Not Financial Advice. Just the opinion of a couple of Apes.
https://twitter.com/MBApesNFT

Section 1: Summary

Executive Summary: $JOE is the token of the Trader Joe decentralized finance platform on the Avalanche blockchain. The platform offers decentralized trading, borrowing / lending, staking, yield farming and soon an NFT marketplace. I believe $JOE is undervalued as the market 

1.) does not fully recognize the potential of the Avalanche blockchain; 2.) underappreciates the project’s strong moat and innovative team; 3.) overestimates the risk of customer departure as reward emissions decline. 

Through my analysis, I arrive at a market cap of $422.5 million utilizing the average of a DCF and market approach, representing 124.3% upside from the current price.

Section 2: Overview

Company Overview: Trader Joe is a one-stop-shop defi platform on the Avalanche blockchain. The company earns protocol revenue through three distinct revenue streams — 1.) Swap Fees — 0.05% of every swap is converted to USDC and distributed to staked holders; 2.) Lending through Banker Joe platform; 3.) Protocol Owned Liquidity — Trader Joe owns 27.5% of its JOE-AVAX Liquidity Pool and receives 0.25% of swap fees on its holdings. Furthermore, the protocol plans to launch an NFT marketplace in Q1 2022 and will earn an estimated 3.0% of all sales on the platform. The project was founded by Cryptofish and 0xMurloc, both full-stack and smart contract engineers that have experience working in big tech and running startups in the crypto space.

Tokenomics: Trader Joe incentivizes users to hold its token $JOE by offering Modular Staking (multiple staking options). This means that you can stake $JOE in any of the three pools outlined below to earn rewards:

1. Rocket Joe — Innovative launchpad that facilitates fair market price discovery. Holders can stake $JOE to earn rJoe. Users require rJOE to participate in the launch event and rJoe is non-transferable. In short, if you want to invest in new, exciting projects on the platform (I hear $YETI is launching soon…) then you need to buy and stake $JOE.

2. sJOE — All swap fee revenue is converted into stablecoins and then distributed to sJOE holders.

3. veJOE — Users stake $JOE to accrue veJOE overtime. The more veJOE you accrue, the higher your $JOE yield in selected farms. veJOE will also provide future governance power.

Check out Trader Joe’s Website to learn more — https://docs.traderjoexyz.com/main/trader-joe/staking

Analysis: Trader Joe’s Modular Staking structure provides incredible long-term value and utility for its holders.

First, Rocket Joe is a unique launchpad that decreases initial volatility by its fair market price discovery mechanism. Every new project launching on Avalanche will want to partner with Trader Joe, cementing Trader Joe as the center of the Avalanche universe. Furthermore, you need to own and stake $JOE to accrue rJOE. Therefore, to participate in new launches users must acquire and hold $JOE.

Second, sJOE allows users to take advantage of the platform’s revenues. Every dollar of the protocol’s swap fees is paid out directly to sJOE holders in the form of stablecoins — users can now receive a daily dividend in USD! This will remove downward sell pressure from $JOE rewards and encourage users to reinvest in the Avalanche ecosystem (promoting more swaps, activity, etc.). In fact, ~50% of users that harvest their $USDC rewards daily are compounding it back into sJOE by buying more $JOE.

Finally, veJOE (which will be launched this week) rewards the most bullish $JOE advocates to hold for the long-term. The staking option allows users to boost their yield on selected farms and will offer voting rights on future governance proposals. Furthermore, it offers unique economics that will benefit the entire community — veJOE is accrued over-time, is non-transferrable and is lost when the underlying $JOE is unstaked. Therefore, veJOE incentivizes users to hold long-term (diamond hands) and may lead to an accumulation war (i.e. the $JOE Wars) between large bag holders. Similar locking structures including Curve / veCurve and more recently PTP / vePTP (Platypus Finance) have resulted in massive price appreciation for the underlying token as users compete for more rewards and voting rights. In fact, new businesses have launched to capitalize on the innovative tokenomic design. Echidna and Vector are two such examples (both launched via Rocket Joe), the two protocols are solely focused on acquiring and locking PTP / vePTP to create lucrative stablecoin yield farms. In the first week of launch, Echidna and Vector have combined to acquire and stake (forever!) over 15% of the circulating PTP supply. Trader Joe has a larger community than Platypus, is a cornerstone of the Avalanche community and is perfectly positioned to capitalize off the new tokenomics design of veJOE. There are already several businesses that profit off Trader Joe yield farming that are primed to compete in the future $JOE Wars including Avalanche staples such as Yield Yak and Penguin Finance. Others like Echidna and Vector will also most likely compete for $JOE and build profitable businesses on top of Trader Joe’s platform. The business model is simple, 1. Accumulate veJOE to boost your yields, 2. Offer users higher yields than they currently earn, and 3. Take a percentage of each reward. Users will receive the benefit of higher yield (even net of fees) and the protocols will earn steady revenue. Win-Win-Win! The new staking option will benefit the entire community and launch a new wave of growth for $JOE.

Overall, Trader Joe’s innovative Modular Staking approach provides utility through Rocket Joe launchpad and voting rights, offers direct revenue participation with sJOE and incentives long-term holders with veJOE.

Section 3: Investment Research

Potential of Avalanche Blockchain

Avalanche is a decentralized, scalable blockchain solution that focuses on low costs, fast transactions, and eco-friendliness. The efficient blockchain currently ranks 4th in Total Value Locked (TVL) and is only 1 of 2 blockchains in the top 8 to grow over the past month, driven by the introduction of liquid staking on Benqi and Platypus Finance’s innovative stablecoin yield farm. In the next few weeks, Yeti Finance will also launch its platform. Yeti will allow users to leverage up to 11x against their entire portfolio and will unlock billions of additional capital on the blockchain. Furthermore, Avalanche is achieving record user growth as well, from 20,194 monthly active users in July 2021 to 800,614 in January 2022. As the blockchain continues to add functionality, users will continue to flock to Avalanche for lower fees and faster transactions. Finally, the next stage of growth is here, and subnet season has finally arrived! With the integration of subnets, Avalanche can scale horizontally and allow protocols to create application-specific blockchains (customized gas fees, decentralization, time to finality, etc.). In March 2022, the Avalanche Foundation announced a $290 million incentive program to accelerate the growth of subnets. Several exciting projects including DeFi Kingdoms (play-to-earn world to explore) and Shrapnel (AAA First-Person shooter) have signed on, as well as established institutional capital including Golden Tree Assets, Jump Capital and Valkyrie Funds that will build the future of Institutional DeFi with native KYC functionality. This will usher in the next wave of growth as users flock to play the most exciting games and institutions begin to move finance onto the blockchain. Ultimately, as Avalanche continues to add users and institutional capital, Trader Joe will benefit as the prominent defi platform on the chain.

Learn more about the subnet initiative here

Trader Joe’s Dominance

Trader Joe is the leading decentralized exchange (DEX) in terms of trading volume and total value locked on a fast-growing blockchain (Avalanche). The protocol currently averages 8 times more daily trading volume than closet competitor Pangolin with 5 times more users over the last 30 days. After launching in August, Trader Joe has already surpassed $1B trading volume in a single day and temporarily reached over $2.0B in TVL on the protocol. The project is embraced by the Avalanche community and its brand serves as a strong barrier to entry for future competitors. Furthermore, Trader Joe’s forward-thinking team will continue to adapt to the changing environment and implement new projects that add utility to its token, bring in new revenue streams and engage its community. The Trader Joe team has a track record of success. In just six months since launch, the team has already added a suite of products including Banker Joe (a borrowing / lending protocol), created lucrative partnerships with other key players on the blockchain and started using revenues to acquire Protocol Owned Liquidity to improve price stability and open an additional revenue stream. Furthermore, the team has revamped its tokenomics with modular staking (get ready for the $JOE Wars) and will launch an NFT marketplace by the end of Q1 2022. The leadership and engineering team have a great understanding of the market and constantly look to innovate, which is essential in an industry that is changing at exponential rates. Overall, between the growth of the blockchain, Trader Joe’s dominate position, the potential of institutional capital and the launch of new revenue streams, Trader Joe has multiple avenues to maintain its high growth into the future.

The Market Overestimates Departure Risk

In the defi community there is a current narrative (given the rapid decline of Sushiswap) that users are agnostic to exchanges and will simply follow the highest rewards; therefore, as reward emissions decline then projects like Trader Joe will lose its customer base. However, it’s unfair to compare Sushiswap to other exchanges due to several project specific problems within the protocol. First, Sushiswap lost key members of its leadership and engineering team that chose to pursue other interests. Trader Joe’s team is eager and hungry to innovate, the founders are dedicated to the community and take a long-term view. Secondly, Sushiswap is behind Uniswap in terms of trading volume and TVL on its native blockchain and could not offer a best-in-class product. On the other hand, Trader Joe dominates Avalanche in both categories and therefore, can offer a superior service and better prices than its competitors. As more resources, including institutional money, enter Avalanche they will flock to Trader Joe as the safest, most reliable DEX on the chain. Finally, Trader Joe understands the limitations of operating solely as a DEX and has started to add additional revenue streams. By acquiring Protocol Owned Liquidity (POL), Trader Joe is in control of its own destiny. The protocol can become self-sustaining and allocate valuable resources to other areas. Furthermore, Banker Joe and the NFT Marketplace will provide supplementary income to sustain operations and fund further growth projects. Overall, Cryptofish and 0xMurloc are taking a long-term approach, adding functionality, revenue, and liquidity and ultimately, building a company that will last.

Section 4: Key Risks and Assessments

Competitive Landscape

The Trader Joe platform is a fork of Sushiswap and therefore, easy to replicate for competitors. Furthermore, decentralized finance encourages openness and interoperability between dapps, making switching costs negligible. Therefore, competitors (i.e. Pangolin and Hurricane Swap) can emerge offering better reward incentives and taking Trader Joe’s market share on the Avalanche blockchain.

Long-term Underperformance of Digital Asset Industry

Overall, Trader Joe and any DeFi platform relies on the growth of the cryptocurrency industry. Fees are determined as a percentage of total use and therefore, its growth will directly correlate with the health of the entire ecosystem and Avalanche blockchain moving forward.

Cryptocurrency Regulation

There’s a lot of uncertainty moving forward about the regulation of the cryptocurrency industry. Changes in rules related to taxation and the structure of decentralized autonomous organizations (DAOs) will have a major impact on profitable in the future.

Section 5: Valuation

Discounted Cash Flow

I derived my base case valuation by forecasting the next 7 years. I utilized a step down from 4.0% monthly growth for total trading volume on Avalanche in 2022 to 0.25% in 2027 (3.0% annual growth rate), which also served as the perpetual growth rate (in line with inflation expectations — insert inflation joke here). Furthermore, I haircut Trader Joe’s market share of total trading volume from 85% in 2022 to 70% in 2027 to consider the potential of new competition. I maintained Banker Joe Revenue flat throughout the forecast, given the limited growth over the past month. Banker Joe Revenue calculated by (Borrowed Total x Borrowing APY) — (Deposited Total x Deposit APY) for each digital asset. Rewards are not included given they are released as part of the emissions schedule. Protocol Owned Liquidity considers the current 30-day average trading volume of the liquidity pool as a percent of total trading volumes (7.5%), in addition to the protocol’s ownership percentage (27.5%) and swap fees (0.25%). Protocol’s ownership of pool increased from 27.5% in 2022 to 50.0% by the end of the forecast given the project’s commitment to building own liquidity pools. Finally, the NFT Marketplace utilizes total NFT sales on Avalanche and a market share of 50.0% given Trader Joe’s dominant brand and strong user experience and an industry standard 3.0% transaction fee on sales. (Note: NFTs are still early on Avalanche blockchain and have significant potential to outperform this forecast moving forward) …. Plus, I hear there’s a pretty cool NFT launching soon, learn more at http://mbapesacademy.com/

Discount Rate: The Beta of 3.0x considers the inherent volatility in the cryptocurrency markets at this time. The Market Rate estimate for a small tech company considers that Trader Joe is already profitable and growing month over month.

Note: Token inflation related to emissions won’t impact market cap, just price per coin. 1. Most costs are considered in token emission schedule (i.e. pay engineers, incentivize leadership); utilized $5.0m to consider additional costs that might arise related to hiring / marketing. 2. No information available; Protocol currently has at least $5.0 million in assets based on normal course of business

Note: DCF for early-stage businesses (especially in crypto) are very difficult. A Sensitivity Analysis provides more insight into the wide range of potential outcomes.

The concluded market cap of $410.6 million represents a 117.9% increase from the current market cap of $188.4 million.

Market Analysis

For this section I utilized a sum of parts analysis to consider Trader Joe’s multiple revenue streams — Decentralized Exchange (Swap Fees), Banker Joe (Borrowing / Lending), Protocol Owned Liquidity and an NFT Marketplace.

Decentralized Exchange

Note: Trader Joe Protocol Revenue above does not include Banker Joe, NFT Marketplace or POL revenue streams. Data via Token Terminal as of March 8, 2022. Annualized Protocol Revenue based on most recent 30-day period. Prior period reflects valuation as of December 7, 2021.

Since the Q4 2021 valuation, the total cryptocurrency market cap has declined by 18.7%, leading to lower annualized protocol revenue across the board. Avalanche, specifically, has experienced a further decline in trading volume as evidenced by a 61.1% decline in Protocol Revenue for Trader Joe and a 66.9% decline for Pangolin. SpookySwap is the one exception as it increased its Protocol Revenue by 208.5% since the prior valuation, driven by an 86.8% increase in total value locked on its native blockchain (Fantom).

Trader Joe is trading at a noticeable discount to its peers (including Pangolin) in terms of MC / TVL and MC / Revenue, despite offering a superior product and having a stronger brand. Trader Joe should trade at a premium to other players in the space given its rapid growth and domination of a promising blockchain.

Trader Joe utilizing a MC / Protocol Revenue equal to the mean of the comparable company set would imply a market cap of $328.1 million.

Banker Joe

To keep this section simple, I utilized the closest comparable company — Benqi — as the focal point of my analysis. Benqi is a liquidity market on the Avalanche blockchain that offers a similar product to Banker Joe. Users can utilize the platform to supply, borrow and earn interest on their digital assets. According to Token Terminal, Benqi currently trades at a multiple of 18.21x Annualized Protocol Revenue (excluding revenue from liquid staking). Banker Joe utilizing a MC / Protocol Revenue equal to the closest comparable company would imply a market cap of $61.4 million.

Note: Banker Joe Revenue calculated (Borrowed Total x Borrowing APY) — (Deposited Total x Deposit APY) for each digital asset. Rewards are not included given they are released as part of the emissions schedule.

Protocol Owned Liquidity

There are no projects that solely offer POL. The most similar concept would be a decentralized exchange given that the revenue is still generated from swap fees. The main difference here is that POL earns 0.25% of each swap fee versus a DEX that earns 0.05%. Therefore, I will simply utilize the same MC / Protocol Revenue multiple that I used to value the decentralized exchange revenue steam. Trader Joe’s POL Revenue as a standalone entity, utilizing a MC / Protocol Revenue equal to the mean of the comparable company set would imply a market cap of $42.4 million.

NFT Marketplace

Finally, the NFT Marketplace is set to launch by the end of Q1 2022 and therefore, should be included in the analysis. There is no data available for Kalao or NFT Trade (the two current NFT Marketplaces on Avalanche) and therefore, I utilized LooksRare for my analysis. It’s also worth noting that Opensea does not have a token or Protocol Revenue. LooksRare operates on the Ethereum blockchain and offers a similar service. According to Token Terminal, LOOKS currently trades at 1.0x MC / Protocol Revenue. The NFT Marketplace utilizing a MC / Protocol Revenue equal to the closest comparable company would imply a market cap of $2.6 million.

Sum of Parts Analysis

The sum of parts analysis outlined above concludes a market cap of $434.5 million, which represents a 130.6% increase from the current market cap of $188.4 million.

Section 6: Conclusion

Overall, through the analysis present above, I have concluded a market capitalization of $422.5 million for Trader Joe ($JOE), representing 124.3% upside from the current price. Trader Joe’s new tokenomics will serve as a catalyst to unlock the next stage of value for the underlying token and propel $JOE to trade more in line with its peers. Given Trader Joe’s robust suite of products, strong brand and innovative team, Trader Joe is poised for a bright future.

Section 7: Sources

https://stats.avax.network/dashboard/c-chain-activity/

www.dappradar.com/rankings/protocol/avalanche

www.defillama.com

www.tokenterminal.com

www.coinmarketcap.com/

https://medium.com/@traderjoe-xyz

https://docs.traderjoexyz.com/main/welcome/master

Disclosure: I/we own $JOE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company that is mentioned in this article.

First Published here