Arca Chief Investment Officer: Why is Sushi considered undervalued?

The author of this article is Jeff Dorman, Chief Investment Officer of Arca, and it has been translated by DeFi Path.

Despite the promising prospects for decentralized finance (DeFi), the recent price drops of DeFi tokens have been disappointing. As a leader in DeFi, Uniswap's token UNI has experienced a "halving" followed by a "toe-cut," raising the question: does it still have potential?

In this regard, Jeff Dorman, Chief Investment Officer at New York investment management firm Arca, shared his views.

The reason 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 realize this value. The same logic applies to UNI.

Uniswap has a clear leading position in the DEX trading market, much like "Ethereum vs other smart contract protocols." In the DEX space, no other protocol comes close to Uniswap (analysis from @DuneAnalytics).

For ETH, EIP-1559 and Ethereum 2.0 have always been in a "future" state, but UNI's "fee conversion" is almost certain, with a timeline set for February 26, 2021 (180 days after governance begins).

Then, UNI will join a small list of tokens, such as HXRO, MKR, FTT, and BNB, which derive actual value from revenue.

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

I believe that anything in DeFi (and digital assets in general) has a higher multiple than the over-expanded stock market during an economic recession.

Once market participants begin to apply the same valuation standards to UNI and ETH, UNI will be seen as the cheapest asset among all digital assets.

Here are five reasons some people believe UNI should not be held:

1. The selling pressure from liquidity mining exceeds demand, but the actual daily release of UNI is 770,000. Once the fee conversion is completed and generates revenue (liquidity mining may end on November 18), value investors will easily absorb this release volume;
2. You believe Uniswap will not maintain its market leadership, and its trading volume will decline or lose competitiveness (like an "ETH killer");
3. You do not believe the "fee conversion" will happen (or even know about the fee conversion);
4. You believe the fee conversion will happen, but since there are still three months to go, you are waiting for the best buying opportunity;
5. UNI is just a part of DeFi, and DeFi is already unpopular;

Argument 1 is real, while arguments 2-5 seem extremely shortsighted.

Uniswap is one of the few companies/projects in the digital asset space that has actual usage and product-market fit. Strangely, digital asset buyers are still chasing unproven future (L1 protocol) projects instead of those with actual appeal today.

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

Remember the failed Facebook IPO? It was priced at $40, then dropped below $20 after listing, as everyone feared it was overpriced.

Smart investors do not bet against the leader.

UNI is often mistakenly referred to as a "governance" token, while the market perceives "governance as worthless."

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 generous income stream in February 2021.

All governance tokens ultimately need to become value transfer tokens, which is why voting is crucial— to guide the flow of funds.

In an industry where achieving real growth is challenging, being bearish on such growth projects seems insane.