How Does the Potential for a ‘Protocol Sink’ Affect the Terminal Value?
The potential for a 'protocol sink' (a mechanism that permanently removes tokens from circulation or locks them up) positively affects the Terminal Value (TV). A strong sink increases scarcity and reduces token velocity, suggesting a more sustainable long-term value.
This can justify using a higher perpetual growth rate (g) in the Gordon Growth Model or a higher Exit Multiple, as the protocol has a built-in mechanism to sustain token value beyond the explicit forecast period.
Glossar
Terminal Value
Valuation ⎊ Terminal Value, within cryptocurrency derivatives and financial modeling, represents the calculated present value of all future free cash flows projected to occur beyond a defined forecast period.
Gordon Growth Model
Model ⎊ The Gordon Growth Model, a cornerstone of dividend discount valuation, provides a simplified framework for estimating the intrinsic value of an asset ⎊ particularly relevant when assessing cryptocurrency projects with tokenomics involving dividend-like distributions or staking rewards.
Perpetual Growth Rate
Momentum ⎊ Perpetual Growth Rate, within cryptocurrency derivatives and options trading, represents an annualized rate reflecting the sustained expansion of an asset's value, often utilized in perpetual contracts to determine funding payments and assess long-term viability.