Velocity of Tokens
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Velocity of Tokens
By James Kilroe
Posted October 31, 2017
The velocity of tokens is a key aspect that affects future token value; however, it is also one of the least understood. This post attempts to describe velocity, how it impacts any token price over time and analyses the velocity of the Dala token as an example.
Equation of exchange
The equation of exchange is defined as: MV=PT
Where: M= money supply,V= velocity of money,P= average price level of goods, T= index of expenditures (such as the total number of economic transactions)
In token economies, this has been adopted by two prominent people — Chris Burniske and Vitalik Buterin.
Burniske definition: MV=PQ
Where: M= size of the asset base, V= velocity of the asset (the number of times that an average coin changes hands every day), P= price of the digital resource being provisioned, Q= quantity of the digital resource being provisioned
Using the Burniske definition, valuations typically solve for M by rearranging the equation: M=PQ/V
In order to solve for token price, one must calculate M, by working out the size of the market in dollars (PQ), divide it by the velocity (V) and then divide M by the number of coins in supply.
Buterin definition: MC=TH
Where: M= total money supply (or total number of coins), C= price of the currency (or 1/P, with P being price level), T= transaction volume (the economic value of transactions per time), H= 1/V (the time that a user holds a coin before using it to make a transaction)
Using the Buterin definition, to solve for the token price, one must solve for C:
C=TH/M
In either definition, one can see that the velocity of the coin is inversely proportional to the value of the token i.e the longer people hold the token for, the higher the price of each token. This is intuitive, because if the transactional activity of an economy is $100 billion (for the year) and coins circulate 10 times each over the course of the year, then the collective value of the coins is $10 billion. If they circulate 100 times, then the collective coins are worth $1 billion. Thus, understanding and calculating the velocity in any token economy is extremely important.