How to value an STO Security Token like Nexo (and why it may be overvalued now)

Nexo pays token holders 30% of their profits

The exciting new asset class of utility tokens were in part exciting because no one really knew how to value them. Hype and a sense of owning a piece of the future was enough to justify prices.

Security tokens, by contrast, are much less exciting. We have a whole world of traditional finance that helps us understand the value of a security. Tokenized securities as a category are an exciting development in the world of fintech, but any individual security token should be a lot easier to value and understand than a utility token.

Introducing Nexo, my favorite security token

Nexo, the crypto-collatoralized fiat lending platform, has been my poster child for a well-run STO. Here’s why:

• They had excellent token economics
• They promised never to sell team tokens under the STO price
• They locked nearly all non-sold tokens so only investors’ tokens would be on the market for the first 6 months
• Team and founder tokens are released over 4 years
• Their sale was massively oversubscribed
• Despite the difficulty with exchanges and STOs, their token has fared well on the market since the start of May, 2018.
• Their product is well designed and already has real customers

Nexo’s Token

Nexo describes its token as a “hybrid” between a dividend and a utility token. I have previously challenged hybrid designs like this, as I believe a rational market will only care about expected yield. The utility feature of Nexo’s token is that platform users receive a discount if they pay off their loans using the token. I argue that even if this use-based demand drives up token price, pure investors will sell off tokens to invest in higher-yield opportunities and cancel out the effect.

But who cares? It was good marketing.

Here is the dividend part: Token holders who have stored their tokens on the platform wallet share in 30% of the company’s profits, paid monthly. Nexo is set to distribute its first dividend payment on December 15th. I got in on the STO and I dutifully have my tokens staked on their platform:

My little piece of the action

So, my 6,991 Nexo tokens are worth $1227 at the time of writing. What can I expect the yield to be?

Why I think Nexo tokens may be overvalued

Lets look at expected yield. I start by breaking down just how big my slice of the pie will be. I only get some of the 30% going to token holders, so I have to do a little math:

Here I assume 80% of the total circulating tokens will be staked in a wallet and eligible to receive dividends.

The key takeaway from the table above is that my cut of Nexo’s profits is .00047%. So, we know what my cut is, so what would my payout be depending on different numbers?

In the above table, I show what I would receive based on different profit levels. Next, I will run through some scenarios and see what are reasonable profit expectations.

Estimating Nexo’s profit

What do we think is a reasonable profit for Nexo? Well, they receive 8%-16% in interest against loans; I will assume the average of 12%. They started offering 6.5% return for people willing to offer liquidity by staking their stablecoins, so I will assume their cost of financing loans is 7%. I will assume, purely a guess, that their operating costs are 20%. Finally, their website says they have had $1bn in crypto-backed loan requests.

So here is the optimistic scenario where they fund all their loan requests:

Optimistic Outcome

So here we see an optimistic yield of 14.6%. This would mean $2–3bn of the entire crypto market would be placed with Nexo as collateral. Not to mention, this assumes that customers would borrow for a full year, which is a generous assumption to say the least. This is far too generous and estimate.

Let’s consider a less optimistic picture. Here are Credissimo’s lending numbers in their pre-Nexo days:

So on average they lent $40mm per year. If Nexo is able to jump to $100mm per year, then the yield at the current token price looks like this, a more conservative scenario:

1.47% — A dismal amount. And this is assuming they are able to lend 2.5x of their historical average

Just 1.47% yield. Of course, we aren’t comparing apples to apples, this is comparing to their previous, non-crypto business.

So what if I decided that the likely yield is too low for the price, where should I put my money? Well, it just so happens that Nexo is offering a 6.5% return for people to stake their stablecoins to provide liquidity to the platform. Based on my model above, Nexo would need to profit somewhere between $17–18mm to beat that 6.5%, whereas the conservative scenario I covered only profits $4mm.

Conclusion

One important thing to note here is Nexo’s vesting schedule. Currently, only 56% of the tokens are in circulation and we assumed only 80% of those would receive dividends. Another 30% will hit over the next year, and the final team tokens will come after 4 years. Each new token is a hungry mouth to feed.

I am open to hearing why my model’s assumptions need adjustment, but I think they are within the realm of reason and give us an idea of the boundaries of what to expect. I think much of Nexo’s token price is due to the excitement around STOs, but that it may be overvalued relative to likely yield. Granted, people hold onto projects like this because they believe in them in the long run. If Nexo can climb to servicing the 1bn in loans they say have been requested, I’ll be glad I kept my tokens.

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