# Valuation Framework

With this understanding of AVAR's supply-and-demand dynamics, we now have the foundation to formulate a valuation framework. This starts with being able to approximate the value of AVAR demanded/burned in a given year.

Investor incentivization during the first few years will significantly increase the Avareum fund's AUM size. The management fee collected from the fund will be liquidated to SSAV for the Token Auction. We can calculate AVAR's earnings per token (EPT) by dividing the management fee by the AVAR token supply.

When using the P/E valuation method, an AVAR token's fair price at a given time will be equal to:

$$
\text{fair price} = \left(\dfrac{\text{management fee}}{\text{AVAR token supply}}\right)\cdot pe
$$

For example, consider the first year without considering supply reduction; this will be a situation with a $300m AUM size and a 2% management fee with an AVAR token supply of 56.737m tokens. At the end of the year, $6m worth of AVAR will have been burned. Therefore, if we affirm the P/E of 30x, the AVAR token's year-end fair value will be:

$$
\text{fair price} = \left(\dfrac{$6,000,000}{56,737,109}\right)\cdot 30 = $3.17
$$

In the second year, if an AUM size increases to $1b, the management fee stays constant at 2%, and the AVAR token supply is 73.261m, the AVAR token's year-end fair value without burning mechanism will be:

$$
\text{fair price} = \left(\dfrac{$20,000,000}{73,261,747}\right)\cdot 30 = $8.18
$$

In the second year, the supply of AVAR is decreased because the Token Auction mechanism has burned AVAR tokens based on the first-year management fee of around 1.89m tokens. If an AUM size in the second year is $1b, the fair price of AVAR with burning mechanism will be up to:

$$
\text{fair price} = \left(\dfrac{$20,000,000}{73,261,747-1,890,000}\right)\cdot 30 = $8.40
$$


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