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The Rocket Pool Investment Thesis, Round 3

A thesis by boodle

This is not financial advice and you should follow up with your own research.

(source: Reddit - March 13, 2021)

Table of Contents
Price-to-Earnings Ratio

Some of us in the Rocket Pool Discord have been talking about why we think Rocket Pool and more specifically the Rocket Pool token (RPL) is undervalued at this time. We wanted to share these thoughts with the community. If you missed first two rounds please go back and read those before proceeding.

  1. A very thorough overview of what makes Rocket Pool a strong protocol from Xer0. The price prediction is based on an ‘Absolute Minimum’ valuation necessary based on protocol insurance. The predicted value was 0.035 on the RPL/ETH ratio, meaning that a $2000 ETH would give $70 RPL. As was stated, this is a conservative prediction. The Rocket Pool Investment Thesis

  2. Valuation based on ‘Total Value Locked’ from PSY_TWEAK. This metric is commonly used to price DeFi protocols as noted in the original post. The predicted value was between 0.034 and 0.136 on the RPL/ETH ratio depending on the TVL. The Rocket Pool Investment Thesis, Speculative Edition

Price-to-Earnings Ratio

Here, I want to explore a third metric, the Price-to-Earnings (PE) ratio. This metric is another that is often used to value DeFi protocols (and more generally in traditional finance). PE ratios should only ever be used to value companies or protocols within a given sector, so please do not interpret the following analysis against traditional stocks, etc.

As was described nicely in the first post from Xer0, the Rocket Pool protocol produces revenue by charging a commission from rETH stakers. This commission comes from stakers and is awarded to node operators, so revenues are produced by only 16 ETH per minipool (half of the total ETH locked). The exact rate can vary depending on the demand for staking services.

Figure 1: Price-to-Earnings for a given number of ETH staked by rETH holders. This assumes a circulating supply of 18M RPL, 8.5% rewards on staked ETH, and an average commission of 10%.

Above, you can see a range of PE ratios for a fixed number of ETH deposited into the pool by rETH stakers. Here, I am using the same number of ETH staked as was assumed by Xer0 in their first post. Using their ‘minimum ratio’ of 0.035, I find a PE ratio of ~ 30. Token Terminal shows PE ratios (they say ‘price-to-sales’) for other defi protocols were: COMP - 13; UNI - 29; AAVE - 59; SNX - 133. By this metric, RPL would be valued similar to UNI’s current valuation if 2.5M ETH were staked and the RPL/ETH ratio was 0.035. Below is a more comprehensive plot of the same figure as above, just with a variety of values for the number ETH staked.

Figure 2: Same as in Figure 1, but for a range of values for the number of ETH staked. The same assumptions are made as in Figure 1.

Based on the projected price-to-earnings ratio, I agree with both Xer0 and PSY_TWEAK that RPL could easily achieve an ETH ratio of 0.035 assuming that audits and launch go smoothly and that this is the predominant staking platform.

As was mentioned in other posts, please come talk to us in the Rocket Pool Discord! We are there every day :)

Edit: The numbers on TokenTerminal have changed a bit, but you get the idea.