Valuation of Governance Tokens of Protocols with Treasury with this 3 Factors

One question I get asked a lot is what value does governance token have? It’s not any different from the valuation of the shares of a company really!

To say that governance tokens have no value is the same as saying the shares of a company have no value.

To understand how to place a price on the governance token of a protocol we can look at a few factors:

  1. Protocol Governance (aka Constitution)
  2. Treasury (aka Book Value)
  3. Earnings & Growth Potential (aka Price-to-book Ratio)

Protocol Governance

A company constitution is a legal document that spells out the rules and regulations on how the company should be governed. It’s what traditional equity investors look out for when they are trying to understand what rights are they given when they own shares of a company. Some questions you might ask is:

  • How are decisions made at the highest level?
  • Is there a different weightage of votes?
  • What are the power and duties of directors?
  • How are meetings and resolutions conducted?

Similarly in DeFi, the protocol governance plays a similar role as the company constitution. This translates to:

  • How are protocol changes made at the highest level?
  • Are there different voting rights (veTokens changes this)?
  • What are the power and duties of multisig key holders? Or maybe there is no keyholder as the votes as self-execution?
  • How is deliberation done at the protocol?

This is important in valuing the governance token because the less power is vested to the governance token holder, the less likely they will be able to do things like:

  • Evicting existing key holders or adding additional key holders
  • Propose changes to remuneration of development team and grants
  • Liquidation of treasury pro-rata to token ownership (ie share buyback)
  • etc


The book value of a company is the value of an asset according to its balance sheet account balance. It serves as a very important metric as it is the total value of the company’s assets that shareholders would theoretically receive if a company was liquidated.

Similarly in DeFi, one has to look at the value of assets (minus liabilities) that the protocol control. It is usually in the form of other assets (ie DAI) [1].

This figure gives you an idea of the minimal amount of assets you are entitled to should the protocol decide to liquidate the entire protocol and distribute the liquidated assets pro-rata to its governance token holders [2].

Earnings & Growth Potential

The Price-to-Book Ratio (or P/B Ratio) measures the market’s valuation of a company relative to its book value and is used to reflect how the market is valuing the company (based on growth, expected future cash flow, etc).

Typically, this number is above 1, which means that the company is worth more than the value of its current assets. Most analysts in TradFi space will use the P/B ratio of different companies operating in similar sectors and adjust them with the growth potential of a specific company to determine what is a reasonable P/B ratio for that company.

DeFi users can look at the P/B ratio of different protocols in the same space or even across to TradFi to have an understanding of what would be a fair P/B ratio to use to value the governance token of a protocol.

Using this Method to Value Protocols Governance Tokens

DeFi presents a new challenge to value protocols using the traditional method but we can certainly use this method to find out what are the reasonable limits to the price of a governance token.

With this method, we can likely form the lower and upper limits to a protocol governance token.

The lower limit will be the value of treasury multiplied by the unlikelihood of a governance failure (or rug) multiplied by the book value of 1.

For example, if a protocol has:

  • 1 mil DAI in treasury
  • Doxxed team with solid reputation (governance = 1)
  • 200k tokens that are issued

The lowest price of the governance token should trade at $5

Similarly, if the protocol has:

  • 100 mil USD (held in veAbcdWrappedUSDT-cowMonkeyKoin)
  • Anonymous team with only 1 month of on-chain activities
  • 1B token, claiming only 100k is in circulation but the rest are not liquidity locked

After applying necessary discounts to the redeemability of the asset, the protocol governance token may only have a floor price of $0.005.

For the upper limit, you might want to multiply the floor by 1000x (on the assumption that a protocol is unlikely to grow 1000x in a short span of time) to get a sense of when a protocol becomes “too expensive”.

You may be surprised how many protocols’ governance tokens seemly broke physics here.

[1] I will debate that in the case where the treasury holds governance tokens that is unissued to exclude their value from calculation unless it’s a repurchased token which will then be reflected as truly treasury tokens. See for discussion on accounting for unissued shares.

[2] If the price of the governance token is trading under the Book Value Per Share (BVPS), there is an arbitrage opportunity to purchase those tokens to increase your earnings during the liquidation. So if the governance is well in place and the token holders do have the right to liquidate the assets, it forms a hard floor for the price of the governance token. For protocols with weak governance (ie undoxxed team) apply the necessary discount.

The author is the CTO of Bluejay Finance. Bluejay Finance is an Asia-focused capital-efficient protocol for multi-currency stablecoins. Our aim is to bring the FX market to DeFi, in order to accelerate financial inclusion for all users and businesses.

We are currently pre-launch as we run rigorous tests on our protocol. You may subscribe to our newsletter or get involved in the following ways:


Not financial advice. Do your own research.




CTO @ Bluejay Finance. Writes about personal finance, risk management & decentralized finance.

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Raymond Yeh

Raymond Yeh

CTO @ Bluejay Finance. Writes about personal finance, risk management & decentralized finance.

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