Desired Token Velocity

Tokens are a great tool to create new economies mostly because they are fast and liquid. However, this can also be a really big issue as expensive tokens can destroy your business models by making it hard to force people to exchange the tokens for their utility value, while cheap coins are bad for investors.

This is what we tend to call the token velocity problem.

Velocity can be measured over any time span, but is normally measured annually. Trading volume can be difficult to measure. This not only includes trading volume that occurs on exchanges, but over-the-counter trades and actual usage of the platform.

Velocity = Total Transaction Volume/Average Network Value

Average Network Value = Total Transaction Volume/Velocity

Velocity is one of the key levers that will influence long-term, non-speculative value. Token velocity can be a big problem as it can create false of conflicting incentives. Most utility tokens don’t provide a compelling reason for token holders to hold the token for more than a few seconds. Absent speculation, assets with high velocity will struggle to maintain long-term price appreciation. Hence, protocol designers will be well-served to incorporate mechanisms into their protocols that encourage holding, not just usage.

Here are some good questions to ask:

• Have you had dozens of conversations about your token value and still you aren’t sure it all works together?
• Is developing the token making your business model more difficult to understand?
• Do you have a hard time explaining your token mechanics to other people?
• Are there people on your team who still don’t understand your token mechanics/value?
• Do you have a two-token economy with a complex interaction between the two tokens?
• Are you trying to stabilize your token against fiat currency, in particular only the currency you think is important (dollar, euro, pound, etc.)?
• Are you trying to stabilize your token against ETH or BTC?
• When people ask you why the token will be worth something, is your only answer “Because as more people use the token, the value rises”? and/or “Because there’s limited supply”?
• Is your token useless to anyone outside of purchasing something from your company (and partner companies)?
• Does your economy include you buying back token before it gets redistributed to others?
• Are you trying to figure out how to get people to hold tokens for a longer period than they naturally would in the ecosystem?