Calculating the Full Diluted Valuation (FDV) in cryptocurrencies refers to determining the business's value after taking into account all potentially outstanding shares, including those in options, warrants, or vesting schedules.

Fully Diluted Valuation, or FDV, is a crucial concept in the cryptocurrency world that helps investors and analysts understand the maximum possible market capitalization of a digital asset. This metric takes into account all tokens in circulation, as well as those yet to be released, priced at the current market price.

The Role of FDV in Cryptocurrencies

FDV can provide valuable insights into the potential impact of future unlock events, such as team vesting, staking rewards, or ecosystem grants, on supply and demand variables. For instance, Stellar Lumens (XLM) has an FDV gap of $5.6 billion, while Chainlink (LINK) has a 343 million token FDV gap. These gaps represent tokens allocated for network incentives, developer grants, future ecosystem growth, node operators, and protocol development.

However, it's important to note that FDV does not necessarily reflect the future on-chain influence of new token holders for governance tokens, as many tokens often stay staked, delegated, or locked by smart contract rules.

Scenario Modeling with FDV

FDV is a useful tool for scenario modeling. By projecting how token unlock events, vesting cliffs, and community airdrops will mechanically affect supply, and then stress-testing price impact under varying demand assumptions, investors can gain a better understanding of how future developments might impact the value of a cryptocurrency.

Cautions and Limitations of FDV

While FDV offers a forward-looking ceiling that reveals dilution risk as locked or unissued tokens enter circulation, it has its limitations. For one, FDV assumes a constant price, which can substantially overstate future value and underplay the real impact on practical market dynamics.

Moreover, FDV does not account for evolving demand and supply conditions, such as changes in adoption rates, protocol usage, and competing alternatives. It also overlooks vesting cliffs and gradual unlocks that stagger selling pressure, requiring investors to overlay actual release schedules.

The Importance of FDV in Evaluating Cryptocurrencies

Despite these limitations, FDV is a valuable metric for evaluating a cryptocurrency project. It helps guide allocation decisions, risk management, and scenario modeling. By revealing "hidden" supply and helping model how future token unlocks could impact price and governance power, FDV, when used alongside market cap, vesting schedules, and on-chain demand metrics, provides a more comprehensive view of a cryptocurrency's potential.

Additionally, FDV helps evaluate a protocol's economic design, including incentive structures and the sustainability of the economic model. For example, Polkadot (DOT) has an FDV gap due to its controlled inflation model and on-chain treasury that holds roughly 30% of total issuance, with new DOT being minted annually for staking rewards and treasury funding.

In conclusion, FDV is a useful tool for cryptocurrency investors, offering a forward-looking ceiling that reveals dilution risk and helping compare projects with wildly different issuance models on a level playing field. However, it should be used in conjunction with other metrics to gain a comprehensive understanding of a cryptocurrency's potential.