Cost of Equity

The cost of equity is the return a company requires to decide if an investment meets capital return requirements. In the context of a decentralized protocol, it represents the return expected by token holders who provide capital to the system.

This cost is higher than debt because equity holders take on more risk and have a lower priority in the event of liquidation. Estimating the cost of equity in crypto involves analyzing the risk premium of the specific asset relative to a risk-free rate, such as staking rewards on a major blockchain.

It is a critical input for calculating the WACC and assessing the attractiveness of a protocol's investment opportunities.