DeFi is not dead. A brief analysis of why Uniswap tokens are undervalued

Preface: Although the development prospects of decentralized finance (Defi) are highly anticipated, the prices of Defi tokens have fallen again and again recently, which is inevitably disappointing. As the leader of DeFi, Uniswap’s token UNI has experienced a "half-cut" and then a "toe-cut". Does it still have prospects?

In this regard, Jeff Dorman, chief investment officer of New York investment management company Arca, expressed his views.

The argument for holding ETH as an investment is that Ethereum is a clear market leader with strong growth and usage, even though ETH token holders have yet to capture that value. The same is true for UNI.

Uniswap has a clear lead in the DEX trading market, just like "Ethereum vs other smart contract protocols", in the DEX field, no protocol can even come close to Uniswap (analysis from @DuneAnalytics)

For ETH, EIP-1559 and Ethereum 2.0 have always been in the "future" state, but UNI's "fee conversion" is almost certain, and the time point is February 26, 2021 (180 days after the start of governance).

UNI will then join a small list of tokens such as HXRO, MKR, FTT, BNB that derive real value from their yield.

Based on Uniswap's average daily trading volume of $360 million and a fee calculation of 0.30%, the annual fee income generated by the Uniswap protocol is expected to be $380 million. After the fee conversion (1/6 of the fees are distributed to UNI token holders), UNI token holders will be allocated $66 million in annual income, and its dividend yield -> 13%. In comparison, the S&P 500 index has a forward P/E ratio of 25 times and a dividend yield of 1.7%.

I think anything in DeFi (and digital assets in general) has higher multiples than an overextended stock market during a recession.

Once market participants begin to apply the same value assessment criteria for UNI and ETH, UNI will be seen as the cheapest of all digital assets.

Here are 5 reasons why some people think you shouldn’t hold UNI:

1. The selling pressure of liquidity mining exceeds demand, but the actual daily release of UNI is 770,000, which will be easily absorbed by value investors once the fee conversion is completed and the income is generated (liquidity mining may end on November 18);

2. You believe that Uniswap will not continue to lead the market and its trading volume will decline or become uncompetitive (like an “ETH killer”);

3. You don’t believe that “fee switching” will happen (or don’t even know that fee switching exists);

4. You believe the fee conversion will happen, but since there are still 3 months to go, you are still waiting for the best time to buy;

5. UNI is just a part of DeFi, and DeFi is already unpopular;

Argument 1 is true, but arguments 2-5 seem extremely short-sighted.

Uniswap is one of the few companies/projects in the digital asset space that has real-world usage and product-market fit. It’s strange that digital asset buyers are still chasing unproven future (L1 protocol) projects instead of projects that have real traction today.

Uniswap (UNI) investors will also benefit from historical lessons.

Remember the failed Facebook IPO, where it was priced at $40 and then went public and dropped below $20, and everyone was afraid it was overpriced?

Smart investors don't bet against the leaders.

UNI is often mistakenly referred to as a “governance” token, while the market believes that “governance is worthless.”

But in reality, UNI is a pass-thru token, meaning its revenue will be passed on to token holders, and UNI token holders will receive a very lucrative income stream in February 2021.

All governance tokens ultimately need to become value transfer tokens, which is the main reason why voting is so important - to guide the flow of funds.

In an industry where real growth is so hard to come by, it seems crazy to bet against such growth projects.