In the case of starting a new project, the organizers often assure potential investors that the number of produced tokens is strictly limited, therefore the increasing demand for the new asset will surely have an impact on its value. However, according to co-founder and senior partner of Multicoin cryptocurrency Fund Capital Kyle Samani, this logic does not take into account the problem of high turnover rate tokens. The expert has studied how this issue affects the formation of the cost of new assets, and describe what mechanisms are in place to combat it.
Example high speed of asset turnover and its consequences
Fraud in the sale of tickets (the same ticket is printed and resold a few times) is a huge problem for event organizers around the world. Therefore it is logical to assume that the blockchain network can be a good solution: if courts will find a way to work with tickets issued on the blockchain, it should completely eliminate fraud.
Not twice to use the same asset issued on the blockchain, which seek to deal with cases of double spending. Moreover, the issue of blockchain tickets can also have other benefits in the form of limit the resale and distribution of profits during the reverse purchase tickets the event, as well as improving the overall capitalization of the venues, organizers, speakers, artists and the buyers themselves.
However, despite all these advantages, crypto-investors no reason to keep the tokens, such as Aventus, Ticketchain or Blocktix (all three engaged in the issue of tickets on the blockchain). Even assuming that these projects will find their consumers and will conduct transactions worth tens of billions of dollars, the mechanics underlying the token-based data platforms, does not guarantee that these factors are somehow reflected in their price.
For a visual example, consider the situation of a hypothetical platform Karn. Users of the platform want to buy tickets, nominal value of which is represented in dollars. They can become the owners of the Karn-tokens as a result of the ticket purchase process, but these tokens they will be in possession of a small amount of time because users no incentive to keep these tokens longer. The same goes for sites of actions which do not want to assume the risks associated with value tokens to the dollar.
In this situation neither party wants to become the holder of Karn-tokens. Moreover, the presence of such tokens creates an extra step in the process of buying tickets, which negatively affects the entire user experience platform for its users. Once one of the parties receives a token Karn, then exchanged either for the tickets (buyers) or Fiat (pad). Even if Karn is an international standard in the field of issue of tickets, no one will be the holder of a token platform. Perhaps even with the growing popularity of the platform will increase the number of transactions in BTC/ETH/USD pair with the core tokens, but the price of tokens will rise cullinane in relation to the speed of transaction processing.
The only party profiting from the growth of the trade turnover of core-tokens, will be the market makers that provide liquidity to the other participants of the process of selling and buying tickets. That is not bad news. At high liquidity pairs of assets, the difference between the prices of buyers and sellers tends to zero, which is good for both sites and participants.
However, for clarity, it should be borne in mind that despite the fact that this hypothetical scenario will benefit both sites, which will no longer be faced with cases of resale of tickets and ticket buyers who will not become victims of fraud, fictitious token Karn will not get all of the advantages inherent in the use of its Protocol.
Definition of quantitative in the rate of turnover tokens
The velocity of circulation of tokens can be calculated using the following formula:
The velocity of circulation of tokens = Total transactions / Average cost of network
The average cost of network = Total transaction volume / turnover Rate tokens
The average cost of a network consists of the market value of all tokens in circulation. The velocity of circulation of tokens can be calculated for any period of time, but usually it is the annual rate. Trading volume is harder to calculate, since this indicator should be included not only trade on exchanges, but in OTC transactions, as well as the actual use of the platform.
We can say that the turnover rate of an asset is equal to zero, provided that during the year, no one sold, and not bought the asset. The lack of liquidity will lead to the fact that the asset is sold at a price lower than its intrinsic value. The rate of turnover of assets helps in the formation of their actual intrinsic value. And the difference between these values is called the liquidity premium.
In the case of a payment token that no one wants to keep the turnover rate will grow linearly along with the increase in the volume of transactions. In the case of the second equation described above, the volume of transactions could rise a million times, while the average cost of the network will remain the same. Almost all token utilities found the problem.
How to reduce the rate of turnover tokens
There are several ways to reduce the turnover rate of the asset.
Profit sharing: for example, the network Augur holders internal REP of tokens can perform certain work and get paid for it. In such cases, the REP tokens are a kind of license parties must pay for the right to perform the work in the blockchain platform. Profit sharing helps to reduce the turnover rate of the token, as the decline in the market value of an asset increases its profitability. Thus, if the yield becomes too high, market participants will buy and hold an asset, thereby affecting the rise in the price of the asset and reducing the rate of its turnover.
Also, using the traditional discounted cash flow method (DCF), the token easier to assess.
The functions of the steak in the Protocol for lock tokens: this method involves using the PoS Protocol (Proof-of-Stake) to achieve consensus in the network. However, in addition to achieve consensus, there is another good reason to use the Protocol of the steak. For example, the platform FunFair that support the work of the various online casino offers a choice of only those games where the participant plays one-on-one against the casino (which excludes games such as poker). Therefore, the casino should always be a supply of funds in reserve in case a player wins a particularly large sum, say, in slot machines, or if someone is lucky 10 times in a row in blackjack. To make payments in such situations, the casino should be more than 50% of all tokens in reserve.
The balancing mechanism of combustion and release (burn-and-mint) tokens: according to the mechanism used by the Factom platform that uses two token — FCT and the EU. Many other protocols use mechanisms for burning tokens, for example, the FunFair. But cryptocurrencies who resort to deflation, to create the conditions for growth in value in the long run can get into a situation inappropriate to the high volatility caused by excessive speculation in the market. The burning mechanism and release of the token solves this problem.
On the platform behind Factom Protocol users pay $0.001. Regardless of price internal token-FCT cost of using the Protocol always remains the same and is calculated in dollars. To enter data into the Protocol required the EC tokens, which users get when burning the FCT. Also on a monthly basis in the framework of the Protocol produced 73,000 token-FCT, which is shared between the validators. If users are not burn all 73,000 of tokens, the remaining FCT is added to the total turnover, which affects the cost reduction. Accordingly, if for a month, burned more than 73,000 tokens, then the total turnover is reduced and the conditions for growth rates. In the long term this creates a linear relationship between the Protocol and price. The relationship between combustion and production of tokens possible due to the fact that Factom is working on its own blockchain.
Gamification as a way to promote the accumulation of tokens: go back to the example with the tickets. In light of the fact that many sites rather quickly tickets sold out, in theory, buyers that keep X tokens for Y days, may be granted any preferred services or services. If enough sites support this initiative, the turnover rate of tokens will go down.
Another example is the YouNow platform, which uses an internal cryptocurrency PROPS that allows users of the platform to leave a kind of «tipping» content creators. The more the content Creator PROPS, the higher its rank on the platform. Thus, it is an interesting situation: on the one hand, there are reasons to content creators PROPS converted to Fiat and got a real income, on the other hand, the more tokens they have, the higher their rank and the more other users can see their content.
Become a means of accumulation: this is probably the most complex method of all, because it is not the result of functions of the specific mechanism, but rather a question of technical viability and market perception of the token. If the market players will agree to accept the token as a good means of accumulation values, then with high probability, the holders of such tokens would be to save money for a long period of time, not to sell or trade for something else.
Another reason to keep an asset is the expectation that it will rise in price. In theory, this factor should reduce the turnover rate of the asset and increase its price. A great example today is bitcoin, whose value was the result of speculative game on the market, and not the true use of cryptocurrency as a payment system. The same factor is also the expectation that the asset will be stable in price. In this connection, projects such as Maker and Basecoin, trying to introduce market their own stablemen.
However, become an established means of accumulation on the stock market is extremely difficult. Therefore, to date, only a few projects are ready to try their hand and try to reach that goal. And still not clear if some project can do it, what will be his ultimate position in the market.
The velocity of circulation of tokens is one of the key levers of influence on long-term and non-speculative value of the asset. A large part of tokens-the utilities do not have good reasons for investing in them. Subject of speculation asset with a high rate of turnover will hardly be able to achieve value growth. In connection with what the developers of the protocols will be more likely to implement mechanisms that encourage not the use of tokens and their accumulation.