Fully Diluted Valuation

3 min read

Pronunciation

[fool-ee dih-loo-tid val-yoo-ey-shuhn]

Analogy

Think of Fully Diluted Valuation as calculating the future value of a new housing development based on current prices, including all planned future construction phases. If a neighborhood has 100 homes currently built and selling for $500,000 each (a $50 million current market), but the developer plans to eventually build 1,000 total homes in that area, the 'fully diluted valuation' would be $500 million—the theoretical value once all planned inventory exists. Just as prospective homebuyers might consider how future housing supply could affect neighborhood prices, investors use to assess how a 's value might be impacted when currently locked, unvested, or unminted tokens eventually enter circulation. This forward-looking measurement helps reveal potential supply-based price pressures not immediately apparent when looking only at today's .

Definition

The theoretical of a calculated by multiplying the current price by the maximum possible supply that will ever exist, including tokens not yet released or in circulation. Fully Diluted Valuation (FDV) represents the projected total value assuming all tokens specified in the issuance schedule eventually enter circulation, providing insight into potential supply-based price pressure over time.

Key Points Intro

Fully Diluted Valuation serves four essential analytical functions in investment evaluation.

Key Points

Supply Expansion Projection: Quantifies the impact of future token releases according to emission schedules or vesting timelines.

Relative Valuation Context: Enables more accurate comparison between projects at different stages of their token release cycles.

Dilution Risk Assessment: Helps investors evaluate potential price pressure from increasing supply against projected growth in demand and utility.

Protocol Value Estimation: Provides a standardized metric for comparing the total theoretical value of different blockchain protocols independent of their current release stage.

Example

A analyst evaluates two promising protocols. A has 10 million tokens in circulation trading at $5 each, giving it a of $50 million. B has only 2 million tokens in circulation trading at $20 each, resulting in a of $40 million—making it appear slightly smaller than A. However, examining their maximum supplies reveals that A will eventually have 20 million tokens total (10 million additional tokens to be released over four years), while B will ultimately have 50 million tokens total (48 million additional tokens to be released over three years). Calculating their Fully Diluted Valuations produces dramatically different results: A's is $100 million (20 million × $5), representing a 2× increase from current , while B's is $1 billion (50 million × $20), representing a 25× increase. This analysis reveals that B faces significantly higher potential supply pressure, with substantially more tokens yet to enter circulation relative to its current supply. Despite having the higher price and appearing to be the more established project based on per-token value, B presents much higher dilution risk to current investors if demand doesn't grow proportionally with its aggressive .

Technical Deep Dive

Fully Diluted Valuation implementations require advanced analytical frameworks to account for complex release mechanisms. The basic calculation (Maximum × Current Price) provides the foundation, but sophisticated models incorporate temporal dimensions by time-weighting future supply releases to reflect net present value principles. Technical approaches vary by architecture: systems like require models accounting for decreasing rewards and actual minting rates compared to theoretical maximums, while systems often implement more complex models incorporating ratios that effectively remove portions of supply from circulation. Supply projection models must account for -specific mechanisms including: governance-controlled minting parameters that may change through future votes, burning mechanisms with variable rates based on usage patterns, supply adjustments linked to price stability mechanisms, and hybrid systems with multiple supply-influencing factors operating simultaneously. Advanced calculations incorporate unlock concentration metrics that flag periods of heightened sell pressure risk when significant percentages of transition from locked to liquid status within short time windows. Algorithmic valuation frameworks implement discount factors for future supply based on release timing, with tokens scheduled for release in distant epochs assigned lower weights than near-term unlocks in adjusted calculations. Quantitative trading systems often utilize custom derivatives including lock-adjusted (applying discount curves to locked tokens based on release schedules), holder-concentration-adjusted (incorporating distribution patterns), and historical release compliance indicators that track projects' adherence to previously announced supply schedules as risk adjustment factors.

Security Warning

When evaluating investment opportunities based on alone without considering , you may underestimate future supply dilution. Always verify a project's maximum supply, schedules, and release mechanisms in official documentation rather than relying solely on third-party market data sites.

Caveat

While Fully Diluted Valuation provides important insight into potential supply dynamics, it represents a theoretical maximum that may never be realized in practice. Many projects implement supply-reducing mechanisms like burns, buybacks, or incentives that permanently remove tokens from circulation, potentially making actual long-term supply substantially lower than the maximum theoretical amount. also assumes current prices remain stable regardless of increasing supply, creating potentially misleading projections since markets typically price in known future supply increases. Additionally, for protocols where governance can modify tokenomics, maximum supply figures might change over time through community decisions. Finally, extremely long-term emission schedules (like 's, which extends beyond 2140) create figures with limited practical relevance for most investment timeframes, requiring time-bound variations for more meaningful analysis.

Related Terms

Market Capitalization

Vesting Schedule

Circulating Supply

Blockchain & Cryptocurrency Glossary

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