DeFi Crypto space is overflooding with newbie Devs and a lot of what is being built in crypto is being built by people that read a Wikipedia article on bonds, or seigniorage, or debt instruments and then thought to themselves, “they can do this better”.

DeFi Crypto Culture has Strangled Crypto Ethos

As Andre Cronje in his recent post said, “Its something that happens often in coding, you find a fresh piece of code written by another organization or developer, you quickly start finding faults, “this isn’t needed”, “this could have been done better”, “why did they do this? its pointless”, and then starts the “I can do this better”. So you spend the next few days, weeks, even months re-engineering the code, then you hit your first wall, and you have to make some adjustments, then your second, then your third and so on, and eventually your code looks exactly like their code did, and you have that “oh, right, that’s why” moment as you finally understand why it was what it was.”

Monetary policy is the same, understanding monetary supply, issuance, debt, bonds, seigniorage, debentures, commodities, securities, derivatives can’t be viewed in isolation. They exist for a reason. But crypto is the new generation, the generation of “we can do it better”.

WeWork Parellels to DeFi Crypto

“We dedicate this to the power of We – greater than any one of us, but inside each of us.” – WeWork S1 filing

At the coffee bar inside of WeWork headquarters, to get a latte, you had to order a cappuccino. To get a cappuccino, you had to order a latte.

That was because WeWork’s charismatic CEO, Adam Neumann, had gotten the two mixed up and rather than correct him, everyone just went with it: Latte meant cappuccino and cappuccino meant latte.

He got people to go along with a lot of other alternative facts, as well: WeWork, he explained, wasn’t a real estate company in the business of sub-leasing co-working space. It was a technology company in the business of “creating a spirit of We.”

More consequentially, he told anyone who asked that WeWork was profitable. 

When the S1 filing required by the SEC showed otherwise, he moved the goal posts with a new accounting metric, the much-derided “community-adjusted EBITDA.”

That bought some time, but not enough: Just as Starbucks was not going to switch the names of its coffees to suit Adam Neumann, the accounting profession was not going to change the meaning of profitability for him.

It’s for that reason he was forced into early retirement. 

It would take several lifetimes to burn through the severance check he received, but if he gets bored. Wouldn’t he make an excellent CFO of a DeFi protocol? No pun intended..

Crypto DeFi and Earnings Before Costs

DeFi protocols of course do not have CFOs. (They’d be unregistered securities if they did.)

But there is nonetheless some funny-money accounting going on.

In the same way that Neumann attempted to change the meaning of “profitability,” DeFi investors are attempting to change the meaning of “earnings.”

After a long run of underperformance, DeFi tokens are often touted as being undeservedly overlooked and inexpensive.

Yearn, for example, trades on 14x earnings, according to Tokenterminal.com. 

14x earnings sounds pretty cheap for a foundational protocol in this new financial system.

But it’s only on 14x earnings because all expenses are being paid in tokens.

Developer salaries and all other costs are paid in previously issued YFI tokens, which makes it feel like they’re free. 

This is not unique to DeFi.

Tech companies have long inflated earnings (and deflated multiples) by paying employees in restricted stock options, which have no immediate impact on the bottom line.

DeFi, however, is taking it to the next level by paying all expenses in the equivalent of stock options: tokens they have issued to themselves. 

“Earnings” are therefore being defined as revenues before any costs are accounted for. 

In TradFi, revenue-before-costs is also known as … revenue.

So when someone says Yearn is trading on 14x earnings, what they actually mean is that Yearn is trading on 14x revenue.

That’s a big difference!

14x earnings is pretty cheap in most cases. 

14x revenue is very expensive in almost all cases! 

None of this is Yearn’s fault.

Quite the opposite: Yearn is perfectly transparent about their costs, all of which can be seen here in a level of granularity that TradFi analysts can only dream of.

(Yearn spent $10,302 on “ETH Denver merch” last year, for example.)

Neither is it the fault of Tokenterminal.com, which even spells things out in the fine print:

“It is worth noting that this [price-to-earnings ratio] is not the same as the conventional definition of price-to-earnings ratio in which earnings is calculated as the difference between revenue and costs and expenses. This is because the majority of currently listed projects record their costs and expenses off-chain, and we only have access to on-chain data.” 

But no one reads the fine print.

As a result, crypto investors are mixing up valuation multiples like Adam Neumann mixed up coffee orders.

In Summary…

DeFi tokens are widely thought of as being cheap, but only because we’re pretending they have no expenses. 

A lot of tech stocks that look pretty reasonable on headline P/E metrics are actually pretty expensive when you add back the invisible expense of stock options.

We should be doing the same in DeFi. But it’s difficult because (as far as I’m aware) most DAOs are not as transparent as Yearn.

Crypto needs more research teams getting to the bottom of these types of things, like sell-side analysts do for us in TradFi.

And sure thing that’s coming.

In the meantime, if someone tells you a DeFi token is cheap on price-to-earnings, tell them it’s probably expensive on price-to-sales.

And if Adam Neumann asks you for a cappuccino, give him a latte.

Recommended Reading: Are You Ready For DeFi Crypto Season?

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