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Use Case + Nothing = 0, Use Case + Token Velocity = 100


When you’ve got been round for some time within the blockchain area, you’ve seen the hype increase round tokenization in crypto circles, particularly these regarding dApps and IDO individuals. Undoubtedly, we have now sufficient crypto literature at hand that talks intimately concerning the idea and constituents of tokenization. Additionally, nearly each blockchain protocol has a whitepaper speaking concerning the tokenomics of their native coin in pure provide and demand phrases – 

‘Because the demand for the token will increase in future, so should the value.’ 

Or 

 ‘Because the circulation of the token will increase, so does its worth.’ 

Or

‘A token’s worth will increase in proportion to the rise within the variety of its use instances.’

And so forth and so forth. 

All these statements are partially true as their simplistic logic fails to have in mind the related ‘velocity’ of the token, i.e., the variety of instances a token modifications fingers, which subsequently impacts the token value. 

This idea is known as the Velocity of the token.

A token’s velocity is an indicator of the token’s state of liquidity and the general utilization charge. Sadly, most crypto fans appear to be unaware of the existence of such an idea. 

The idea of token velocity is extremely underutilized in cryptocurrency valuation. Nonetheless, the thumb rule goes like this – a coin is inversely proportional to the worth of the token i.e., the longer folks maintain the token for, the upper the value of every token. (Nate Nead, Funding banker and principal at Deal Capital Companions LLC) 

For example, the token financial system for a specific blockchain platform is $500 billion, whereas the yearly circulation is 10x for each token. This implies the collective worth of the tokens might be $50 billion. At 100x circulation, the collective price of the tokens can be $5 billion, and at 500x, $1 billion. 

For this very motive, in all chances, the tokens with excessive velocities and excessive Transactions Per Second (TPS) have much less worth. Conversely, cryptocurrencies corresponding to BTC and ETH are valued greater for the in-built friction within the blockchain that prohibits the next TPS. Alternatively, Litecoin has a TPS of 56, and the value of a person LTC isn’t anyplace close to BTC or ETH value. 

However does this imply that prime token velocity is dangerous? Is zero velocity a possible possibility, then? Earlier than we discover solutions to those questions, let’s first perceive the arithmetic concerned within the idea of the rate of a token. 

Figuring’ the Token Velocity Idea 

Token velocity is the full quantity of transactions in USD divided by the token’s market cap. The method for the rate of a token is derived from the equation of change: 

MV=PT

The place,

M= Cash provide

V= Velocity of cash

P= Common value degree of products, and

T= The whole variety of financial transactions

The equation of token velocity is derived as follows: 

MV=PQ

The place,

M= Dimension of the Asset Base

V= Velocity of the Asset or the variety of instances the token modifications hand every single day

P= Value of the digital useful resource being provisioned, and

Q= Amount of the digital useful resource being provisioned. 

By rearranging the equation, we get:

M= PQ/V

This equation clearly brings out that the value of a token is inversely associated to its velocity.  

The Three Eventualities: V=0, V=1, 0<V<1

  • V=0: Zero velocity for any token will outcome within the token getting deceased sooner or later of time for need of any transactional exercise. One mustn’t overlook that minimizing velocity can’t result in the best worth for a token as a result of velocity is correlated to transactional quantity. A sure degree of motion is important for a wholesome financial system. Take into consideration the financial idea of melancholy in an financial system. In such a scenario, the amount of financial transactions declines quickly, resulting in the decrease velocity of the forex. This lowered velocity results in depreciation within the worth of that individual forex. The identical idea holds true for crypto tokens. If everybody holds the tokens, it’ll collapse the transaction quantity as a consequence of zero demand.   
  • V=1: Let’s perceive this with the instance of a hypothetical coin ‘HairyApe’(HA). The HA tokens gas the ticketing system within the Furry Ape Zoo. Guests coming to the zoo every day must buy the HA tokens utilizing fiat. They would want to ship the cash to the zookeeper to enter the zoo. The zookeeper shortly resells the coin for fiat. And the method goes on. No member of the customer community desires to maintain the coin after it has served the aim, and the zookeeper doesn’t hold them both, for there isn’t any incentive to carry the coin – all different transactions contain fiat. This association helps to develop the transactional quantity and, in flip, the rate of the token. The community worth stays fixed, which implies every token would now maintain a lesser worth as per the rate equation.
  • 0<V<1: Each token has a novel velocity at which its value will carry out greatest. Deriving the optimum vary for any token is a tough process as circumstances hold fluctuating, and each token serves a novel goal. Ideally, any velocity inside the too low – too excessive vary generally is a possible velocity possibility for any token. There’s a necessity for extra rigorous analysis on the rate of token metrics within the coming days.      

The Goldilocks Zone of Token Velocity: Use Case+Token Velocity=100

Vitalik Buterin, in his velocity idea, talks succinctly concerning the present crypto-economy being speculation-driven as a result of the system suffers from optimistic suggestions results. If the value of a token is rising, folks begin holding the coin as a result of its perceived yield is now greater than an alternate token. As hypothesis units in, it drives the costs additional up, and a brand new equilibrium is achieved. This course of operates in reverse, too, deriving decrease equilibrium ranges as folks begin promoting tokens with falling costs. 

Basically, as a result of there isn’t any want to carry the token, the value is simply linked to hypothesis. 

Easy methods to attain the Goldilocks zone of use case+token velocity association then? The reply is fairly easy: Lowering the rate of the tokens organically by attaching a viable spectrum of use instances to the token. The logic is thus – folks may have higher causes to carry the crypto tokens fairly than simply hypothesis. Let’s focus on a number of of those methods: 

  • By having a profit-sharing community in place, the protocol can incentivize the person to carry extra tokens, thereby decreasing velocity. This may be accomplished in an association the place the token holders are given a share within the earnings for doing work for the platform, offered they maintain the required variety of tokens for a particular interval. As the value of the token falls, its revenue share yield will increase.
  • The common staking operate helps cut back the rate of the token considerably because the staked belongings are frozen for a set tenure. 
  • HODLers usually purchase and maintain tokens for the assumption {that a} explicit cryptocurrency, corresponding to BTC, would change into a forex sooner or later. Constructing on the identical perception, person belief within the stability of a token as a future various forex may very well be ‘periodized,’ i.e., a holding interval could also be launched to include the rate of a token for a bigger time period.  
  • The idea of gamification in dApps is one other option to make customers maintain tokens for a set tenure. This may be accomplished by introducing a situation on the platform that customers who maintain the cryptocurrency for n variety of days would have entry to greater rewards. 

Velocity might be a big influencer within the value dynamics of any token in the long term. Most utility tokens maintain no extra lure to make customers maintain the token past the utility they serve, which brings hypothesis into play. Minus the hypothesis, they maintain barely any risk for hypothesis. The incorporation of utility mechanisms inside the protocol is not going to solely optimize velocity but in addition result in appreciable value appreciation.  

Disclaimer: Cryptocurrency shouldn’t be a authorized tender and is presently unregulated. Kindly be sure that you undertake ample threat evaluation when buying and selling cryptocurrencies as they’re usually topic to excessive value volatility. The data offered on this part does not signify any funding recommendation or WazirX’s official place. WazirX reserves the suitable in its sole discretion to amend or change this weblog put up at any time and for any causes with out prior discover.

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