Editor's note: Seeking Alpha is proud to welcome Vash Marada as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »
After the burst of the cryptocurrency bubble, things have been mostly in the doldrums when it comes to price action. In fact, I'm sure many readers here probably believe cryptocurrency and digital assets as a whole are dead. But as history has shown us, it's during these periods that investors should be most attentive.Those who have been attentive may have noticed that in the past quarter several crypto assets have been starting to rise from the ashes, slowly regaining some energy in their price movement.
One of these happens to be a digital asset known as THETA (THETA-USD), whose price action can be seen here:
The Theta Network is a blockchain project built by a group known as Theta Labs, a subsidiary of esports live streaming platform Sliver.tv. The blockchain goes live on March 15, 2019, after a year of development and testing. This launch is likely a significant factor in THETA's current steady price action. Although it's still in an extremely speculative phase, I believe it's worthwhile to give it a solid examination due to its applicable value proposition and upside potential.
My goal is to lay out an understanding of what the blockchain-based Theta Network is, and ideally in a manner that you don't need a degree from MIT to understand. From there we will devise a rudimentary valuation framework as to how to value the crypto asset known as the Theta token (THETA), which operates on this network. By crypto asset or digital asset I'm referring to what many would consider a cryptocurrency; however, I believe asset is a more appropriate term in this case as Theta operates more as a store of value than a medium of exchange.
I would like readers to be mindful that although I believe this asset could accrue significant value, we are in an early phase dealing with a variety of unknowns. This should be seen as a fledgling bird that has a great opportunity to soar but could also fall to its death. For those of you not fond of metaphors this means that we are still in a very speculative phase of investment, and the risks of Theta crashing are very real. However, the high upside case has enough of a possibility that I find it deserving of acknowledgement.
My goal for this framework isn't to sell anyone on investing in Theta, but to help provide a guide to monitoring and assessing it throughout its development. This way whether it flies high or free falls down, there can be proper investor awareness, something crypto has been greatly lacking.
Also for those that don't like metaphors, I regret to inform you that they will be scattered throughout this piece. But I believe they will provide a more digestible understanding of concepts that can get a bit complex. So, please, bear with me.
What is the Theta Network?
The Theta Network is a network of user devices, known as relayers, that allow users to share computing and bandwidth resources, predominantly in the realm of data intensive streaming (such as video).
To better understand this imagine a situation where you're watching a video online that thousands of other people across the world are also watching. It's laggy and buffering, probably because your connection to the website serving the data is weak. But what if you had a better connection to some of those other people watching? What if they could share the video data they receive with you? You'd probably get more data packets at a better rate, giving you a faster stream with better quality. This is similar to how torrenting works, and this is the goal of the network Theta is creating.
The Core Problem
Content delivery networks (CDNs) are currently how video streaming companies distribute their data. Basically, operators (companies) own data centers scattered across the globe that relay information to our laptops. Think of CDNs as shipping routes and ports across the world. Video streaming companies pay these CDN operators to basically use their shipping routes and ports, so that their ships carrying "video data" can travel the globe quickly and efficiently. Some large streaming companies are their own CDN operators.
So far CDNs have been mainly how content has been distributed across the web, but they face a couple challenges. For starters, they can be expensive to set up, maintain, and use because they require the building of physical data centers. This creates another limitation in the sense that it's hard to build a data center that's close enough to everyone. Those that are farther away from their nearest data center will naturally get data later, which leads to worse video quality. Now, so far this has been handled fairly well, but with the onslaught of high-definition video, live streaming and VR, coupled with a boom in video consumption (especially in less developed regions), we end up with a lot of less-than-optimal video. Anyone who has had the pleasure of using Google hangouts with more than three people should be familiar with this.
Here's a chart to better showcase the bandwidth bottleneck we're looking at with the upcoming video formats:
Source: Theta Whitepaper by Theta Labs
It's an evident enough challenge in the industry that noteworthy figures in streaming space are backing Theta's solution. A founder of YouTube, a founder of Twitch, and the chief network officer of Verizon (NYSE:VZ) are all on the advisory board of Theta Labs:
The role of the Theta Token(s)
So far so good? Let's make things more interesting. The Theta Network has two crypto-assets that exist within its ecosystem. They are known as the Theta Token (THETA) and Theta fuel (TFUEL). Your reaction to this may be similar to that of someone discovering they're about to have twins. "Two!? I could barely handle one!" I empathize with the frustration, I really do. However, this is likely to be the nature of many crypto economies to come, and therefore best not to fight it. Instead, let's just take a deep breath, relax and dive in on how these tokens work.
Theta Token (THETA)
THETA should be treated like an ownership share of the network. There's a finite number of THETA tokens (1 billion to be exact), and they allow for security and governance of the network. Since the network is decentralized and there shouldn't be a single party controlling it, we need a way to manage the system as it grows and keep it secure from exploitation. It's like having a voting system and law that has to be upheld.
Those who own THETA tokens have the ability to partake in the voting and maintain the law. To do this they must "stake" their tokens, or lock them up in exchange for a Guardian Node on the network. These nodes are machines (both physical and virtual) that produce and validate blocks on Theta's underlying blockchain. This is how all transactions on Theta's network are tracked, instead of by a centralized party. Think of owning a Theta like having a taxi medallion. By having a medallion you have the ability to operate and monetize a taxi (Guardian Node) and voice your opinion in the unions (partake in governance).
However, in order to have a Guardian Node you must stake at least 100,000 THETA, and you can stake up to 1 million. The more you stake, the greater dividend you are rewarded. That dividend is known as TFUEL, the other digital asset, which I'll cover next.
Keep in mind you don't have to own 100,000 THETA. You can own 1 Theta or even a fraction of 1. But you need 100,000 to participate in securing and governing the network. So why even make it possible for anyone to own less? The main reason is skin in the game. With more people owning a crypto-asset, a crypto-asset grows stronger, because there are more people incentivized in that networks success. Since Theta is a deflationary asset designed to accrue value as the network grows, the more people that own a piece the more incentive they have to help make sure the network, and they themselves, prosper.
Theta Fuel (TFUEL)
TFUEL should be treated like a transactional currency within the network. It's inflationary, with 5 billion to start (5 per every theta) and a supply growth projected to be 5% annually. It exists as a medium of exchange for services on the network. For example, relaying video data to other users devices would pay me in TFUEL. I can use that TFUEL to pay for my own access to content streamed to me. TFUEL is also being used as a way to tip streamers/content producers on platforms beta testing Theta, such as Sliver.TV.
Having the average user to do this on their own is high friction. But the way this works in practice is video platforms themselves like Sliver.TV and Samsung VR interact directly with the Theta network. They then incentivize their users to allocate resources from their devices (laptops, tablets, phones, etc.) to rebroadcast content they are streaming. So in order to watch that esports tournament in high-definition VR on their website, I may have to dedicate some of my machines resources to rebroadcasting the data for others viewers. In exchange I'll get TFUEL coins I can use to unlock other videos on the site. The amount of complexity the end user faces when interacting with TFUEL is really up to the video platforms being built on the Theta Network.
The Ecosystem Players
There's a lot of moving parts here, so let's break the roles down in Theta's ecosystem:
Content Providers: Primarily video platforms and video distributors. They purchase TFUEL to distribute to relayers and build applications on the Theta Network because it reduces their content distribution expenses.
Content Relayers: Users on the video platforms who distribute content by relaying data to other users on the platform in exchange for TFUEL as payment.
Content Consumers: Pay TFUEL to access content on a platform.
Content Producers: Influencers that exist on content platforms that get rewarded in TFUEL for uploading content.
Stakers: Help secure and govern Theta's underlying blockchain by validating blocks and voting on proposals in exchange for TFUEL.
Speculators: Own Theta and TFUEL with the projection that value will accrue overtime, incentivized to help the network grow.
Now it should be understood that one can assume multiple roles, in fact one can assume all of them. But they each have their role in valuation so it's good for us to separate them out for better understanding. Keep in mind that there are likely more roles and/or more nuanced roles that can emerge as the system evolves.
As investors it's hard for us to have a perfect view of an early projects evolution (especially one such as this) but this is a good start to derive a basic value framework.
Valuing Theta Tokens
We'll focus on valuing THETA tokens rather than TFUEL due to their stronger price drivers from having finite supply and greater early demand. Although TFUEL should correlate fairly strongly in value growth alongside Theta, it being an inflationary currency should give it far more stability and less upward price motion. That said, TFUEL is vital to deriving the value of THETA, because it acts as the monetary powerhouse of the network. After all, would anyone stake a node if TFUEL had no value? Of course not! In the Theta Network economy, TFUEL is equivalent to the dollar. That's why the more people want TFUEL, the more powerful the Theta Network economy (and thereby the THETA Token) becomes.
The basic formula for I've generated for projecting THETA value is the following:
THETA Price = (TFUEL Inflow - TFUEL Outflow + % Expected Capitalization Growth) / Security Cost
Where Security Cost = .66 * Theta Staked in Guardian Nodes
Yes, I know. Like all equations it has the habit of looking weird. So let's break it down.
This is the accrued value of capital being allocated into TFUEL. The main roles affecting inflow would be the content providers, the content consumers, and the speculators. Of those three, the most heavily weighted capital allocation should come from the content providers. After all, they are the ones that would be budgeting video propagation dollars to to TFUEL for the cost reduction. It's based on this that everything else can operate.
In their white paper, Theta Labs projects a cost reduction for providers of up to 80%. This means a company paying $100,000 monthly for distribution now could pay $20,000 monthly by utilizing Theta Network. But this would require them to allocate a good chunk of that monthly $20,000 to TFUEL. By summating the estimates on content provider TFUEL allocations, we can estimate the base inflow.
The amount of capital flowing out of TFUEL into other currencies/assets. This is determined primarily by the stakers, relayers, and content producers who receive TFUEL as a reward for their actions contributing the network. The more they decide to hold on to that TFUEL or reuse it within the network, the stronger the economy will be.
We can get a glimpse of outflow by tracking the percent of TFUEL that flows from relayer, staker, and producer wallets to exchange wallets, then compare that to the exchange activity of TFUEL itself.
Percent Expected Capitalization Growth
This is how much we expect the TFUEL Capitalization (the inflow/outflow differential) to grow over time. Much like P/E ratios, this is a factor for market forces to find a convergence on with respect to timeline. It's common for investors to have a 10-year outlook but due to this being such an infantile system it's likely we'll be projecting on a much shorter timespan.
To get this projection we can look at the blockchain to identify content relayer growth, and the average TFUEL awarded per relay. We can also map the average TFUEL per provider.
This will likely be the oddest element to those unfamiliar with blockchain land. In a staking based network such as this one, the cost of the tokens need to be high enough that it detracts a single entity from purchasing up tokens to gain control of the network. For example if I expend 500 million dollars to buy up enough tokens to overtake the network, and ultimately I gain control of a network with 1 billion dollars in capitalization the initiative would be worthwhile. To mitigate this threat the cost of majority ownership must be higher than the cost of the network valuation.
In Theta's case, blockchain consensus between all the nodes is achieved when 2/3 of the Guardian Nodes are in agreement. That means for security we would need the cost of 66% of the Theta staked in the Guardian Nodes to equal the total valuation of the network.
Although this is feels subject to market forces and can't be guaranteed, it seems like the intention of Theta Labs in the economic architecture, as they mention in their white paper:
The primary reason for fixing the Theta token supply is to make it prohibitively expensive for a malicious actor to acquire enough tokens to threaten the network. Since new Theta tokens will never be created, the only way to acquire more is by purchasing existing tokens and over time making it more expensive to amass a controlling amount of Theta tokens.
In a hypothetical scenario where we calculate TFUEL inflows to be $1,000,000,000 and outflows to be $300,000,000 with an expected growth of 40% (400,000,000) and 500,000,000 Theta tokens are staked in Guardian Nodes, our Theta price calculation would look like this:
- (1,000,000,000 - 300,000,000) + 400,000,000 ⇒ 1.1 billion / (.66 * 500,000,000) ⇒ 3.33
- Therefore we estimate the average cost per Theta token to be $3.33
Of course, the true work relies in properly deriving and projecting these numbers once the network is live, and there are likely unknowns we haven't accounted for. However, this should give us a solid basis on how to organize our approach.
This should also showcase the upside potential for Theta to some degree (which is currently around .12 -.15 at time of writing). Although these numbers are hypothetical, they are not by any means outside the realm of possibility. Let's explore THETA's mystical realm of possibilities for a better understanding.
The Bull Case
Friends With the Trends
It's no secret that Esports, Live streaming, VR and video in general are all rapidly growing markets:
With the growth of these and the growth in overall percentage of data going through the web that consist of these, we're likely to see more content providers and distributors entering the industry. This provides a rapidly growing candidate pool to distribute content via Theta and bypass current infrastructure costs.
Convincing Adoption Incentives
Speaking of infrastructure costs, according to Cisco's VNI forecast:
Globally, Internet video traffic will reach 187.4 Exabytes per month in 2021, up from 49.4 Exabytes per month in 2016
Here are reasonable CDN costs currently:
Source: Google Cloud Pricing
These are Google Cloud's generalized rates, large providers have individual contracts that are much cheaper due to their heavier usage. If we took a lower estimate average of all these rates, we're looking at .01 per GB transferred. At that rate the video market would be paying on average $10,000,000,000 per month for distribution.
Theta is claiming they can cut costs up to 80%. If that ends up being the case, there is a strong driver here.
Strong Team and Partnerships
With a team that has 30 years of video streaming experience combined being backed by some of the heaviest hitters in the streaming industry, Theta Labs definitely has the minds and reputation to pull this off. What also helps their brand reputation are partnerships with significant gaming industry players such Samsung VR, Twitch and Tencent Gaming as well as several asian media providers such as Pandora.TV and MBN (the largest news channel in South Korea).
Each have unique cases for using Theta, which allows for some creative opportunities to arise. In MBN's case they plan on growing their paid content reader base by incentivizing individuals to relay content for cheaper subscriptions. As seen in the picture below where Bob pays $6 for his news subscription instead of the full $12 that Alice pays due to relaying.
Source: Theta Medium Blog
On top of this, Theta is also partnering with several other blockchain projects that would ideally create a stronger ecosystem with benefits to THETA/TFUEL purchasing power.
Promising early engagement
As of last month Sliver.tv has seen some promising results integrating THETA into their own platform as a test. From their blog:
Nearly a million users have now earned Theta Tokens on SLIVER.tv, which they can use to donate to their favorite streamers. While the team was confident in Theta Token's design, the real test was releasing them into a live streaming video ecosystem and observing their adoption firsthand. The results were remarkable: since Theta Tokens were launched on SLIVER.tv on December 15, more than 1,000,000 Theta Tokens have been earned by 980,000 SLIVER.tv viewers and more than 250,000 Theta Tokens have been donated to SLIVER.tv streamers. The number of donations is increasing every day, and there are more than 75,000 unique users donating Theta Tokens on a frequent basis. With each donation, viewers send special messages which are called out by the streamer in their live stream, and seen by an audience of thousands of concurrent viewers in real-time. During this testing phase, influencers can redeem Theta Tokens at market value for cash or for other various rewards. Top streamers are earning thousands of dollars per month, with some quickly approaching 5-figure monthly payouts!
In our earlier equation we mentioned that a net capitalization (total inflow - total outflow) of 700 million with a 40% growth rate would yield a token price of $3.33. At the current price of around .12 - .15 this would be a 22x - 27x gain. And looking at the CDN cost reduction numbers described above it alongside the strength in partnerships with a large audience, it's actually very plausible.
All this being said let's not fall into the trap of idealism and give the bearish side of things a look.
The Bear Case
Uncertain Legalities and Regulations
Theta was an ICO and it's uncertain if regulators (especially the SEC) will question their current model. The THETA token is not considered a security at the moment, but that doesn't mean the SEC won't change their mind. This being said the ICO, although advertised, never went public and was purchased up by private sale investors, who are accredited. This puts Theta in less risk than other projects undergoing SEC scrutiny.
Another legal concern that springs to mind is content ownership and licensing. Content being distributed this way generally has to get downloaded onto users machines, at least partially. For many content owners this could be an issue, but it really depends on the content providers handling of the situation.
Monetary transmission also always brings up a host of concerns such as capital flight and money laundering. It's hard to go after a decentralized network for this, and to be frank a traceable blockchain such as Theta is probably not the most discreet tool for committing financial crimes, but it still could be exploited and therefore worth mentioning.
Another issue with a globally transferable economic system is how the global economics will play out. For example, with Bitcoin, a lot of mining power became aggregated in China due to the low cost of electricity. With so many actors with financial incentives, Theta is open to numerous potential global exploits.Aside from this, the biggest concern with the currency is getting outflow minimized, meaning those involved in the ecosystem (especially producers, relayers and stakers) have to take TFUEL seriously. In the early phases it's easy for it to be valued the equivalent of monopoly money, liquidated immediately for fiat. After all, you have to pay bills in fiat. Overcoming this hurdle will require some strong network effects, but for the strong network effects to exist we need TFUEL to be treated with value in the first place.
Broad Alternative Solutions
There's a couple alternative things that could happen in the distribution game that could put a damper on/overshadow Theta's solution. They are as follows:
- CDNs could reduce their costs significantly through their own innovations.
- Video providers could take Theta's open source technology and silo it into their own content.
- Other decentralized networks with better structures could win (both blockchain and non)
- Innovation in content distribution (such as video packet minimization or faster networks) could leapfrog the need for Theta.
It's very possible for an early attacker to buy up THETA and stake a dominant amount of Guardian Nodes early. Guardian Nodes need to grow quickly for the network to have some sense of security.
Apart from this, there are potentially several unknown security risks. Especially on the relayer front with shared data.
There's a lot of actors on an unproven economic system and lot for users involved to wrap their head around (look at how long this article is!) Staking based blockchains at scale have a lot of unknowns and we have no true idea what performance (and performance bottlenecks) will be like until we see it in action.The decentralized governance and growth of the ecosystem in a fair and balanced manner will also be vital. This is something else we can't attest to until actually witnessed.
Investment Indicators and Strategy
Key Performance Indicators
- Growth in all Ecosystem Actors, with appropriate balance
- Quick Build up of Guardian Nodes
- Greater acceptance and usage cases of TFUEL as payment (with actual usage growth in those cases)
- Unique and creative products built on Theta Network (with user engagement)
- Consistent growth in wealth creation (more business incentives on the network)
Since THETA is a high risk asset, it makes sense to keep our initial allocation small and increase our bet size as we see confirmation signals. The primary confirmation signals from a fundamental perspective are inflow growth, a reduction of bear case risks, and meeting of the checkpoints for success (which should ultimately lead to inflow growth). If these continue to be demonstrated I will likely start looking for appropriate entry to deploy the next phase.
I generally look for timing these entries with appropriate price action on the charts and/or economic conditions involving Theta. For example, currently THETA is releasing its main net and will be conducting a "token swap" in which those holding Theta tokens will get 5 TFUEL per token held. This leads to a positive price driver for Theta as more investors purchase it to get the TFUEL reward, be mindful they could be just as quick to sell off after however. A stronger positive driver would be when Guardian nodes start coming on line, as staking them would lock up Theta supply and lead to upward price momentum while also giving the network far greater security.
From the risk avoidance side I would look for threats to inflows (starting to notice how it's all revolving around inflows?). The bear risks are all cases of this, and if I see more confirmation on that front I'll likely reduce my position. My timetable for Theta is 3-5 years so I'm looking toward weathering the price volatility as long as the inflow outlook is positive. One threat to inflows that one should be mindful of is the crypto-asset market as a whole having issues. This is something we should be mindful of and if there is a significant threat to crypto (mass government bans, heavy regulatory waves, quantum computing attacks), it could be a strong enough reason to reduce allocation as well. This is a low probability scenario, especially currently with crypto near lows, but in the wild west of digital asset investing, it's best to be prepared.
Disclosure: I am/we are long THETA-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have a small position currently and will look to deploy more capital into Theta in the coming months if my conditions are met.