Leveraging theCryptoeconomic Machine

A Fundamental ValuationFramework for Investing

David Grider, CFAWesley Pryor, CPA

Crypto Advisory, Research & Investment Fund

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Abstract

It has become de rigueur -- even clichéd -- for financial analysts to warn of bubbles in the cryp-to-asset space.

By nature crypto-assets generate no traditional cash flows or operational financial metrics such as earnings and EBITDA that may be used in conjunction with traditional fundamental valua-tion techniques. For lack of a functioning valua-tion model for crypto currencies, some analysts have defaulted to the assumption that inherent value must not exist. The incline of the price increase alone is considered sufficient evidence of a market bubble.

This assumption is inaccurate. As in all markets, overvalued assets exist in the crypto space. Key fundamental drivers of token price may be defined, quantified, forecasted, and benchmarked to determine a crypto-asset's intrinsic value and attractiveness as an invest-ment.

However intuitive, our position has not been a popular one. The cryptocurrency community has struggled to reach consensus on the metrics that should be captured and translated into a token's market price. Some argue that tokens have no inherent value and should be considered worth-less. Others rely on analogies to gold's utility as a store of value or, eschewing fundamental princi-ples of economics, believe that the market oppor-tunity presented by crypto-assets should cause prices to move parabolically in perpetuity. As of late, investors have begun to use a rudimentary model of technical analysis, qualitative assess-ments of technology features, and the intensity of news coverage to guide their valuations. These attempt are largely descriptive and incorporate little insight into the fundamental impact of underlying drivers on token assets valuation.

Our investing philosophy is that tokens are no different than any other financial asset. By under-standing and measuring the way in which these value drivers translate into token price, we may assess the intrinsic value of crypto-assets to make stronger, more informed investment decisions.

Table of Contents

1.0 A Cryptocurrency Valuation: Overview 3

• 1.1 Intrinsic Value Driver: Utility 3

• 1.2 Defining Fundamental Utility 3

• 1.3 Total Network Value: Current and Forecasted Utility 4

• 1.4 Network Velocity and Active Supply 4

• 1.5 Bringing It All Together: Required Market Capitalization 6

2.0 A Practical Example of Network & Token Value Mechanics 6

3.0 Application for Making Investment Decisions 8

• 3.1 Relative Peer Valuation 9

• 3.2 Absolute Utility Valuation 11

4.0 A Practical Example Application - PureUtilityCoin (PUC) 11

• 4.1 Justified Investment Holdings and Network Velocity Life-Cycle 14

5.0 Conclusion 17

Appendix 18

1.0 A Cryptocurrency Valuation: Overview

Our framework identifies token utility demand and velocity as the key drivers of intrinsic valuation. We build on these concepts by examining the crypto-economic mechanics that govern a tokens market price. These mechanics allow us to quantify the level of influence and directional price relationships that result from changes in certain value drivers.

We apply this foundational understanding to the investment process through the use of two fundamental valuation approaches: a relative valuation framework and absolute valuation framework.

The relative valuation framework provides a basis for which a tokens investment attractiveness can be assessed through comparison to its peers. The assessment is determined by comparison of each peer’s utility value in relation to its market value in formulating price multiples for judging investment attractiveness. This paper also contemplates variations of the approach which incorporate differing future utility growth expectations among peers into the price assessment.

Further, the framework extends the intrinsic value assessment through the use of an absolute valuation methodology to arrive at a Pure Utility Value Expectation Theory. Using this model, the theoretical network value of the tokens' pure fundamental utility is determined year by year over its technological use life-cycle. The network value is discounted and risk-adjusted back to its present value to determine the current intrinsic value of the technology at a given time.

This absolute valuation methodology contextualizes how the tokens network value should adjust over time as the network matures. Importantly, this long-term view of intrinsic value refines the concept of velocity by determining the implied amount of tokens that should be withheld from supply for investment. Finally, the insight provided by justified velocity serves as a reasonableness check on our relative valuation framework for overall market expectations of utility.

1.1 Intrinsic Value Driver: Utility

Tokens have value and are demanded for the same reason as any product or service: They provide real world utility to their users through the digital good offered by the token. The demand for this utility creates demand for the intermediary token.

The initial step in assessing any cryptocurrency is understanding its primary utility use case. When designed effectively, each token performs at least one job which benefits its users. These jobs constitute the fundamental utility of the token. Jobs are essentially digital goods and run the gamut from facilitating transactions, powering smart contracts, providing access to computing power and storage capacity, to a host of other currently unimagined use cases.

At a minimum, each token with a current job should take on the inherent intrinsic value of that job while active in the period of exchange.

1.2 Defining Fundamental Utility

Cryptocurrencies such as Bitcoin, Litecoin, Monero, and Zcash act as a medium of exchange or a payment rail for facili-tating value transfers between parties.

Accordingly, their fundamental utility demand should stem from users who purchase them to fulfill their need to transfer value. The level of fundamental utility demand at any given time should be assessed on the basis of the actual amount of payments facilitated including the network transaction fees required for performing the service.

For valuation purposes, we elect the fiat-equivalent value of payments sent (e.g., the U.S. dollar or the Euro) as the primary metric of utility. Cryptocurrency users live and transact the majority of business in a world where the value of real goods and services are measured in fiat terms. Further, the prices of these goods and services remain relatively fixed over the medium term.

When value is sent for goods and services using a cryptocurrencies network, their token gains the tangible value of those goods and services during the period of value exchange.

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In this theory of temporary value acquisition, the fundamental utility value of a payment tokens network is backed by the transaction value exchanged for these real goods and services flowing through the network. As such, the transaction value backs the cryptocurrencies' inherent underlying fundamental intrinsic value no differently than the gold standard once backed the U.S. dollar.

As a greater fiat equivalent of goods and services are purchased using a cryptocurrency's network, the token's price should rise -- holding constant, of course, other velocity and token supply factors.

1.3 Total Network Value: Current and Forecasted Utility

Like any asset, the price of a token will reflect both its current and future expectation of value. Tokens offer their user access to participate in the networks ecosystem and obtain the utility provided. They can also be redeemed by the network for the market rate of the utility provided or sold at market rate to another user.

Therefore cryptocurrencies generally offer two forms of utility value to their users: (1) current fundamental utility, and (2) forecasted utility (sometimes also referred to as 'speculative utility'):

Current Fundamental Utility: The level of current demand and resulting portion of the token's value that is solely derived from users who purchase it today for its intended use case. These "token users" benefit by gaining access to the value proposition of the digital service provided by the token. For cryptocurrencies, we specifically define the value proposition as the fiat-equivalent transaction value sent during any given period (e.g., one year). The level of demand for this form of utility can range from zero to the size of the tokens total addressable market.

Forecasted Utility: The demand and the resulting portion of the token's value that is based on the market's perception that the utility value will increase in the future. These "token holders" are the recipients of any future utility of the token. Future utility may take any form of holding tokens for any period of time beyond that needed to facilitate the fundamental utility of a transaction. The level of demand for this form of utility is either negative or positive based purely on user expectations, ranging from the loss of the entire value of the network to near-infinite (and empirically unsupported) growth.

The vast majority of current token network values are currently derived from the forecasted utility component because we are in the infancy phases of their technology life-cycle. For this reason, the cryptocurrency asset class has been criticized by members of the traditional finance community, journalists, and even governing regulatory bodies as a bubble market.

One suspects the source of unease with the future utility of token value is technological rather than risk-based. After all, the valuation of biotech stocks has long incorporated assessments of both fundamental utility (e.g., products currently on the market producing current cash flow) and forecasted utility (products in the pipeline and engaged in FDA clinical trials prior to market). A company that obtains FDA approval for a new drug may reasonably expect stock prices to increase, perhaps dramatically, based on proven historical relationships between expected future utility and realized future utility of FDA-approved products.

Here the novelty of crypto networks proves a stumbling block in accurate valuation. To assess the reasonableness of the future utility component of a crypto-asset, the underlying value drivers must be analyzed with a new fundamental frame-work.

1.4 Network Velocity and Active Supply

At any given time, a level of demand exists for the current fundamental utility of the job a token provides. Tokens may be removed from the active supply in various ways, including being held for investment, used as a perceived value storage, or even lost. Each type of removed token reduces the amount of tokens currently available to provide their designated job.

Active Token Supply (Token Float) = Issued Token Supply – Lost / Destroyed Tokens – Locked Tokens - Investment Holdings

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Once a token has finished providing its designated job, it can be resold and returned to the system at market price for its type of job. The period of time required in aggregate for the network to execute the job demand cycle is known as its "token turnover" or "network velocity."

Network velocity is distinct from efficiency and rate of productivity (‘fundamental velocity’) in that network velocity measures actual turnover. In contrast, fundamental velocity is defined as the maximum rate at which a token could theoretically turn over given all technological, usability, and other user constraints. The funda-mental velocity among different active tokens may vary depending on the job being performed (e.g., high value transactions require longer confirmations times than lower value ones) but can generally be assessed on a weighted average basis. Increases or reductions in fundamental velocity could be caused by any number of factors, including technological changes affecting the time each token must be held, changes to the composi-tion of average token demand velocity, or other general changes in user preference. In reality, some portion of the tokens are not tradable in the active supply and therefore will have a velocity of zero. Just as traditional economics forecasts velocity using money supply metrics such as M0, M1, M2, and M3, which are measured by their level of liquidity in being converted to cash, we can observe how tokens held for different use cases impact the velocity of the overall network:

The network velocity is effectively the weighted-average velocity of the amount of token demand for each of its use cases (e.g., such as holding for investment, proof of stake). In contrast, the fundamental velocity is the pure velocity the network would facilitate if all tokens remained in the active supply and were consumed at the rate of their actual use case velocity.

Token Category Demand

1005

1060

251510

Category Percent

5%10%60%

15%10%

CategoryVelocity

000

3055

Weighted Velocity

0.00.00.0

4.55.5

10.0

Category Description

Total Issued Supply Less: Lost or Destroyed Less: Bonded Tokens (PoS) Less: Investment Holdings

Active Token Supply Utility Use Case 1 Utility Use Case 2

Network Velocity

Example Total Network Velocity

Token Category Demand

251510

Category Percent

60%40%

CategoryVelocity

3055

Weighted Velocity

1822

40

Category Description

Active Token Supply Utility Use Case 1 Utility Use Case 2

Fundamental Velocity

Example Fundamental Velocity

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1.5 Bringing It All Together: Required Network Value

How much money must be held within a network to facilitate its primary utility?

The equation of exchange is used within traditional economics to demonstrate the relationship among money supply, velocity of money, the price level, and an index of expenditures within a given economy. The formula is as follows:

Money Supply x Velocity of Money = Price Level x Number of Transactions

Translating the equation of exchange by way of analogy allows for its application in assessing the value of a cryptocurrency.

Network Value x Network Velocity = Current Utility Demand

Therefore the most effective way to value a cryptocurrency's required network value is to forecast the amount of its current fundamental utility demand and network velocity in a given time period (e.g., one year). When current utility demand is divided by network velocity, we arrive at the network value required to facilitate that demand:

Token Network Value = Current Utility Demand Network Velocity

Token price is therefore total network value divided by the current total issued token supply:

Token Price = Token Network Value Total Issued Supply

2.0 A Practical Example of Network & Token Value Mechanics

The mechanics of crypto-economic value drivers and their influence on price must be understood in the same way that the accounting relationships of financial statements must be understood to assess a company’s value. Both increases in fundamental utility demand and reductions in the usable token supply (network velocity) drive growth in the aggregate value of the token network. Alternatively, decreases in demand and increases in usable token supply reduce aggregate value of the token network.

The table below shows the impact of these changes and others on network value and token price. Each year in the table corresponds to a new “scenario” whereby a new transaction will be presented and resulting impact on network value and price are calculated.

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Scenario One - Base Current Fundamental Utility Value: The base case scenario illustrates the implied network value and token price when the technology is used solely for providing its intended current utility. With no tokens removed from the supply for invest-ment purposes, the network velocity equals the funda-mental velocity and results in a purely fundamental utility value of the network and token price in its base year.

Scenario Two - Current Utility Demand Increases: Scenario Two increases current utility demand while holding all else constant. The increase of current utility demand by 100% from $1,000 to $2,000 results in a proportional 100% increase in the token's network value and price increasing from $100 to $200 and from $1.00 to $2.00, respectively.

Scenario Three - Forecasted Utility Demand Increases: Scenario Three reduces the active token supply due to a net increase in forecasted utility demand while hold-ing current utility demand constant. The $200 of forecasted utility demand used to purchase the 50 tokens for investment at a price of $4 reduces the active supply by 50%. The reduced active token supply lowers the overall network velocity proportional-ly by 50% due to the newly held for investment tokens which have a velocity of zero. The 50% lower network velocity causes the same level of current utility demand to

be facilitated with half the supply and therefore causes an inverse 100% increase in the token's network value and price from $200 to $400 and from $2.00 to $4.00, respectively.

Scenario Four - Forecasted Utility Demand Increases: Scenario Four reduces the active token supply due to a net increase in forecasted utility demand while holding current utility demand constant. In contrast to Scenario Three, Scenario Four reduces active token supply by only 25 tokens instead of 50. Importantly, the overall network velocity is again lowered by 50% as the 25 token-reduction still corresponds to a 50% reduction in the active token supply. The sum effect is another increase in network value and token price of 100%. Driven by the increase in price, a net increase in forecasted utility demand of $200 is required to purchase these tokens for investment.

As a greater proportion of tokens are removed from the supply for investment holdings, each individual token removed or added back exerts a greater impact on network value and token price. The "leveraging" effect of tokens held for investment on utility demand is analogous to the amplifying powers of debt leverage on a traditional company's financial performance. As lever-age grows, increasingly smaller changes in financial performance yield larger changes in market capitaliza-tion and return on equity.

Year 1

100

0100

100%

10

10.00

$0$1,000

$100

$1.00

Year 2

1000%0

100100%

10

10.000%

$0$2,000100%

$200100%

$2.00100%

Year 3

1000%(50)50

50%

10

5.00-50%

$200$2,000

0%

$400100%

$4.00100%

Year 4

1000%(75)25

25%

10

2.50-50%

$200$2,000

0%

$800100%

$8.00100%

Year 5

1000%(75)25

25%

10

2.500%

$0$1,000-50%

$400-50%

$4.00-50%

Year 6

1000%(50)50

50%

10

5.00100%

($50)$1,000

0%

$200-50%

$2.00-50%

Year 7

200100%(100)10050%

10

5.000%

$50$1,000

0%

$2000%

$1.00-50%

Year 8

30050%(100)20067%

10

6.6733%

$0$1,000

0%

$150-25%

$0.50-50%

Year 9

3000%

(100)20067%

20

13.33100%

$0$1,000

0%

$75-50%

$0.25-50%

Total Issued Token Supply Inflation Rate% Less: Investment HoldingsActive Token Supply Token Float %

Fundamental Velocity

Network Velocity Change %

Forecasted Utility DemandCurrent Utility Demand Change %

Network Value Change %

Token Price Change %

Token Mechanics Example

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Scenario Five - Current Utility Demand Decreases: Scenario Five reduces the current utility demand while holding all else constant. The decrease of current utility demand by 50% from $2,000 to $1,000 results in a proportional 50% decrease in the token's network value and price from $800 to $400 and from $8.00 to $4.00, respectively. While the current utility demand has returned to its base level, the price is still elevated due to the leveraging effect of the tokens removed for investment and the resultant lower network velocity.

Scenario Six - Forecasted Utility Demand Decreases: The inverse of Scenario Four, Scenario Six increases the active token supply due to a net reduction in forecasted utility demand for holding tokens as invest-ments. The doubling of the active supply and network velocity cause the network value and token price to reduce by half. Here a net reduction of only $50 to the net forecasted utility demand caused the network value and token price to decline by half. By comparison, a net reduction of $200 was required in Scenarios Three and Four based on their lower token price.

Scenario Seven - Token Supply Increase (Constant Float %): Scenario Seven increases the issued token supply with inflation while also increasing the tokens held for investment, causing the token float percentage to remain constant. The 100 additional tokens increase the total issued supply by 100%. Despite the change in issued supply, token float percentage remains steady at 50% because of the $50 net increase in forecasted utility demand. As a result, the constant token float percentage maintains a constant network velocity. In aggregate, the constant network velocity and constant

current utility demand result in a constant token network value. Notably, each individual token is now worth 50% less due to the 100% increase in token supply inflation.

Scenario Eight - Token Supply Increase (Float % Change): Scenario Eight increases the issued token supply due to inflation while holding all else constant. The 100 additional tokens increase the total issued supply by another 50%. As there is no net change in the forecasted utility demand, the portion of the supply held for investment remains at 100 tokens. The greater total issued token supply and constant supply held for investment cause the token float percentage to increase to 67% and the network velocity to increase with it. Increased velocity and increased overall supply cause both the network value and token prices to decrease, though at different rates. The 50% token price decrease is caused by the 50% inflation in total issued token supply. The 25% decrease in the network value is caused by the 1.67 change in the network velocity to 6.67 (25% = 1.67 / 6.67).

Scenario Nine - Fundamental Velocity Increases: Scenario Nine increases the fundamental velocity of the network while holding all else constant. This veloci-ty change is distinct in that it is not driven by a change in the total issued supply or the active supply. Rather, the shift in velocity is caused by a change in the funda-mental speed at which the average active supply turns over. The increase in fundamental velocity causes a proportional increase in the network velocity and a corresponding decrease in the token's network value and price.

3.0 Application for Making Investment Decisions

Thus far we have examined the crypto-economic mechanics that drive network value and price. However, an understand-ing of these relationships alone is not sufficient to make sound fundamental investment decisions. For any investment framework to be applicable in the efficient allocation of capital, it must also provide a practical method with which it can be used to assess an asset's intrinsic value relative to its current market price.

This framework provides both relative and absolute valuation methodologies for assessing a cryptocurrency’s price based on its fundamental utility. When paired, these relative and absolute valuation approaches create a framework for decision-making that leverages the strengths of one to ameliorate the theoretical limitations of the other.

Underlying both approaches is the assumption that a token's market price will ebb and flow over time. In the long term, intrinsic value will ultimately correlate to its fundamental utility demand.

The relative valuation approach formulates assumptions about a token's utility demand, its demand growth, and its veloc-ity compared to peers in estimating the future price. The strength of the relative valuation methodology is its reliance on historical and short-to-medium term forecasted utility demand and market valuation metrics. Using these metrics, inves-tors may obtain clearer and more decisive insight into expectations for the future utility of a token.

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Though the relative valuation framework provides a strong basis for making investment decisions between two compara-ble token assets, using this approach in isolation will not yield long-term investing success. Knowledge of which token is relatively most attractive among peers yields little insight if those all peers are drastically overvalued by unrealistic expec-tations for their future network use and utility value demand.

Short-term traders may pass tokens among themselves at successively lower or higher prices for a time, but their activity makes no provision for long-term network value to persist past the phase of investment speculation. Like traditional prod-ucts and services, tokens have adoption and usage life-cycles for primary utility. The laws of economics dictate that gains earned by early investors must be repaid through pure losses by later investors or by willing users who view token price declines as an acceptable cost of accessing its fundamental utility. If end users do not purchase tokens based on the perceived value of their utility, the level of tokens held for investment will exceed the equilibrium of peak realized funda-mental utility demand. The inevitable result for investors is a loss on their investment.

Long-term network value is therefore a prerequisite for the ability of investors to liquidate portfolio holdings. The absolute valuation framework is based on the premise that a token's network value should ultimately dovetail to the present value of all the fundamental utility that it is expected to provide to its users over its technology life-cycle. As such, the absolute valuation approach allows investors the ability to step back from the microcosm of the current- and near-term utility demand and velocity-driven market prices. The calculation of a network's long-term utility growth and ultimate demand allows investors to gain a ‘big picture’ view of a token's value. The value of this perspective is that it provides investors insight into an assumed realistic potential network value which may appear detached from market prices on this absolute basis but would not otherwise be captured using the inherent current market assumptions for future value implied by the relative valuation approaches.

3.1 Relative Valuation: Comparable Peer Analysis

The concept of relative valuation is an extension of the law of one price, which states that two assets with identical expected cash flows and risk profiles should have the same price. We expand this traditional valuation concept to the notion that two crypto-assets with identical fundamental utility value streams should have the same intrinsic price.

Leveraging this concept, two crypto-assets (or, alternately, a group of peer crypto-assets with the same primary fundamen-tal utility demand use cases) may be benchmarked against each other in assessing relative value.

Recall that the aggregate value of a token's network is derived from both its current utility value and forecasted utility value. It follows that the cryptocurrency that trades with a larger proportion of its network value derived from current utility vs forecasted utility should be less expensive on a relative basis, holding fundamental velocity and forecasted utility growth equal.

Comparable assessments of two competing cryptocurrencies may be made using a metric we call the network value to utility ratio (‘the NV/U Ratio’). The network value / utility ratio is calculated as a multiple of the token's network value at a point in time, divided by its utility demand over a selected time period. Higher utility value demand over the selected time period (e.g., one year) relative to the token's network value implies that more of the tokens are being used and fewer are being held as investments.

Network Value / Utility Ratio = Current Network Value Fundamental Utility Demand

In the terms of a traditional entity valuation, a token's network value becomes a metric akin to a traditional P/E or EV/EBITDA ratio. Alternatively, when viewed as a kind of currency, the ratio corresponds to the inverse of its velocity of money.

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Given these relationships, tokens which trade at lower NV/U ratios should be considered less expensive and thus more attractive investments.

Network Value / Trailing Utility Demand Ratio: The example below calculates the current network value relative to the fundamental utility demand seen using the network over the prior year. The strength of the trailing ratio is that it relies less heavily on forecasted assumptions about future usage. Instead, the ratio is derived from estimates of actual demand imputed using historical blockchain data. Per the trailing NV/U ratio analysis below, Token A appears the most attractively priced crypto-asset:

Network Value / Forward Utility Ratio: Markets are forward looking by nature, and the NV/U ratio is flexible enough to allow for modifications which incorporate such future expectations. Replacing trailing utility demand in the ratio with forecasted utility demand estimates allows for the consideration of future utility demand growth in the relative valuation assessment. The strength of the forward ratio is that it allows for forecasts about future usage instead of relying on histori-cal demand which may not be reflective of the network's ongoing utility. The one year forward NV/U ratios analysis below would indicate that Token B appears the most attractively priced crypto-asset using this assessment:

Network / Utility to Growth Ratio: Even factoring in forecasted utility demand may not be sufficient if the comparable tokens are located in different life-cycle phases. To account for life-cycle discontinuity, the relative valuation assessment may be further modified to include consideration of a token's long-term forecasted growth rate through use of the network value / utility demand growth ratio. Similar to a stock’s price to earnings growth ratio, the NV/U ratio is divided by its long-term expected compound annual growth rate (‘CAGR’). The result is an assessment that accounts for growth expec-tation over a multi-year period. The NV/U growth ratio analysis below indicates that Token C is the most attractively priced crypto-asset:

Token A

$75B$150B0.50

Token B

$6B$8B0.75

Token C

$3B$2B1.50

Network ValuePrior-Year Fundamental Utility DemandNetwork Value / Trailing Utility Demand Ratio

Network Value / Trailing Utility Demand Ratio

Token A

$75B$300B0.25

Token B

$6B$25B0.20

Token C

$3B$4B0.75

Network ValueNext Year Forecasted Utility DemandNetwork Value / Forward Utility Demand Ratio

Network Value / Forward Utility Ratio

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3.2 Absolute Valuation: Present Value of Utility

The absolute valuation framework joins: 1) the pure utility value expectations theory, and 2) the justified network velocity theory. These theories can be leveraged in conjunction with relative valuation approaches to estimate a network's long-term intrinsic value and the reasonableness of the amount of the network tokens currently held for investment.

Absolute valuation models for traditional financial assets have historically utilized various forms of discounted cash flow analyses.

In contrast, this cryptocurrency absolute valuation framework is based on a present value of utility assessment. Such an assessment presumes that a token is worth both the current utility it provides to users and the present value of the future capital appreciation that investors expect to gain from holding the token to peak demand. In practical terms, the absolute valuation framework understands a token's theoretical intrinsic network value from its combined pure fundamental utility value and forecasted utility value expectations for appreciation over its technology adoption and usage life-cycle.

A given amount of fundamental utility demand is generated by token users each year, creating a simultaneous minimum amount of value that must be stored in the network to facilitate that demand. The minimum network value is the amount of current fundamental utility demand facilitated divided by its theoretical fundamental velocity.

The fundamental velocity is what the network velocity would be for its given use cases absent any tokens being held for investment reasons. As demand grows over time, so too does the overall network value. With increasing network value, token investors are able to sell their holdings in exchange for higher prices or to cash them in for greater utility. The forecasted utility value is the price appreciation generated from the fundamental utility network value growth each year. Applying time value of money, this string of remaining expected value appreciation is discounted back to the present in deriving the forecasted utility value component of the network at a given time.

Having isolated the present value of forecasted utility, the investor is left with two estimates: (1) the portion of the network's total intrinsic utility value derived from current utility demand, and (2) the portion of intrinsic utility value derived from forecasted utility demand, discounted to comparable current utility terms.

A comparison of the two provides a starting basis for assessing the network's justified velocity and justified amount of held for investment tokens.

4.0 Pure Utility Value Expectation Theory: Example Application

In this business case, the PureUtilityCoin hypothetical token provides a practical illustration of our valuation framework.

Token networks, like any new technology or service offering, experience a life-cycle that includes market introduction, growth, maturity, and eventual decline.

PureUtilityCoin has a theoretical total addressable market opportunity of $1,000 a year in annual utility demand, a peak market share of 100%, 20-year life-cycle, and the adoption curve below:

Token A

0.50100%0.5

Token B

0.75150%0.5

Token C

1.50500%0.3

Network Value / Trailing Utility Ratio Forecasted Utility Growth Ratio (5 Yr. CAGR)Network Value / Utility Demand to Growth Ratio

Network Value / Utility to Growth Ratio

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The fundamental velocity must be assessed to determine the amount of value required to be stored in the network to facil-itate the annual utility demand. The PureUtilityCoin fundamental velocity is calculated based on the weighted-average velocity of its fundamental use cases as shown below:

A fundamental velocity of 10 would allow each token in the network the ability to be used 10 times in a given year to meet annual utility demand. Therefore the minimum fundamental value of the network each year is 1/10th of the annual utility demand in any given period as demonstrated below:

Use Case Percent

75%25%

Use Case Velocity

525

Weighted Velocity

3.756.25

10

Utility Use Case 1 Utility Use Case 2

Fundamental Velocity

Example Fundamental Velocity

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Market Adoption Life-Cycle

Annual Utility Demand & Current Utility Network Value

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The appreciation in current utility network value each year produces the economic benefit of price appreciation to token holders until peak annual utility demand is realized.

The forecasted utility value of the token is derived from the net present value of the appreciation in current utility network value each year.

The PureUtilityCoin forecasted appreciation in annual current utility network value is discounted at a hypothetical rate of 30 percent per year.

The chart below demonstrates changes in the current utility value of the network discounted forecasted utility value of the network relative to the remaining expected utility value:

Year 1

$2.06

$32.33

$32.33

Year 2

$5.23$3.17

$2.44$38.86

$38.86

Year 3

$12.66$7.43

$4.40$5.72

$43.09

$43.09

Year 4

$27.57$14.91

$6.79$8.82

$11.47$41.11

$41.11

Year 5

$50.00$22.43

$7.85$10.21$13.27$17.25$31.01

$31.01

Year 6

$72.43$22.43

$6.04$7.85

$10.21$13.27$17.25$17.88

$17.88

Year 7

$87.34$14.91

$3.09$4.02$5.22$6.79$8.82

$11.47$8.34

$8.34

Year 8

$94.77$7.43

$1.18$1.54$2.00$2.60$3.38$4.40$5.72$3.41

$3.41

Year 9

$97.94$3.17

$0.39$0.51$0.66$0.85$1.11$1.44$1.88$2.44$1.26

$1.26

Year 10

$99.21$1.26

$0.12$0.15$0.20$0.26$0.34$0.44$0.57$0.75$0.97$0.38

$0.38

Year 11

$99.70$0.49

$0.04$0.05$0.06$0.08$0.10$0.13$0.17$0.22$0.29$0.38$0.00

$0.00

Current Utility Network ValueForecasted Value Appreciation

Present Value - Year 1 Present Value - Year 2Present Value - Year 3Present Value - Year 4Present Value - Year 5Present Value - Year 6Present Value - Year 7Present Value - Year 8Present Value - Year 9Present Value - Year 10Present Value - Year 11

Forecasted Utility Network Value

Forcasted Appreciation in Annual Current Utility Network Value

A E N I G M a

Forcasted Utility Network Value

A E N I G M a

A E N I G M a

13

The composition of network value in the initial phases of the life-cycle is primarily derived from forecasted utility value expectations, eventually transitioning towards current utility value as the network matures. This relationship between forecasted and current utility as a percentage of the total intrinsic network value is illustrated as follows:

4.1 Justified Investment Holdings and Network Velocity Life-Cycle

Fundamental velocity or maximum velocity of use has been applied thus far in the intrinsic absolute valuation framework for forecasting current utility network value. In contrast, the intrinsic fair value of the network also includes the present value of remaining forecasted current utility value appreciation.

This expected appreciation causes investors to remove tokens from supply, thereby increasing the total network value that actually results from the current utility demand. In aggregate, the intrinsic network value is therefore greater than the current utility network value, leading to an actual total network velocity that will be lower than the fundamental velocity at certain stages of the network life-cycle.

Composition of Network ValueA E N I G M a

Composition of Total Intrinsic Network ValueA E N I G M a

A E N I G M a

14

A E N I G M a

15

Year 1

$20.58

$2.0610

$34.390.60

Year 2

$52.30

$5.2310

$44.091.19

Year 3

$126.60

$12.6610

$55.752.27

Year 4

$275.75

$27.5710

$68.684.02

Year 5

$500.00

$50.0010

$81.016.17

Year 6

$724.25

$72.4310

$90.318.02

Year 7

$873.40

$87.3410

$95.689.13

Year 8

$947.70

$94.7710

$98.189.65

Year 9

$979.42

$97.9410

$99.209.87

Annual Utility Demand

Fundamental Network Value Fundamental Velocity

Total Intrinsic Network Value Network Velocity

Example Fundamental Velocity and Network Velocity

Investors require a quantitative framework for assessing if the level of tokens held for investment, resulting velocity, and network value are justified based on long-term expectations of value. To evaluate these relationships, we have developed a theory of pure utility value expectations by leveraging our framework's assertion that the value of a network will reflect all of the current and future utility that it is expected to provide. Leveraging this theory, we observe the intrinsic network value change over the token life-cycle in the chart below:

The network's intrinsic value appreciates in the early half of its life-cycle due to increasing user adoption and current utility demand. As the network matures, the rate of value appreciation continues but at progressively slower rates until peak current utility demand is reached. Once peak utility demand has been reached, no further appreciation is expected, and the future expected returns of the network trend into negative territory.

The network value return dynamics above have underlying implications for investment behavior and overall network veloc-ity. Early in the network life-cycle, investors should be justified in removing a relatively larger portion of the token supply from the float as investment holdings in anticipation of the value appreciation to come. However, the proportion of removed tokens must appropriately trend towards zero through the life-cycle until peak utility demand is reached.

Investors holding too few tokens will create a network value that is unjustifiably low, thus allowing investors to receive a rate of return above the required market rate of return. Investors holding too many tokens will either achieve a rate of return below market rate or, worse yet, be forced to take losses once utility demand has surpassed its peak.

The justified level of investment holding and network velocity should therefore be regarded as the economic equilibrium level of these metrics that causes investors to receive the market required rate of return on the crypto-asset over its adop-tion life-cycle.

A E N I G M a

Intrinsic Network Value Change

A E N I G M a

Under holding of Tokens

Justified holding of tokens

Over holding of Tokens

Amount of Tokens Held by Investors

Below intrinsic value

Intrinsic value

Above intrinsic value

Network ValueImplications

Above justified velocity

Justified velocity

Below justified velocity

Network VelocityImplications

Above market returns

Equilibrium market return

Below market returns or investment losses

Investor ReturnsImplications

The chart below illustrates the reduction in the justified amount of tokens that should be held for investment along the life-cycle as the remaining expected appreciation approaches zero. The reduction in the justified investment holdings produces an increase in the justified network velocity until it reaches the fundamental velocity at peak current utility demand.

The total intrinsic value change comprises the change in current utility value attributed to users and the change in forecasted utility value attributed to investors. Note that the total intrinsic network value change describes net value creation over the life-cycle but does not identify the method by which value creation is captured and extracted.

Rather, the combined effects of network intrinsic value change and changes in the justified investment holding and veloc-ity determine the method of value capture and extraction between parties. The composition of the network value change attributed to the change in current utility network value is derived from the change in current utility demand divided by the fundamental velocity.

Investors capture the network value creation over time through a combination of the following:

Investment Holdings Sold (Network Value Extraction): Network value is extracted as gains on held for investment tokens are incrementally sold to the active usable supply. These transactions keep the market in line with the justified level of investment holdings. Sold investment holdings are returned to the network and result in an increase to the network veloci-ty and a reduction in the required network value. These extraction or network money outflows can be offset by new network money inflows from current demand.

A E N I G M a

Justified Network Velocity & Investment Holdings

A E N I G M a

A E N I G M a

16

Investment Holdings Value Appreciation: Remaining tokens that are held for investment capture unrealized gains from network value appreciation. The majority of appreciation is derived from increasing adoption and the money flows related to current utility demand.

The composition of these changes as a result of network appreciation and extraction through the token life-cycle is repre-sented as a continuum below:

As the intrinsic network value accretes during years 1-10, token-holding investors are the primary beneficiaries of the network's value creation. Once peak utility demand is realized, forecasted utility value returns through years 11-20 become negative, and there is no longer an incentive to hold tokens for investment. For fundamental users, the network value decreases in the latter half of the life-cycle are socialized over token users who must view them as an acceptable added cost of accessing its fundamental utility during the period of exchange.

5.0 Conclusion

Our model demonstrates the value of a token is not its scarcity or utility as a store of value. Instead, a token’s value is a reflection of the utility expectations of its users, now and in the future. In developing an expectation of this current and future utility and the resulting valuation, we have presented both relative and absolute valuation frameworks. Our relative valuation framework provides investors with a short to medium term outlook on the value of a token relative to its peers. The absolute valuation framework takes the long view, using Pure Utility Value Expectation theory and the computation of Justified Investment Holdings throughout the network velocity life cycle to gauge the long-term attractiveness of an investment.

When leveraged in totality, the product is a fundamental valuation framework that objectively quantifies the attractive-ness of crypto-assets to make better investment decisions.

Composition of Total Intrinsic Network Value Change

A E N I G M a

A E N I G M a

17

6.0 Appendix

Year 1

2.06%$20.58

10

$2.06

$32.33

$34.39

94.02%5.98%

100.0094.025.98

0.60

Year 2

5.23%$52.30 $31.72154%

10

$5.23$3.17

154.15%$38.86$6.53

20.19%

$44.09$9.70

28.20%

88.14%11.86%

100.0088.1411.865.88

1.190.59

98.23%

($2.02)$8.55$6.53

Year 3

12.66%$126.60 $74.30142%

10

$12.66$7.43

142.06%$43.09$4.23

10.88%

$55.75$11.6626.44%

77.29%22.71%

100.0077.2922.7110.85

2.271.08

91.44%

($4.78)$9.01$4.23

Year 4

27.57%$275.75 $149.14

118%

10

$27.57$14.91

117.80%$41.10($1.99)-4.61%

$68.68$12.9323.19%

59.85%40.15%

100.0059.8540.1517.44

4.021.74

76.81%

($9.72)$7.74

($1.99)

Year 5

50.00%$500.00 $224.25

81%

10

$50.00$22.4381.33%$31.01

($10.09)-24.56%

$81.01$12.3317.95%

38.28%61.72%

100.0038.2861.7221.57

6.172.16

53.73%

($14.81)$4.72

($10.09)

Year 6

72.43%$724.25 $224.25

45%

10

$72.43$22.4344.85%$17.89

($13.12)-42.32%

$90.31$9.30

11.48%

19.81%80.19%

100.0019.8180.1918.47

8.021.85

29.93%

($14.96)$1.84

($13.12)

Year 7

87.34%$873.40 $149.14

21%

10

$87.34$14.9120.59%$8.34

($9.55)-53.38%

$95.68$5.375.94%

8.72%91.28%

100.008.72

91.2811.09

9.131.11

13.83%

($10.02)$0.47

($9.55)

Year 8

94.77%$947.70 $74.30

9%

10

$94.77$7.438.51%$3.41

($4.93)-59.09%

$98.18$2.502.61%

3.47%96.53%

100.003.47

96.535.24

9.650.52

5.74%

($5.02)$0.09

($4.93)

Year 9

97.94%$979.42 $31.72

3%

10

$97.94$3.173.35%$1.26

($2.15)-62.99%

$99.20$1.021.04%

1.27%98.73%

100.001.27

98.732.20

9.870.22

2.28%

($2.16)$0.01

($2.15)

Year 10

99.21%$992.06 $12.64

1%

10

$99.21$1.261.29%$0.38

($0.89)-70.15%

$99.58$0.380.38%

0.38%99.62%

100.000.38

99.620.89

9.960.09

0.91%

($0.89)$0.00

($0.89)

Market Share Annual Utility Demand Change $ Change %

Fundamental Velocity

Current Utility Network Value Change $ Change % Forecasted Utility Network Value Change $ Change %

Intrinsic Network Value Change $ Change %

Forecasted Utility Network Value %Current Utility Network Value %

Total Issued Token Supply Less: Justified Investment HoldingsActive Token Supply Change

Justified Network Velocity Change Change %

Composition of Forecasted Change Sold Investment Holding Value GainedInvestment Holding Value AppreciationTotal Forecasted Network Value Change

Example – Pure Utility Value Expectation Theory (Part 1 of 2)

A E N I G M a

A E N I G M a

18

Year 11

99.70%$996.96

$4.900%

10

$99.70$0.490.49%$0.00

($0.38)

$99.70$0.110.11%

0.00%100.00%

100.00-

100.000.38

10.000.04

0.38%

($0.38)$0.00

($0.38)

Year 12

97.64%$976.38($20.58)

-2%

10

$97.64($2.06)-2.06%$0.00$0.00

$97.64($2.06)-2.06%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 13

94.47%$944.66($31.72)

-3%

10

$94.47($3.17)-3.25%$0.00$0.00

$94.47($3.17)-3.25%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 14

87.04%$870.36($74.30)

-8%

10

$87.04($7.43)-7.87%$0.00$0.00

$87.04($7.43)-7.87%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 15

72.12%$721.22

($149.14)-17%

10

$72.12($14.91)-17.14%

$0.00$0.00

$72.12($14.91)-17.14%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 16

49.70%$496.96

($224.25)-31%

10

$49.70($22.43)-31.09%

$0.00$0.00

$49.70($22.43)-31.09%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 17

27.27%$272.71

($224.25)-45%

10

$27.27($22.43)-45.12%

$0.00$0.00

$27.27($22.43)-45.12%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 18

12.36%$123.57

($149.14)-55%

10

$12.36($14.91)-54.69%

$0.00$0.00

$12.36($14.91)-54.69%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 19

4.93%$49.27

($74.30)-60%

10

$4.93($7.43)-60.13%

$0.00$0.00

$4.93($7.43)-60.13%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Year 20

1.75%$17.54

($31.72)-64%

10

$1.75($3.17)-64.39%

$0.00$0.00

$1.75($3.17)-64.39%

0.00%100.00%

100.00-

100.00-

10.00-

0.00%

$0.00$0.00$0.00

Market Share Annual Utility Demand Change $ Change %

Fundamental Velocity

Current Utility Network Value Change $ Change % Forecasted Utility Network Value Change $ Change %

Intrinsic Network Value Change $ Change %

Forecasted Utility Network Value %Current Utility Network Value %

Total Issued Token Supply Less: Justified Investment HoldingsActive Token Supply Change

Justified Network Velocity Change Change %

Composition of Forecasted Change Sold Investment Holding Value GainedInvestment Holding Value AppreciationTotal Forecasted Network Value Change

Example – Pure Utility Value Expectation Theory (Part 2 of 2)

6.0 Appendix (Continued)

A E N I G M a

A E N I G M a

19

A E N I G M a

20

This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. Securities of Aenigma Fund I LP (the “Fund”) managed by Aenigma Capital LLC (“Aenigma”) are offered to selected investors only by means of a complete offering memorandum and related subscrip-tion materials which contain significant additional information about the terms of an investment in the Fund. This presentation is not intended as a recommenda-tion to purchase or sell any digital asset.

An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is the possibility of loss and all investment involves risk including the loss of principal. Securities of the Fund are not registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions.

The information in this presentation was prepared by the General Partner, but the General Partner makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of General Partner, are necessarily speculative in nature and are subject to change without notice. The General Partner has no obligation to update or amend this presentation or to notify a reader thereof in the event that any matter stated herein, or any opinion, project on, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

This presentation is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express consent of the General Partner.

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