted by Chris

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