Background

For many years centralized exchanges have dominated in both traditional and crypto markets. It wasn’t until the concept of DeFi and AMMs that crypto native users were able to trade spot markets without the need of a broker. While this concept was novel it did not provide a practical solution for users who still wanted the benefits of CeFi exchanges (namely deeper liquidity and the ability to trade derivative products) but feared custody issues with these exchanges, which were only made worse by the downfall of FTX.

Enter dYdX, one of the first on chain order books that pioneered the development of the space by offering on-chain perpetuals with self custody.

Since then an explosion of on-chain trading platforms has taken place and the race for market-share is on.

In this report we will take a look at Vertex Protocol promising DeFi exchange with strong backing and great product fit, that I believe is currently undervalued.

Industry Overview

Cefi Exchanges still overwhelmingly dominate the space by volume. Below shows the 24 hour volume breakdown between DeFi and CeFi as of March 12, 2024 (data from coinmarketcap).

24hr Percentage of Volume CEFI vs DEFI

We can also take a look at the individual exchange level; this volume is across both spot and derivative markets. In this view it’s evident Binance is King but also the top 5 exchanges account for 90% of the volumes.

Notably though, Uniswap cracks the top 10 list at #8 with approximately 90 bps of total volume, dYdX at #12 with 70 bps and near the bottom of the list with 10 bps, Vertex.

24hr Percentage of Volume by Exchange

As the space continues to grow, volumes will also increase, but I believe the mix of volume will also change as DEFI protocols gain more prominence and trust. Also of interest, is that at the current moment the largest DeFi venue by volume,Uniswap, focuses solely on spot transactions. As larger full service DeFi exchanges, which provide the same look, feel and products of CeFi exchanges, come online I believe the shift in market share to these exchanges will be significant.

Competitor Overview

To better understand Vertex Protocol’s position in the space we will compare it against the following exchanges:

To begin we will take a look at the current volumes and fees generated by these protocols (Data from token terminal).

The figures below are based on Annualized MTD numbers as at March 11, 2024, as well as average FDV for the period.

We can convert these into multiples and see how they have changed for each competitor over time

Fully Diluted Value to Annualized Volume

Fully Diluted Value to Annualized Fees

Multiple Valuation

Using the latest values we can create a multiple table:

Then apply VRTX current Annualized Fees and Volume to get implied FDV

DCF Analysis

For the DCF analysis we will project out three scenarios, based on 5 year growth and terminal value.

Scenario 1: Volumes in the entire Crypto Space do not change but in 5 years DeFi represents 20% of volume and Vertex Protocol still owns 90 bps of that volume.

Scenario 2: At the end of Year 5 Vertex Protocol has the same volume as dYdX does today.

Scenario 3: Over 5 year Vertex Protocol has the same average volume growth as its competitors have over their history.

Other Assumptions

Valuation Football Diagram

This graph shows the range of Implied FDV (Excluding outliers)

Analysis

Vertex Protocol currently sits at about a $300-355 Million FDV. I believe that this valuation is undervalued based on where current competitors are priced and also with respect to its own potential growth.

From a Volume to price perspective Vertex has the lowest multiple among its peers and from a fees perspective has 3-4x potential if valued similarly to dYdX or perp.

The dcf analysis helps us to better understand current valuation as well. In Scenario 2 our fair value is similar to current market conditions, but in this scenario we assume that in 5 years time Vertex will only have grown as large as dYdX is today. Given the overall potential growth in both the crypto space and DeFi trading platforms at large I don’t believe the full growth potential of the platform is being captured in current prices. It is also worth mentioning that the other two scenarios are also fairly conservative in terms of volume growth however, still imply close to a billion dollar FDV.

It is also important to note that from a project perspective Vertex is doing all the right things. Developing a self custodial exchange with all the product offerings of traditional CeFi exchange with features like universal margin, orderbook/amm , low cost execution and even a mobile app.

Finally, unlike some of its competition Vertex has some notable investors and partners including Wintermute, Hack VC, GSR and Jane Street. An important consideration when evaluating the ability of the project to sustain itself, drive for market share and grow token price.