A datatoken valuation heuristic

Antaraxia -

Background

In dynamically priced datatoken markets, it is difficult to determine if the current market price represents a fair value for access to the underlying data asset. Investors might risk paying a significant speculative premium when buying datatokens in the absence of objective measures of the intrinsic value of a data asset.

Proposal

Determine the market value of the base IP of the data asset. This could be through market valuation where available or through the bid price for an auction of the tokenized base Intellectual Property (IP) of a Data asset (as a data NFT using Ocean V4, for instance).

Simultaneously, tokenize data access rights using ERC20 datatokens (e.g. Ocean datatokens)

List the datatokens on dynamically priced marketplaces (e.g. Ocean Marketplace Pools).

When the market capitalization of the datatokens exceeds the valuation of the dataNFT/base IP, the datatokens are overvalued relative to the base IP.

Reasoning

Base IP can generate immense, ongoing value for holders of the IP. The present value of the Base IP is (ideally) the market determined value of all future cash flows that will be generated by the base IP, discounted to the present.

Datatokens typically provide access to a data asset, but not ownership of the base IP. The market capitalization of datatokens should be less than the market value of the base IP. Why? Because Base IP can be used to generate more ongoing value than a specific creative instance of this IP.

Let's examine this reasoning by means of an analogy.

Analogy

Having the sole creative copyright for the Harry Potter franchise would have enabled one to sell books, movies, license rights for use of the name, and a whole universe of other commercial applications.

Would it make sense if the market valuation (sum of prices of all units) of a new Harry Potter book suddenly exceeded the current market value of the copyright? If the copyright were marked to market, it should be a lot more valuable than the market valuation of the new book.

Implication for datatokens

In efficient datatoken markets, the situation in the analogy above should be reflected. If the market capitalization of datatokens exceeds the Base IP valuation, it should mean that the datatokens are relatively overvalued. This seems true almost by definition.

In non-efficient datatoken markets, the overvaluation heuristic might be useful to determine if a given datatoken has a significant speculative premium baked into its price.

Determining if a datatoken is undervalued is a lot trickier. Based on the discussion above, it would be normal for the market capitalization of datatokens to be less than the Base IP. How much lesser is much more difficult to estimate.

For static assets - assets that don't change with time - the ratio of market cap to Base IP valuation should tend to 1 since access and ownership are identical. Deviations from 1 will determine if the static data asset is over or undervalued.

For dynamic data assets, the undervaluation heuristic fails. This is mainly because it is unclear how the underlying asset will evolve with time. It is therefore possible that the Base IP will also reflect this uncertainty and will change with time.

How do we decide if the market valuation of the Base IP isn't too speculative? It is possible that we may not be able to arrive at the intrinsic valuation of a data asset independent of it's subjective use. Market pricing mechanisms such as auctions are a good way to reflect subjective worth to participants. This is, in principle, a good way to determine the maximum current worth of a data asset.

That said, in overheated markets such as JPEG-NFT community markets (Apes, CryptoKitties, ...), participation may be based on the assumption of the presence of greater-fools and not subjective utility.

Conclusion

The ratio of the NFT-tokenized Base IP valuation to the market cap of equivalent datatokens can be useful to determine relative overvaluation in dynamically priced datatoken markets. Ocean's V4 release provides a mechanism for the release of dataNFTs that should allow, in principle, such a valuation to be possible.

The topic of intrinsic valuation of data (i.e. independent of it's many possible end users) is a fascinating and unsolved. I discussed this in a previous article series. Craig Danton has also written on this topic. If you'd like to collaborate on the topic of data (and datatoken) valuation, please don't hesitate to reach out on Twitter (@antaraxia_kk).

Notes

  1. One fairly obvious (and very valid) critique of this heuristic is that it requires the market valuation of the base IP. While this might be unreasonable in some cases, the release of Ocean V4 has me hopeful in this regard.
  2. The data NFT concept is discussed in more detail in the latest version of the Ocean whitepaper.
  3. I've compiled a list of working notes on the topic of data valuation. Those interested can take a look here.