Stablecoins are digital tokens designed to maintain a stable value relative to a specific asset or basket of assets, such as FIAT or a commodity like gold, with the purpose of having a non-volatile and highly liquid asset. There are many stablecoins (SCs) out there, but which one is safer?

First of all, what problem are stablecoins solving? In order to have an efficient market, trades must run smoothly, and to do so, you need liquidity. While introducing FIAT currencies is an effective way to enhance liquidity in the crypto market, the process of exchanging cryptocurrencies for FIAT can be time-consuming and costly. Stablecoins were introduced to the crypto market with the sole purpose of being able to exchange your unstable asset for a stable asset in a matter of seconds and preserve the total value of your portfolio.

Let’s identify what types of stablecoins are available on the market.

FIAT-pegged Stablecoins are backed 1:1 by FIAT and held in a safe bank account, which gives more security to the holders even though it makes the SCs centralized and puts them at risk of having their funds frozen by governments. For each FIAT held by the company behind the stablecoin, there is one token in circulation, not one less. Every time the liquidity in the bank increases, the company mints new tokens; if the liquidity in the bank decreases, the tokens are supposed to be burned.

Examples: Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), we do not hold this stablecoin.

Algorithmic Stablecoins are tokens whose price is dictated by an algorithm that manipulates the supply of the SCs (which many consider not to be a good solution in the long term) based on the “rules” of the smart contract (when the price goes up, new coins are issued to reduce the price and vice versa) and not by the reserve stored in a bank, so that they do not need assets such as FIAT, gold, or crypto as collateral.

We suggest caution with algorithmic stablecoins, and it is important for investors to conduct their own research (DYOR) before engaging with them.

Overcollateralized stablecoins use crypto and tokens (making the reserve easily auditable) as collateral rather than FIAT or a different store of value, making the price highly volatile. These SCs are 150% collateralized in order to preserve price stability.

Example: Dai (DAI)

Commodity-pegged Stablecoins are backed by commodities such as gold.

Examples: Paxos Gold (PAXG) and Tether Gold (XAUt); we do not hold these stablecoins.

What about the “wrapped” versions of cryptocurrencies such as WBTC, WETH, etc.? These are crypto-pegged tokens, not stablecoins; they are not stable in price; their price depends only on the token or crypto they are pegged to.

USDT is not 100% backed by FIAT (~80% is in cash); it is also collateralized with assets and receivables from loans made by Tether to third parties.

Are Stablecoins Securities?

Now that we have explored the different types of stablecoins, let’s touch upon the regulatory considerations surrounding their classification.
FIAT is a government-issued currency that is supposed to be backed by commodities such as gold, but truth be told, it is not.
Most of the cryptos and tokens are considered utilities, even though some of them are securities. So, stablecoins are to be considered utility tokens. But what happens if a stablecoin is backed by securities such as US bonds or Treasury bills? In this case, it has to be considered a security instead of a utility token. What about crypto-pegged tokens? These are also to be considered utilities if they are pegged to a utility token.

What else can you do with stablecoins?

Let’s go back to the business model and how companies profit from releasing stablecoins into the market. Mostly, companies such as Circle and Coinbase created their own stablecoins in order to increase their audience and make transactions easier within their exchanges and with other exchanges. Other companies charge a fee for trading their SCs.

• How can users benefit from stablecoins? Is there any way to earn money from holding stablecoins? Yes, there is. One of the safest investments in the crypto space is providing liquidity to stablecoin pairs such as USDT/USDC and earning trading fees.
  Read more about how liquidity works in our previous: #EP 3 ~ Liquidity Explained
• Another way to earn from SCs is to speculate during depeg periods, but how? EX: Let’s say for some reason USDC goes down to $0.9; here you have an opportunity to buy USDC with a premium and earn 10% once the USDC price goes back to $1. It is a risky trade because the price might go down, causing the stablecoin to fail (this has already happened in recent events), but if it works, it is a short-term trade to make quick bucks.
• Landing, borrowing, and leverage trading are other ways to profit from your stablecoins.

Are stablecoins safe?

Not as you may think. Holding your money in the bank is safer because it is insured if it is lost or stolen. But when it comes to stablecoins, there is no refund; if a stablecoin deviates from its price, you are most likely to lose your portfolio value. What should you do then? The best solution is diversification; holding stablecoins is not a bad idea, but holding one single stablecoin is. DYOR and diversify your stablecoin portfolio based on your needs.

FIAT-PEGGED STABLECOINS LIQUIDITY
In addition to their role in providing stability, stablecoins also play a crucial role in maintaining liquidity within the cryptocurrency market.
As we mentioned above, when a company injects new stablecoins into the market, they are supposed to collateralize them (in banks in forms of cash, tresuary bills, etc.), so what can they do with these funds? Not much, they can invest these assets but losing them will make the stablecoins depeg.

Conclusion ~ Long-term stability

A lot of crypto adopters do not consider stablecoins cryptocurrencies because, whether collateralized or algorithmic, they are both controlled by a company and so they do not respect the crypto narrative. But stablecoins must be considered tokens because FIAT-pegged stablecoins, for instance, are tokenized versions of FIAT currencies.

We talked about what problem stablecoins are solving previously, but what we haven’t said yet is that this is not a long-term problem; cryptos such as Bitcoin are highly volatile due to their low market cap. The higher the market cap (simply put, “money in”), the lower the volatility. Long-term investors speculate that stablecoins will no longer be needed once Bitcoin reaches a more stable price. Therefore, the question is not what problems they solve but for how long they will be needed.

Another question comes to mind: why are we using stablecoins if we cannot trust them? Well, there are two answers here:

• The short-term trader in me would say, “I got out of a profitable trade; I want to rest and get in on the next one”.
• The long-term investor in me would say, “I am out of the market, and I want to preserve my portfolio value”.

Stablecoins have less than 15% of the market’s dominance,  compared to BTC (44%), and ETH (20%), which is very low. I would say that we do not trust stablecoins enough to own major allocations of them, but we are looking forward to a less volatile market.

---

THIS IS NOT FINANCIAL ADVICE
Nothing in this report/analysis constitutes professional and/or financial advice. The shared content is for educational and informational purposes only. Do your own research before investing.

Liquid Staking Derivatives (LSD) is a new staking option that enables stakeholders to profit from staking and maximize their returns by trading or using stTokens in the De-Fi protocol.

What is staking?

Staking is a token distribution mechanism used to issue tokens in the market through smart contracts; it also functions as a rewarding mechanism because it rewards stakeholders with the assets staked.

In traditional staking in Proof-of-Stake (PoS) protocol-based projects, which is also the most secure version of staking because it is done directly with the chain, your tokens are in a lockup period during which the tokens staked cannot be withdrawn for a certain period of time; in some chains, there is also a minimum number of tokens to stake. Although it offers a secure return on staked assets similar to a bond, it also limits the potential to earn higher returns on those assets from the DeFi ecosystem. Additionally, in some chains, there is a minimum number of tokens required for staking.

Lido, Coinbase, and RocketPool are offering a unique solution called Liquid Staking Derivatives (LSD):

• that simplifies the staking process with a user-friendly interface, requires no additional resources, and operates serverless.
• that provides an opportunity to earn on small deposits.
• stTokens can be traded or used to maximize your profits in DeFi protocols.
• it also provides a different solution from other staking options.

These are the reasons why DeFi advocates are crazy about it! Because they can have fun and generate more profits by trading them or providing liquidity (ex. stETH/ETH). Isn’t it lucrative?😌

STAKING OPTIONS
Solo staking: which requires setting up a validator node and a minimum deposit (i.e., Ethereum requires a minimum of 32 ETH staked).
SaaS staking: with this option, you have your own validator but still have to trust a third party (usually centralized) and still have to make the minimum deposit required. 
Centralized exchanges: even though APRs are higher, I do not suggest locking tokens on CEXs.

How do LSDs work?

As mentioned above, several protocols offer LSD; for the sake of example, we will use Lido (which is the protocol with the highest deposits).
Lido is a protocol that acts as an intermediary for staking your ETH (and other tokens) on the Ethereum chain without a lockup, keeping your staked “ETH” in your wallet.
There are two ways to earn rewards, and both require a stTOKEN:

• Connect your decentralized wallet to stake.lido.fi and swap your token (ex. ETH) for stETH (which is not an Ethereum native token; it is a pegged ERC-20 token with counter-party risks). Once the swap is successfully completed, you will start earning rewards.
• Buy stTOKEN on CEX (not all CEXes support stTOKENS) and withdraw to your wallet (e.g., Metamask).

Add the stTOKEN to your wallet so that it is visible when you withdraw. The contract address can be found on CoinMarketCap.

WHAT IS LEVERAGE STAKING?
A new type of staking is available with LSD now, called leverage staking, which basically works this way:

Swap ETH for stETH (on Lido)
Earn rewards
Stake stETH to earn ETH
Swap ETH for stETH (on Lido)
Earn rewards
Stake stETH to earn ETH
and repeat that again…

It looks to me like an endless Ponzi scheme… I do not like it at all.

Conclusion

Staking data
Despite being the second largest cryptocurrency by market cap, $ETH has a very low supply staked; according to Messari, 15% of the $ETH in circulation is staked, compared to 90% of $BNB, 68% of $SOL, and 46% of $DOT. Furthermore, Kraken, Coinbase, Binance, and Lido own over 60% of the ETH staked, making Ethereum staking centralized.

Liquidity
LSD runs on a liquidity basis, as the name suggests. If the LDS tokens in circulation are not backed 1/1, the system dies; the same goes if these tokens run out of liquidity because when you swap your ETH with Lido and get back stETH, Lido must stake ETH in the Ethereum native staking contract to earn $ETH and reward stETH holders.

But what would happen if all the stETH holders wanted to swap back for ETH? Is this possible if the ETH held by Lido is locked? This scenario is very unlikely to happen, but taking it into consideration is not a bad idea. Be prepared for the worst.

Mass adoption
Some on CT believe that LSD has the potential to become the dominant staking mechanism, becoming the quickest and most profitable way to stake your assets and invest in or trade them at any time.

LSD has quickly gained popularity among DeFi investors because, as previously stated, it allows you to use the same asset to earn in two protocols. Isn’t that cool?

That being said, I believe the technology and application of LSD are impressive, and I may agree with the DeFi advocate who claims that this will dominate the staking mechanisms for one simple reason: Degens freaking love maximizing their profits!🤟

---

THIS IS NOT FINANCIAL ADVICE
Nothing in this report/analysis constitutes professional and/or financial advice. The shared content is for educational and informational purposes only. Do your own research before investing.

In finance, “liquidity” refers to the degree to which assets or securities can be bought or sold in the market without affecting the asset’s price. A liquid asset can be bought or sold quickly and easily, as there are many buyers and sellers available in the market. An illiquid asset is more difficult to buy or sell, as there are fewer buyers and sellers or the asset is not in high demand.

The greater the liquidity of the asset, the more stable its price is likely to be. This is because there are more participants in the market willing to buy and sell the asset, which helps to smooth out price fluctuations.

Bob is going to go to the lakes (pools) to fish with his grandfather. Once they arrive at the pools, they have to decide on which one to throw the bait, and Bob insists on fishing in the ‘scenic’ pool even though there are fewer fish (10 fish and 5 fishermen). Instead, Bob’s grandfather is going to the pool that has more fish (100 fish and 20 fishermen).

Who will catch the most fish today?

Obviously, Bob’s grandfather wins. But why? Let’s pretend all the fish were to be caught. What would be the total catch for Bob and his grandfather?

• Bob’s pool: 10/5 = 2 fish per person out of 10 fish.
• Bob’s grandfather pool: 100/20 = 5 fish per person out of 100 fish.

(Bear with me; these numbers are not realistic; they might get more or less fish, but for the sake of the example, we will keep it very simple.)
Even if there are more people around, Bob’s grandfather will be able to catch a greater number of fish due to the abundance of fish in his pool, allowing him to easily catch them.

Bob has learned a new lesson today. The following day, Bob and his grandfather are going to fish in a new and bigger pool (1000 fish, 50 fishermen).

1000/50 = 20 fish per person out of 1000 fish. Despite the fact that each fisherman is supposed to catch 20 fish, Bob only caught fifteen and his grandfather twenty-five. This could be because Bob fell asleep for a few minutes, went behind the bush to piss, or, more likely, because he lacks experience and skills.

Again, Bob has learned a new lesson today. Knowing where to fish does not guarantee that you will perform as well as the others.

Crypto Liquidity Pools

The liquidity pool is a smart contract that allows traders to trade tokens even if there are no buyers or sellers instead of using the traditional order book from the stock market and CEXs.
Every liquidity pool is initialized with a pair of assets in a 50:50 ratio (ex: ETH/MHL Token), and most liquidity pools utilize an algorithm called the Constant Product Automated Market Maker that decides the price of the token based on the amount of the token bought and the ratio in the pool; basically, the more MHL Token you buy, the higher will be the price of each token bought because the pool is trying to keep the ratio at 50:50.

This pool was initialized with 1 ETH and 100 MHL tokens.
1 ETH = $1,300
100 MHL tokens = $1,300 = $13 per token.
Pool total value: $2,600 — — Ratio 50:50

What happens when you buy 20 MHL tokens? Once the trade has been concluded, there will be fewer MHL tokens and more ETH (20 MHL tokens x $13 = $260).
First of all, you will never buy the tokens at the same price; the price will increase with every token you purchase because the ratio between the tokens also changes, therefore their value. But let’s keep it simple.

Now the pool has ~1.2 ETH = $1,560
80 MHL Tokens = $1,560 = $19.5 per token
The price of MHL tokens has increased because it has to balance the pool back to 50:50 — — Pool total value: $3,120

TRADE TOKENS WITHOUT A PAIR (ROUTING)
What if I want to sell MHL for AVAX?
Well, if the DEX does not have the pair AVAX/MHL, you will still be able to exchange your MHL tokens for AVAX; in this case, the contract will execute 2 transactions:
Sell MHL for ETH then Sell ETH for AVAX.
It will take a little longer, and you will have to pay more in gas fees.
Most of the time, you do this kind of procedure because the token may have just been launched and the DEXs are not offering that specific pair.
If you really want to buy such a token, I would suggest you do it on a big DEX, such as Uniswap, so that the trade will be faster (if the token is liquid enough).

Every time you trade tokens using a liquidity pool, you will pay gas fees to conclude the trade.
But who pays these fees? Liquidity providers. That can be a single person, an entity, or the team or founder of the token.
The earnings generated by a liquidity provider depend on how much you contribute to the pool (in this case, ETH and MHL).

ETH/MHL pool total value: $3,120 — — The ratio is 50:50.
Let’s pretend you want to add $3,120 as an investment into the pool (this means: 1.2 ETH = $1,560 & 80 MHL Tokens = $1,560). The pool value will increase to $6,240, and you will own 50% of it; therefore, you will earn 50% of the fees collected by the pool every day.

The more people invest in the pool, the lower will be your ownership of the pool, and the bigger the value of the pool, the more stable will be the price of the assets because more money is required to impact the price.

PRICE VOLATILITY
The bigger the value of the pool, the more stable will be the price of the assets; this means that if the pool is small, the price impact will be bigger.
Always ensure that your trade will not have a significant impact on the price of the token, because if you buy an illiquid token and its price rises by 30%, traders will sell to make a quick profit out of it.

Risks of investing in liquidity pools:

• Rug Pull: without going into technicality, this is a scam performed by a team, founder, or token owner who sells a large amount of the token in a pool that they initialize, which is not enough liquid to absorb the selling pressure. Pulling out the liquidity.
• Impermanent loss: due to the lack of space in this report, I will share below a YouTube link from Binance Academy. Please listen carefully before becoming a liquidity provider:

Conclusions — Don’t be exit liquidity

WHAT ABOUT NFTs?
Why do people say that NFTs are not liquid? Because they are not. In order to sell your NFT, you have to list it on a marketplace and wait until someone meets your price needs and buys it. This is a peer-to-peer trade.
Even though there are some protocols trying to fix this issue by introducing liquidity for NFTs, the problem persists. It is indeed harder to sell NFTs than token.

Let me tell you very quickly why knowing how liquidity works matters:

• Let’s pretend you bought a token a while back, and during the bear market, the token dropped by 80%, and you are still in, frustrated. What to do now? You can either sell it and hope there will be enough liquidity in the pool to sell the asset, or you’ve got to hold it.
• A friend of yours told you to buy a token that is launching soon, and even though you don’t know how liquidity pools work, you still want to buy that new token. If it is illiquid, it may be difficult to buy (let alone sell), and the price impact will be significant, and you will not know why.
• Let’s say you are purchasing a token on a less-established DEX with low trading volumes because that token isn’t listed on major DEXs; this token is most likely a scam, or there might be some bugs in the contracts; It is advisable to invest in tokens that have undergone contract audits.
• You invested in a private round of a token sale, and you have a vesting period of 6 months; but in the 4th month, the founder of the token/project decided to remove their initial liquidity from the pool, so now it will be harder to sell because the token is more volatile, and when this happens, most of the liquidity providers remove their liquidity too. In this case, 99% of the time, the price drops significantly due to panic sales.

These are some of the most common scenarios in which a lack of liquidity causes your investment to fail. The best way to prevent this is by not buying illiquid assets. Liquidity doesn’t really matter until it does.

---

THIS IS NOT FINANCIAL ADVICE
Nothing in this report/analysis constitutes professional and/or financial advice. The shared content is for educational and informational purposes only. Do your own research before investing.

Fundraising is the process of collecting money from individuals, organizations, or businesses in order to support a cause, project, or organization; it is also used by blockchain-based projects to raise funds and is typically used to support the mission or goals of the project, such as to fund research and development or for marketing purposes. Before discussing the methods that teams use to fundraise, let us take a brief look at how many types of fundraising exist.

IPO

An initial public offering is the process by which a private company becomes a publicly traded company by offering its shares for sale to the public. The IPO process involves the company issuing shares of stock to the public for the first time, typically through an investment bank. The process for this fundraising mechanism is long and expensive; for this reason, blockchain-based projects were looking for different solutions.

In 2014, Alibaba Group Holding Limited went public through an IPO on the New York Stock Exchange (NYSE), and it raised $25 billion.

ICO

An initial coin offering is the process by which a private company issues a new cryptocurrency or token to the public. ICOs are typically used by startups to raise capital for their projects. One of the most profitable fundraising bubbles in history was the ICO. In 2017 and 2018, $14 billion was raised during ICO rounds, and in 2019, ICOs raised less than $400 million. The drop-off is due to the failure of 99% of these start-ups. The main reason behind the rise and fall of ICOs was regulation.

In 2014, Ethereum conducted an ICO to raise funds for the development of its platform, which raised over $18 million in the process. In the Ethereum ICO, “ETHER” was the crypto issued in exchange for Bitcoin.

IEO

An initial exchange offering (IEO) is a fundraising event that is conducted by a cryptocurrency exchange (CEX) on behalf of a blockchain project. In an IEO, a cryptocurrency exchange acts as an intermediary between the project and investors, providing a platform for the sale of the project’s tokens or coins. IEO was introduced after the failure of the ICO mechanism in order to prevent investors from being scammed. In 2019, IEOs raised over $1.6 billion, which is not much if you think about it. This is because you can’t trust an unregulated exchange; the issue persists.

In 2019, BitTorrent conducted an IEO on Binance Launchpad held in two rounds: in the first round, investors used $BNB to purchase $BTT; in the second round, Bitcoin was added as a second option, raising over $7 million in funding.

STO

A security token offering is an alternative to an IPO in which a company issues tokens that represent ownership of the company or its assets. The token acts as a share of the company (fractional ownership). Blockchain technology is used to issue and track the tokens.

In 2018, Telegram Open Network (TON) raised $1.7 billion in an STO that was aimed at funding the development of a decentralized messaging app and a blockchain platform.

IDO

An initial DEX offering is a fundraising event in which a company issues tokens that are sold through a decentralized exchange (DEX). IDOs are similar to initial coin offerings and initial exchange offerings, but they use decentralized exchanges rather than centralized ones to sell the tokens. IDOs have become a popular way for startups to raise capital, but it is important for investors to carefully research the company and its business plan before participating in an IDO.

In 2020, Polkastarter (POLS) raised $875K during their successful IDO in just six hours from more than 500 investors worldwide.

Benefits and risks of fundraising

Fundraising is used by teams that need money to research and develop their product because, most of the time, they do not have the financial resources to develop and deliver it to the market. Teams will use the funds raised by the investor for:

• Research and development: build the back- and front-end, develop smart contracts, audit the code, and more.
• Marketing and branding: paid advertising; paying designers or artists; building a go-to-market strategy with a professional marketer; and more.
• To pay themselves and private contractors.
• Build partnerships and find investors for the next round.
• And more.

But fundraising is also beneficial to investors, even though buying in early has its risks. When investors purchase a company’s shares or tokens, they receive a discount from public sales based on the risk; the greater the risk, the greater the discount.

How much should the team raise? This depends on how much time and effort the team will put into the development phase, the marketing strategy for the short and long term, and how much they are going to need for product and community management. These numbers must be backed by a solid plan; without one, it will be hard to convince private investors, venture capitalists, DAOs, and Web3 consumers to invest in your project.

How much should an investor invest? Well, this depends on your risk tolerance. In the crypto space, we used to say, “Invest only what you can afford to lose.” The secret to a good investment is to research and diversify based on your knowledge and the market you like the most (NFT, L1, L2, gaming, metaverse, DeFi, etc.).

Are there any risks during the fundraising phase? Yes, there are.

Investors may lose money if they invest in a team without experience in product and community management or because of market conditions that influence the project’s performance.

The teams might not reach the hard cap, so they won’t be able to execute their plan, or they might waste or lose the funds raised (because of a bad marketing strategy or because of mistakes made during the contract’s development, for example).

FOLLOW THE MONEY
Here are two websites where you will be able to follow the investors’ money during the fundraising of blockchain-based applications:
https://www.coincarp.com/fundraising/
https://crypto-fundraising.info

Having difficulties with company valuation for fundraising purposes?
Check out Educational Program #1.
Be prepared to explain the amount of funding you are requesting from the investor. Know your numbers.

TIPS
Here are some tips that can help you succeed during a fundraiser.

• Clearly define the purpose of the fundraiser and the benefits of the product or service being offered.
• Develop a strong business plan and financial projections.
• Build a solid team.
• Engage with the community.
• Be transparent.
• Follow all relevant regulations and guidelines.

Overall, the key to success during fundraising is to have a clear vision and plan and a strong understanding of the needs and interests of potential investors.

Conclusion

Founders have been using fundraising mechanisms for many years now, and overall, they are working very well because they give new entrepreneurs the opportunity to launch their projects. Despite this, you must be careful of projects that use blockchain to carry out unregulated fundraising.
Approach each investment with logic; if you miss an opportunity today, you will have another tomorrow. Patience is a virtue of winners.

---

THIS IS NOT FINANCIAL ADVICE
Nothing in this report/analysis constitutes professional and/or financial advice. The shared content is for educational and informational purposes only. Do your own research before investing.

What is a startup? A startup is a company or venture with a unique and scalable product or service, led by a new entrepreneur.
A business valuation, also known as a company valuation, is a process and a set of procedures used to estimate the total economic value and the assets of a business.

Founders, how many times have you been in the position of coming up with a valuation for your project or company but had no clue how to do it?
Investors, how many times have you invested in a blockchain-based project (token sale or equity deal) for a valuation that was too high and asked yourself how the team came up with that huge number?

Well, today I will explain how to properly value your project so that you’ll be ready next time.
The valuation of your company depends on many factors, such as the following: the goods owned by the company, the intrinsic value of the business, revenue generated, and forecasted profits for the following years.

How to evaluate your business

Bob wants to start a homemade lemonade business using his grandmother’s recipe. But Bob has no money to incorporate the company, pay expenses, or purchase inventory. Now Bob is looking to raise his first round of investors.

Before incorporating a company, it is advisable to consult with a lawyer and an experienced entrepreneur in the sector to develop a solid business plan and an effective go-to-market strategy.
What is Bob’s business worth right now? $0, because this is just a business idea, but Bob has “proof of concept” because other people have run the same business successfully, and this can bring his valuation to $1.

Bob is trying to raise the first round of investors, the so-called “Friends and Family (and Fools, because 50% of the startup does not make it)”.
After raising $50k from the 3Fs-round (for 20% of the company at a $250,000 valuation, or rather, the possible future evaluation), Bob incorporates the company (by paying taxes and the lawyer), designs his company brand, buys the first materials to start the business (lemons, water, sugar, and Grandma’s secret ingredient), and spends a couple of funds on advertising.

FRIENDS, FAMILY, AND FOOLS ROUND
Usually, during the 3Fs-round, the valuation of the company is very low because of the high risks, and it can range from $50,000 to $500,000.
Are the investors in the 3Fs-round a good deal? No, most of the time they bring only money and no experience, and they take a big chunk of your equity.

What is Bob’s business value right now? Between $1 and $50,000. If Bob decides to sell the business after a month because he wants to switch carriers or because it is losing money, he will get between $1 and $50,000, depending on how much risk the investor is willing to take, because he hasn’t made any profits and owns a company that isn’t making money yet.

And let’s assume Bob managed to get a patent for his homemade lemonade; this will increase the value of the company since nobody except his company can manufacture that specific lemonade.
After the second month, Bob started making money, and his marketing campaign turned out to be good. He managed to make $50,000 in sales with $30,000 in operation expenses, bringing the real valuation of the company to $20,000 + multipliers, but it is too early to talk about this because Bob is not done. He is confident in his business, so Bob decided to put the $20,000 he made back into the company.
After the sixth month, Bob’s business is doing well, with $200,000 in sales (in the first 6 months) and $125,000 in operation expenses, bringing the real valuation of the company to $75,000 + multipliers.
After one year, Bob has $500,000 in sales and $300,000 in operation expenses (salary, utility, inventory, marketing, etc.); bringing the company valuation to $200,000 + multipliers.

Risk management in the early stages

Before spending funds on advertising, it is very important to build a marketing plan based on the financials of the company. No rush; just because you are spending money today does not mean that you will make it back tomorrow.
Door-to-door and word-of-mouth advertising are the best and cheapest forms of advertising because you are selling your product directly to the consumer.

The valuation of the company at the moment is $200,000 (EBIT = Earnings Before Interest and Taxes) because this is the amount of money earned from the business (if there are liabilities or debt, the amount must be subtracted from the valuation of the company), but now we have to take into consideration the multipliers (the number of years with the expected revenue that must be backed by the numbers, the business size, the brand, and the market trends; usually between 2x and 6x) based on the risk of the business. The smaller the business, the higher the risks involved; usually, for businesses with revenue smaller than $1 million, the multiplier is between 2 and 3 (in years).

Let’s say, for the sake of the example, that Bob’s revenue was linear over the first 3 years in the business.
Year 1: $200,000;
Year 2: $200,000;
Year 3: $200,000;
Total: $600,000

And Bob expects to earn the same amount in the next three years (the multiplier is 3).
Year 4: $200,000;
Year 5: $200,000;
Year 6: $200,000;
Total: $600,000

For a total of $1.2 million, this is the valuation of the business.

Let’s pretend Mark Cuban (this is just a hypothetical example) is interested in buying Bob’s Company.

How much should he pay? $1.2 million, but usually investors are looking for discounts (from 10–30%) because $1 today is worth more than $1 tomorrow. With a discount, the investor recovers the investment before the end of the sixth year. Here, it is up to Bob to sell the company for the best price possible; however, Bob is confident in his abilities and the company, so he declined Mr. Cuban’s offer.

What would I advise Bob to do?

First of all, I would value the company at least $1.5 million, depending on the value of the goods owned by the company.
Second, I would advise him not to sell the company.
It is better to sell 10% of the company for a $120,000 investment (at a $1.2 million valuation) to an investor (in an angel or seed round; typically in these rounds the valuation of the company is between $500,000 and $2,000,000) to help Bob improve the business model and the advertising strategy to reduce his operational expenses and increase his margins.

Assume Bob’s new business partner is Chef Wonderful (this is just a hypothetical example), and he manages to increase his revenue by 50% every year (revenue typically grows by 5% to 30% per year).
Year 4: $300,000;
Year 5: $450,000;
Year 6: $675,000;
Total: $1,425,000

After 6 years, Bob’s revenue is equal to $600,000 (first 3 years) + $1,425,000 = $2,205,000 (this may appear exaggerated for a lemonade business, but for a startup, it is not).
He now expects to earn 50% more each year, as he has in the previous three.
Year 7: $1,012,500;
Year 8: $1,187,500;
Year 9: $2,278,125;
Total: $4,478,125 

REVENUE VS PROFIT
The revenue is the income generated, including the expenses. Profits refer to the net income earned after accounting for taxes, employee salaries, investor returns, and personal compensation.

What is Bob’s business value after six years in business?

$2,205,000 + $4,478,125 = $6,683,125

Bob is tired now and wants to exit the business. He is selling the company to Lori Greiner for $7 million (this is just a hypothetical example) because he still owns the patent and inventory for the next year and because the size and brand of the company have increased. Now Lori is going to make a billion dollars out of it! Classic.

Bob’s exit profits = 7,000,000 * 70% = $4,900,000
3F-round exit profits = 7,000,000 * 20% = $1,400,000 (28x on their investment after 6 years)
Mr. Wonderful exit profits = 7,000,000 * 10% = $700,000 (5.8x on his investment after 3 years)

I guess Bob’s granny is proud of him.

Other variables

The Friends and Family round could be structured as a convertible note (which converts to equity at a later stage to delay the company’s valuation) or a SAFE (Simple Agreement for Future Equity) which is a convertible security that has no payment requirement, no maturity date, and no interest rate.
Pre-money valuation. EX: $100,000 investment for 10% at a $1 million valuation keeping the valuation at $1,000,000 after the investor has made the investment.
Post-money valuation. EX: $100,000 investment for 9.09% at a $1 million valuation brings the valuation to $1,100,000 after the investor has made the investment.
Vesting. Both for the founders, in order to ensure that they will continue to work after the funds are raised (between 2 and 4 years), and for the investors.
A business idea is not a business. Before making up valuations, think of the expenses and your margins. Do you have a prototype or beta test? How are you and your investors going to be profitable?

Once you have the answers to these questions, the product, and the business model, you can get closer to a realistic valuation of your business.

WEb3 project valuation

Can we apply the same valuation model to Web3 startups? Yes, we can.
Even though valuations in the Web3 space are frequently exaggerated, we can apply the same valuation model to blockchain-based startups.
Whether they are selling equity shares or tokens during the sale rounds, the team evaluates their project at a “future evaluation”, which is why investors sign SAFE and/or SAFT agreements.

SAFE & SAFT
Simple Agreement for Future Equity is a founder-friendly alternative to convertible notes, which are used by founders to raise capital in early rounds).

Is there a formula to calculate your future valuation without revenue? No, there is no such thing. This type of valuation is based on two factors:

• Proof of concept: You can get a similar valuation from others who have run a similar business. But that doesn’t make for a fair assessment.
• Non-rational valuation: If the business model is unique, the founders value their company based on the price they are willing to sell it for. But no one would buy a business that does not make money.

So, what should you do? Compromises have to be made with investors or VCs who will buy tokens or equity based on their valuation of the business.
However, before assigning an arbitrary valuation to potential investors, it is advisable to consult with industry experts such as Web3 lawyers, financial advisors, product managers, or DevOps professionals. Don’t be greedy; be smart.

---

THIS IS NOT FINANCIAL ADVICE
Nothing in this report/analysis constitutes professional and/or financial advice. The shared content is for educational and informational purposes only. Do your own research before investing.